Bounce will not necessarily mean the Bottom is in.

Yes, I have been sounding the cautionary story for a bit now. Last week I said the risk is to the downside and then yesterday I did a note on the SPY situation. Those notes remain relevant today as well. However, and there is always a however, the stock markets look oversold in the near-term. So, a bounce soon should not be surprising,

The hardest thing to do is to not have any particular bias when analyzing the markets. The bias should be developed after the analysis is complete. So, in many ways, I should not be influenced by my prior notes on what I think of the markets. I should so my analysis today to see where we stand. I will try.

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SPY Weekly Chart

Let us first look at some charts to see the technical situation.

On the weekly chart we are not overbought yet based on the RSI level. Remember that on the monthly chart which I reviewed yesterday (link above) we were overbought. The point of statis this important fact is that the chart timeframes are important. Overbought on monthly does not necessarily mean prices will fall tomorrow. The monthly is slower moving and it may take a couple of candles for that to happen. And each candle is a month.

On the weekly, each candle is a week and not being overbought yet may mean we go higher for a couple of weeks more. Plus, the chart pattern is indicating a semblance of a bull flag. Note though that 4 of the last 5 candles are down. That is not good as it indicates slowdown in the momentum which of course we have experienced. Also, the price is now below the 20-period SMA.

So, at best the signals and indicators are mixed. We should stay alert to take action based on which direction price moves. At the very least, we should have some risk mitigation if we are long. Mitigation could be stop sell orders, or take on some hedge positions using options, etc.

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SPY Daily Chart

Now let us look at the daily chart.

Now that same area on the chart does not look like a bull flag anymore. It looks like price tried to make new highs above that 610 level and failed several times. Price is well below the 20-day SMA (red) and the 50-day SMA (purple). So, we are clearly trending bearish.

Yet, we can also see that the RSI did not get completely oversold and reversed on Fri. It is too early to say if that means we continue up for a few days. But we know that momentum to the upside, as of now, has died down.

I drew a yellow descending line to indicate that price may see support along that trendline. If momentum to the upside is to return though, price has to go over the ascending trendline that has been established since Aug 2024.

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Trending

I am discussing the SPY in detail which represents the S&P 500. The other major stock markets are not faring much better as well. Here is the trending heat map.

The SPX sectors trending heat map looks like this.

The overall picture does not look too bad when we see the sectors. So, we could wonder why the SPX (I used the SPY ETF above) itself looks so weak. The answer lies in the weights. Here is the composition of the SPX currently.

The XLK, XLY and XLC together make up 50% of the SPX and they look the worst as of now. That is why SPX is weak.

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Technology

The tech sector weakness is the key reason why the stock market overall is weak. Of course, the small caps are very weak as well. I bring up the tech sector because that has in the past been the strength of the market. I assess the 11 below closely and they look very weak. Here is their trending heat map.

The above 11 covers the 2 Big Tech ETFs that I track: MAGS and FNGS.

So, in summary, the technical analysis tells me that the markets are more inclined toward the downside with a chance of a bounce in the near-term.

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The Fundamentals

What do the fundamentals say? Note that I am not a big fundamentals person as they do not provide me timely indicators for what the market will do. However, they do provide holistic guidance around what the economy, sectors and stock markets may do in the future.

And I am solely talking about earnings here. I know there are a lot of data points around the economy, interest rates, trade policy, inflation and others. At the end of the day, all of these boil down to what impact they will have on company’s earnings.

We have just about completed the earnings releases for the 4th quarter. Factset.com provides very good information on the earnings from a historical perspective. More important is that they track the forward guidance, and the forward analysts estimates to provide a view what to expect in the future.

The most interesting chart I found on their website (available free by the way) is this one:

It compares the Q1 2025 revenue growth estimates per sector between what analysts estimated end of December 2024 and what their estimates are today. We can see that the healthcare XLV, utilities XLU, and energy XLE are the only 2 sectors where the estimates have gone up. In all other sectors the estimates have come down.

The earnings growth estimates are even worse.

The estimates have come down in all the sectors.

Of course, one could argue that estimates are lower from before gives the opportunity for companies to beat these lowered estimates. Maybe so, and quite likely they will indeed beat the estimates. But they are still beating lowered estimates. And the “growth slowing” phrase repeated often enough in financial media and that sentiment along can cause some turbulence in the markets.

So, we have to be aware that the fundamentals are not as strong as they were 2 - 3 months back. Some of that was evident in the stock price reaction post earnings. The latest of these was with NVDA last week where the earnings were quite good, and the forward guidance was good as well. The stock price fell anyway.

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Strategy

All this is fine, and one may ask what is one to do in these situations. I can say what I am doing.

I have lightened my long-term portfolio to 60% cash for now. I do this when the major markets on the daily charts show price below their 50-day SMA. This is a simple and straightforward rule, and I always stay disciplined to follow it. I know that I may give up some gains when the market bounces and I am OK with that.

As regards my trading account, which is more geared towards short-term income and growth, I play the volatility. In times like this where stock market is falling, and volatility (VIX) is rising, the best approach is to be selling options.

Please review this post on X platform where I go over the strategy in more detail.

The 1-year daily chart of the VIX shows that it is elevated but still not excessively so.

Despite this the implied volatility on options is already very high. Thus, it does not make any sense to “buy” options. It is much better to be an options seller. That note in the link above gives a good idea what type of options I sell.

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Earnings Releases

These are the companies with +10b market cap that are reporting earnings next week.

Tuesday is retail strong with TGT, BBY and AZO reporting before market open and ROST reporting after close. I am most interested in the CRWD release after close.

Wednesday after close MRVL, MDB and ZS are of interest to me. Gives me another read on tech earnings.

Thursday I am looking at AVGO and COST after close.

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That’s all folks. Have a happy trading week ahead. It will be week 10 of the year.