Welcome to Market Purgatory

To say that the bears have been firmly in control of the equity markets during the past several weeks would be stating the obvious. However, the sharp decline we’ve witnessed in the broad market hasn’t been straight down. The market has experienced several volatile turnaround days, including last Friday and again on Tuesday. In fact, the volatility we’ve witnessed over the past two weeks has placed stocks in what I call “market purgatory.”

Stocks now are trading right between their short-term, 50-day moving average and their long-term, 200-day moving average. This market purgatory can be seen here in the chart below of the S&P 500 Index.

As you can see, the S&P 500 now trades right below the 50-day average (blue line), and right above the 200-day moving average (red line). This midway point for the stocks between short- and long-term trends begets the question — what’s next?

Well, I think a great case could be made that we now are going to experience some buying that takes us back up to the 50-day average. Yet, an equally strong case can be made for further declines all the way down to the 200-day average.

I admit that I don’t know for certain which camp will be proven right, and until I start to see a strong trend forming either way, I recommend that you stay patient with any new money you want to invest.

Believe me, there will be plenty of opportunities to jump back into equities on the long side, or on the short side, when this market finally chooses whether it wants to keep running with the bulls, or start rolling around in the dirt with the bears.