One indicator suggests market may bounce soon

 

A few housekeeping items before getting to today’s charts:

  • I was on BNN’s MarketCall last night
  • I’ll be speaking at the Oakville Central Library tomorrow (Thursday January 30th) at 7:00pm on the effective use of technical analysis and to promote my book Sideways. I hope to see you there if you live in the area. Admission is free.
  • I’ve written a few new Investors Digest and Moneyletter articles – visit www.valuetrend.ca and click on the “Read Keith’s Articles” at the bottom of the homepage to see them
  • My Globe & Mail article following up BNN’s show is available here: here.

Now let’s get the markets. The past year + has been quite a bull run for the US equity markets. “Buy on the dips” has been an effective strategy. On last night’s BNN show I highlighted a couple of support levels on the chart for the current dip that may be worth buying at. My main message: Watch for a bounce from next support on the S&P 500 at around 1725, if current support of 1775 doesn’t hold.

Below is a chart of the number of stocks that comprise the S&P500 that are above their 50 day MA’s. You might notice the blue horizontal lines I’ve drawn. This indicates where about half (240, to be exact) or less of the stocks comprising that index have dropped below that MA. On each such occasion, the market rallied shortly after this level was breached—see the S&P 500 chart below.

# stocks over 50 day MA

 

Before you get too excited, I’ll point out that in 2010, 2011, and 2012, this indicator dropped much further than it has over the past year. The corrections in those years were deeper—particularly 2011’s. The 50 day MA indicator dropped to a level of 20 during 2011’s  correction! The weekly chart below has three extreme levels circled, each signalling a buy from a deeper pullback.

# stock over 50 day MA weekly

 

The takeaway here may be that the market could rally very soon, were it to follow the pattern it has over the past year or so. However, the market could sell off more if it were to follow a more typical correction seen in the 2010- 2012 period. My estimation is that we’ll not experience a severe correction until Q2 or Q3. Seasonal and trend analysis are favorable enough to suggest this correction will be short lived. But only time will tell.

4 Comments

  • Hi Keith

    Great charts and you seemed to time the “correction” quite accurately. Well done!

    Great show yesterday on BNN!

    Do you often/ever hedge your investments with ETFs/options to protect your portfolios from anticipated declines?

    Reply
    • Thanks Daryn
      Sometimes I will use a short type ETF to offset risk, but only for what I perceive as higher risk/greater downside probability. That’s not the likely situation right now–this is more of a correction, not a bear–which isn’t worth trading aggressively IMO. For more aggressive downside potential, I have used HDGE in the past–it shorts a bunch of low quality stocks. But it still loses if markets go up, so you need to time it well. Its almost got a beta -1.0!

      Reply
  • Keith,
    i understand that Tech. analysis love to compare past to present, and would somewhat agree if each business cycle was the same .. wage inflation, etc. etc. … but i don’t think you can compare drops in 2010, 2011 to 2014 ….. would you agree that during that time and even now, investors were parinoid and even a slight drop in the market brought back memories of 2009 and would hit the sell button in a heart beat …. not to mention the poor soles in foreclosure selling to pay mortgages or LIBOR manipulation watched daily and feed investor reactions ….. your points are valid but maybe now the level of decline will never reach the same as 2010 …. not until something triggers the next recession…. please correct my thinking

    Reply
    • What a great question Bob-thanks for asking!
      I am actually using 2 timeframes in my blog purposely for the very reasons you suggest. That is, on the daily chart, we have a minimal correction type of market where investors buy on every dip–that’s been the case for over a year. However, as you mention, there were more extreme dips a few years ago as investors tried dealing with the paranoia surrounding the local economy, and the European near-collapse.
      However, as Templeton said, the most dangerous words in investing you can use are “This time is different”. In other words, there is always a new reason for markets to panic lurking–we just don’t know what it is yet!. So my thoughts, as I hope I expressed in the blog, are that at this time, the correction will likely be shallow, and the # stocks over 50day MA indicator may not dip to its more hyper-paranoid market levels. But I could be wrong, and prior levels could be seen if a big shoe drops. Never say never.
      Thanks again–great topic.

      Reply

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