Lessons from the Pros


Dire Market Warnings

In my last article, we took a deep dive into the S&P 500 index to evaluate the signs and likelihood of a bear market. Today, we will examine the other equity market indexes to see if they are also indicating a bear market correction. There are four major stock market indexes in the United States, the S&P 500, the Nasdaq, the Russell 2000 and the Dow Jones Industrial Average. While they are all made up of stocks, each has their own individual characteristics due to the stocks that make them up.

The Nasdaq 100 index is an index that is comprised of the top 100 stocks listed on the Nasdaq exchange. As you can see below, the index is weighted heavily in the technology industry. The Dow Jones Industrial Average (the Dow), is one of the most popular indexes and most quoted in the world. It is interesting because it is made up of only 30 stocks. While many quote the Dow as a proxy for the American Economy, it is in fact a poor representation of it and is unevenly weighted.

Sector allocation lists for the Nasdaq, Dow and Russell 2000 Indexes.

The Russell 2000 index is made up of smaller companies that have most of their business dealings within the US. The weighting of the index is also more aligned with the economy of the US. The largest sector portion of the index, financials, is also the largest employer. This makes the Russell 2000 index a better barometer for measuring the health of the stock markets and the economy.

During the 2007 market crash, the Russell 2000 index peaked well before the other indexes. This relatively unfollowed index showed traders who were paying attention that the markets were worsening and that the new highs in October 2008 were not going to last.

Stock chart showing the July 2007 peak in the Russell 2000 index

The same picture is happening today. The Russell 2000 index peaked in August 2018, before the peak of the other indexes in September. Since then, there was a drop in the index of over 27% from those highs. At the time of this writing, the Russell index is still down over 17% from the highs.

Stock chart showing negative divergence in the Russell 2000 index.

Looking at the daily picture of the Russell 2000, we are indeed seeing some bear market signals. Prices were hitting a daily supply zone on January 14th and it looked likely to continue its march downward. The momentum indicator shown on the chart verified that supply should hold, and lower prices are coming. This may lead the other market indexes lower as well.

Daily chart of the Russell 2000

Looking at the big board, the Dow isn’t fairing much better. There was negative divergence that warned of prices turning down before the fall drop. The fact that the RSI cannot get above 60 on any of the market rallies is typical of a bearish environment. Add that to the fact that price has made lower highs and lower lows and you need to be protecting your retirement accounts.

Dow chart showing bear market prices.

The Dow is also in supply on the daily chart and looks to be headed for lower prices soon.


The tech heavy Nasdaq 100 has not been spared from this selling pressure. As with the other indexes, there was a divergence on the indicators which hinted at price weakness before the drop late last year.

Stock chart with text: The failure of the RSI to get above 50 is extremely bearish for the Nasdaq Index.

On the daily chart, the Nasdaq is primed to turn lower from the current supply zones it is trading in, too.

Daily Nasdaq chart showing current supply zones.

So where does this leave us? If you listen to most brokers and money managers, they will tell you to just hang in there and that your money will be fine. But was it fine in 2008 to watch your retirement accounts lose nearly 50% of their value and be forced to wait for five years for them to get back into positive territory?

Free Trading WorkshopThe markets tell you where they are going. You need to listen and act. We only have so much time in our lives. When we suffer through bear markets due to inaction, it delays our ability to retire comfortably. Do not be a victim of bad financial advice, take charge of your own accounts and become an educated investor. There are excellent opportunities for you to grow your wealth even in bear markets. Do not sit by and waste your precious time. Learn how you can invest and trade the right way so that you can enjoy life on your terms!

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.