Stock market display screenshot on the street with stock market crash sell-off in red … [+]
The US stock market has been flirting with record highs this week, and this has caused a lot of nerves among investors. One of the reasons stock traders have been feeling jittery about the S&P 500 index reaching its record high is the wave of sales that has eroded most profits in the last hours of the day.
Famous saying
Remember the famous saying that novice traders open the market, and professional traders close the market? Beginner traders make most of their decisions on the back of fear like vulture and trade over the first few hours of a trading day. On the other hand, professional traders sit and wait for the trend, and they pay attention to fundamentals.
The S&P 500 index has frightened stock traders and reminded them of a stock market crash as the S&P 500 experienced an intense sell-off in the last hours of trading on Tuesday, August 11th. The theme has been about the same ever since. The sell-off came late in the day, and when it hit the S&P 500 and Dow Jones indices, the U.S. stock market began to lose its balance.
Smart money index
The S&P 500 index had several attempts at a record high this week, and it has failed to break above this level. Bloomberg terminal has a smart money index, and it shows that smart money loses gas because the stock market charges higher.
Smart Money Index shows traders have become nervous as the S&P 500 struggles to move forward … [+]
It is critical to mention that this smart money index does not necessarily mean that the decision it takes is necessarily the right one. Similarly, in mid-April to mid-May, the smart money index fell, but there was no stock market crash.
However, the smart money index showed that the inflow of smart capital sided during January, while the S&P 500 index went up. We all know what happened next; the stock market crashed.
From mid-March to mid-April, both the Smart Money Index and the S&P 500 moved in the same direction. The smart money could see the bottom. By looking at the current action of the Smart Index, it becomes quite clear that it is leaving the playground.
One of the reasons could be that the S&P 500 index does not show convincing signs that it may move above the record high.
That the question for traders and investors remains, however, is how we can make this sense, and what is the path of least resistance? But, before we do that, let’s lay some necessary foundations.
Are stocks going up or down?
The Nasdaq
In simple terms, U.S. stocks have seen a strong rise since the coronavirus stock market crash. The Nasdaq index has been the leading index.
The S&P 500 is up 46%, the Dow Jones is up 45%, and the Nasdaq is up 60%. The chart below shows the percentage performance of the US stock indices since March 20 this year.
The chart shows percentage ratings for the Dow Jones, the Nasdaq and the S&P 500 index. De … [+]
Is it a bubble?
The performance of the stock market is not necessarily a true reflection of the economy. One aspect that many may agree on is that the U.S. labor market has experienced a significant improvement from its highs. For example, the Initial Jobless Claims have fallen below the one million mark since the coronavirus pandemic.
The dominant trend toward ongoing claims and initial unemployment claims has been at a disadvantage, meaning fewer Americans are filing unemployed claims. The U.S. unemployment rate has also dropped to 10.5%, and we can perhaps see it moving to a single-digit territory as well.
The recent U.S. quarterly GDP is something that makes stock traders nervous and she thinks the current stock bubble could pop, and the stock market crash could happen.
Given the fact that economic activity in the US has returned, it is likely that the next four-year GDP reading may show us a strong number and that may justify why the stock market is at the level it is at now.
Can the Bubble pop?
The S&P 500 must continue its journey beyond the current record high. When it starts to consolidate at this level, it can make many stock traders nervous. Technical analysts will begin to say that the S&P 500 index has formed a double top (shown below), one of the most reliable bearish signals, and a small pullback could create significant chaos.
The S&P 500 chart shows that the index may form a bearish pattern, a double top.
For the S&P 500 index to move higher and convince stock traders of its strength, we need the momentum and pressure from some of the lower sectors of the S&P 500 index. These S&P 500 sectors are energy, financial, real estate, and industrial. Without their help, any upward movement for the S&P 500 index can always raise questions.
The bottom line
Traders are nervous that the S&P 500 index may not cross above the record high and is losing momentum at this point. This causes stock traders to lose their confidence in the stock market. The stock market needs a new catalyst, and the S&P 500 needs to move above the clock to assure traders that this coronavirus stock rally is not yet ready to crash.
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