When investing in the stock market, it is a good idea to keep an eye on the major indexes and watch for warning signs that could indicate a significant change is about to occur. One of those warning signs is happening now. Recently, the semiconductor manufacturing index (SOX) dropped below its 200-day moving average. That doesn’t sound like a significant event, until you factor in the fact that this index is a leading indicator for the stock market and the economy as a whole. Another interesting tidbit is that this index has been above the 200-day moving average for two years, which has been the longest such streak in the history of that index.
Another indicator that investors should watch is the S&P 500 index (SPX). This index is a good one to follow as an overall indication of the health of the stock market and the economy. Recently, this index has been finding support at the 200-day moving average, having bounced off that line both in March and April. The question is, will the index also find support at the 200-day moving average level in May? If the S&P 500 index crashes through that level this month, then that would be a significant indicator of trouble ahead for the stock market.
A final indicator to watch would be unemployment statistics. How would the unemployment rate be an indicator for the stock market you ask? The answer is, it is not a direct indictor for the stock market, but it is an indicator for the overall economy. In particular, when the unemployment rate drops to extremely low values, it seems to precede a recession. In April 2018, the unemployment rate fell to 3.9%, a value not seen in this country since the year 2000. Does everyone remember what happened in March 2000? For those of you who forgot, that is when the NASDAQ “dot-com” boom peaked at 5000, then dropped almost 90% over the next three years.
So, for those of you who are invested in the stock market, watch for these warning signs and obey the signals.