Acting like a scout

October 11, 201816 Comments

The scouts have a motto: “Be prepared”. I try to ascribed to this philosophy – originally brought to the Boy Scouts in 1907 by Baden Powell.

As this blog is written, North American markets are selling off. We don’t know how deep the correction will go. I will only say that: I was prepared, and so were you if you have watched my BNN shows or followed this blog!  To reiterate my message: the excess moves of last year needed to be washed out by either a 10-20% correction – or a period of sideways volatility.

That era of correction/volatility began early this year (after the January highs).  ValueTrend moved into more than 20% cash in the spring. If you read my Bear-o-meter blog last week (Oct. 3rd), you know that I got a drastically bearish signal that day. The next day, markets began what has, so far, been about a 6.5% drawdown. Normally, the Bear-o- meter doesn’t signal moves that quickly, But, conditions were likely in place for the weeks preceding that signal, so I’ll take it for what it is. I’ll talk a little about that below. To reiterate why cash is king at times like this:

  1. It dampens (although doesn’t eliminate)  your downside
  2. It provides capital to buy stocks after this well overdue correction completes itself

The ValueTrend Equity Platform will take advantage of this volatility in the most prudent manner possible. These are the moments that illustrate the value of Technical Analysis.

 

“It is better to be prepared for illness than wait for a cure” Roger Moore

 

A brief look at the S&P

Since the trough from the last bull market in 2009, we have seen four counter-trend corrections greater than 10% in depth. Of those incidents, two were deep and long enough to keep the market below the 200 day SMA for about 3 months or more.

Bull markets, as I have noted in the past, typically last 7-17 years FROM THE BREAKOUT POINT (i.e. the old highs). The recent breakout point to start our count for the current bull was 2013. Thus, we are 5 years into the bull –less than the historic length for most bulls.

Each bull market ends with a parabolic move surrounding speculative markets. Last year’s move was  parabolic. But…it wasn’t led by lousy stocks. Yes, the FANG’s were moving like crazy –I mean, Amazon is great, but…is it THAT great….? Nonetheless, the FANGS are real companies with real earnings and real business models. They are overbought, arguably overvalued, overhyped. They need to correct, and the bond market trigger discussed on this blog might be the excuse for the current selloff on these (and other) stocks. But history shows us that stock market bears typically lag a bond bear. Here’s a link to my observations on that.

Moreover… big, bad, horrid bear markets are brought on by rampant stupidity via purchasing stocks with no earnings (the 1999 tech bubble), or severe stupidity in thematic investing and leverage (the 2007 subprime and oil bubble) or massively over extended stock valuations in can’t go wrong stocks like the “Nifty Fifty” stocks. FYI–these were the stocks that went wild, and proceeded the sideways/ multi-bear market period of the 1970’s. None of those conditions exist at this time.

So…how low can it go?

Well, if we are to believe that we have a few more years of the bull market before the real bear begins, and if we see corrective periods similar to the 4 noted on the chart above… I will suggest that we may see a correction that does not exceed 20% (or not by much). The market will dictate whether you should sell more than cash reserves you may already hold by a break of the SMA and a break of the last low on the weekly chart (mid 2500’s on the S&P 500). A drawdown from the (approx..) high of 2950 to the (approx.) last trough on the weekly chart of 2550 would be about 14%. I won’t call if that is to happen. But that is a reasonable first level of support, should the current break of the 40 week (200 day) SMA last much longer.

Meanwhile, my neartermed timing system is setting up for a buy signal—although we need to see the indicators hook up before calling it.

 

Bottom line:

Selloffs in bull markets are opportunistic for those of us with cash so long as we remain in a bull market. At this point, we are in a bull market. Bob Marley has this market pegged in his song “Don’t Worry, be Happy”.

 

16 Comments

  • hi Keith my health hasn’t been to great for the last 6 to 8 months so i have gradually reduced my stock holdings in open acc so that i am holding approx. 76 % / $ 370,000 in cash. when this correction decides to turn upward what would be the best plan of action for this cash

    Reply
    • KV
      I cant advise you as to what to do with your cash unless you are a client. But, it sounds like you are looking for some sort of professional guidance. As you may know, I don’t use this blog as a “commercial” for ValueTrend–but it sounds like you may indeed want to explore dealing with us. You can contact us if you want to explore how we manage money. Basically, it is our job to take this type of decision and worry off of your plate – and manage your money in the way that suits your objectives. Hit the “contact” button on the website and I will communicate with your directly if this is of interest.

      Reply
  • The fear indexes seem now to be at extreme fear levels already. Time to bargain hunt?

    Reply
    • I would say that it is a great unknown as to whether the we just saw the bottom of this correction–but certainly a prudent “legging in” strategy may be in order with select stocks. I am not committing my cash just yet. But…will soon….

      Reply
  • Hello Keith,
    Do you think today’s rebound on the NYSE & S& P 500 going to last, or do you expect another leg down. A part of me thinks this might be a dead cat bounce.
    Thank you ,

    Reply
    • That is a good question Ray
      On the one hand, we have a break of the 200 day SMA. That by itself becomes more meaningful if todays bounce doesnt bring it back above, or doesn’t last.
      I do know that you can see “V” reversals after a sharp drawdown. But more often than those are “complex” bottoms/reversals–meaning choppy action before a turnaround.
      Not sure if I would make a call yet on what is to happen. But it does indeed seem a bit early to call an end to a selloff. We shall see. Perhaps it will turn quickly–but I am not deploying my cash just yet.
      BTW–the short termed timing system on this blog is in the “turnaround” zone, so no surprise we get a bounce. Its whether that lasts or not is the question, per your comment.

      Reply
  • Yesterday afternoon they had a technical person on BNN. He indicated he was bullish on gold now as it is entering its period of seasonal strength. I thought gold’s period of seasonal strength was July to October and then February to March.

    Reply
    • You are right Dave–i think the guest was incorrect–at least according to Thackray, and Vialoux’s work.

      Reply
  • Hi Keith,

    What is your strategy when a news event causes a stock to fall significantly below long term support (example Mfc short report and Snc no remediation)? Do you simply stick to your 3 bar rule?

    Thanks,

    Josh

    Reply
    • Good question, especially given the current selloff–I am inclined not to sell anything into the panic–but on an individual basis we looked at both fundamentally and decided that we wouldn’t sell based on current facts–so is now just wait for the market to finish washing out, recover, then see if these two can trail along –if not, they would have to be sold.

      Reply
  • Keith, I thought “Don’t Worry, be Happy” was written by Bobby McFerrin and Google confirms.

    Excellent blog this morning. Wish I was as prescient.

    Reply
    • I am not sure who originally wrote it buy Bob Marley certainly popularized the song.

      Reply
  • Traders and investors typically greatly underestimate in these two key market areas:

    1) Markets are frustrating, volatile and difficult.

    2)The power and strength of primary trends.

    (chris Ciovacco market model)

    Reply

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