The Markets ended this week showing a little vulnerability to the downside. Sometimes it’s important to look at some of the broader indexes. Let’s take a look at the Russell 2000, an index that measures the performance of 2000 small cap companies.

There is no doubt that the Russell 2000 is in an intermediate decline and if that is the case the rest of the market is in an intermediate decline as well.

We have a similar story with the NASDAQ Composite Index. This is just the beginning of an intermediate decline and it should continue.

Looking at the S & P 500 which is also in decline, we should see a price decline that breaks the trend line that has been in place since this last April before we start looking for a bottom. We could get a crash like we did last February where we got a low very quickly. That correction lasted about 2 weeks. This time it could unfold a little differently, taking more time with a bottom sometime in late October or early November.

The Federal Reserve appears to have been propping up the market indexes while the underlying markets have been deteriorating badly. Some stocks are down as much as 20% while the indexes look to be in much better shape. We will probably see the markets bounce or go sideways with a more gradual decline than what we saw last February. We are already seeing some extremes in volatility and that should slow the decline.

The first leg down should tag the trend line that has been in place since April, then we should have a bounce. After the bounce, we should look for the second leg down and a break below the trend line to around the 2700 level on the S & P 500. This would be a retest of the June low.

Investment Strategy

One way of dealing with these types of corrections or for that matter with bear markets is through the use of the TVIX. The TVIX tracks two times the daily performance of the S & P 500 VIX Short-term Futures Index. It is enticing because it has the potential to give one massive returns in a very short period of time. However, you need to have impeccable timing.

Once this intermediate decline has run its course we should see the final move to new highs in this 4-year bull market cycle ending sometime in 2019. The bull market actually paused in 2015 and early 2016, only to begin a new cycle.

Market Optimism Gauge

When we look at the Intermediate Term Optimism Index we find that it recently tagged the red line and my expectations are that we will see this index move down to the 30 level and tag the green line before this decline is over. The beginning of market moves typically come from this level. The market needs this correction in order to stage its next and final market move for this bull market.

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