U.S. Stock Market - Is There A Yellen Put?

Most major U.S. stock market averages were down sharply last week (about 3%). Many uninformed Wall Street pundits are describing this slide as "normal profit-taking" following an extraordinary advance over the last five years and from last year's exceptional rally in particular.

The $64,000 question for investors now is how do we determine if this latest pullback is merely a "correction" in an ongoing bull market or the beginning of a major new bear market? After almost 40 years of studying the markets, 9 years trading personal capital as a market maker on the CBOE, 10 years as editor and publisher of the Sutton Daily Advisory Letter, and 13 years managing money, I still don't have the answer to this question. And, quite honestly, there may not be a definitive answer. For me, however, I place a lot of trust in my computer trading system. I need to see weekly chart sell signals in most of the major averages and I need to see at least a few actual or preliminary monthly chart sell signals. For example, for the week ending January 24, 2014, weekly chart sell signals were triggered by my computer trading system in almost every major index (see the Russell 2000 Weekly Chart here). And now, preliminary monthly chart sell signals have already been triggered in several major indexes, and most of the other major indexes are close to triggering sell signals. And just in case nobody noticed, the Russell 2000 Index and the Nasdaq Composite Index BOTH crashed below their respective 150-day moving average lines on Friday, April 11th, for the first time since December 2012. It is my humble opinion that the 200-day moving average lines for both of these closely-watched benchmarks will provide equally feeble support for anyone who is still bullish. For me, the evidence is clear. A major new bear market is now underway!

Russell 2000 Index Weekly Chart with 30-week and 200-week Moving Average Lines

Russell 2000 Index Daily Chart with 150-day Moving Average Line

And what about the so-called "Yellen Put"? Over the last five years, the bullish case for stocks was bolstered by the fact that the Federal Reserve seemed to be there at every meaningful correction in the stock market with a new package of monetary stimulus (quantitative easing "QE") or Fed-friendly forward comments on the expected path of short term interest rates (Zero %, Aka "ZIRP", zero interest rate policy).

Like the former Chairman of the Federal Reserve (Ben Bernanke), investors can expect the new Chair Janet Yellen to provide support in the case of any serious decline in the U.S. stock market. Unfortunately for investors, the so-called "Yellen put" is probably significantly "out of the money" right now. In other words, the Federal Reserve will NOT be there for investors until and unless there is AT LEAST a 20% correction. Dovish "rhetoric" from Fed officials can be anticipated when the market corrects 10%, but the serious monetary accommodation (i.e. a whole new QE package) won't be presented until the "official" definition of a bear market is met with a decline of 20% or more.

My forecast from last week's column is repeated here:

The S&P 500 Index will retrace at least 50% of its last major bullish leg from October 2011 at 1074.77 to the record intra-day high recently posted at 1897.30. This would translate into a 21% correction to the 1486.04 level.

Attached below are the latest daily and monthly bar charts for the most popular ETF in the world, the S&P 500 Index ETF (symbol SPY). Both charts reflect all the buy and sell signals generated from my computer trading system. The latest monthly chart sell signal does not become official until April 30th. In the interest of full disclosure, I have a significant long position in the SDS "double short" S&P 500 ETF in one of my managed accounts.

Daily Chart of S&P 500 ETF (symbol SPY) with Computer Generated Buy & Sell Signals

Monthly Chart of S&P 500 ETF (symbol SPY) with Computer Generated Buy & Sell Signals