As I age, I become more of a skeptic. As Canadian rock group Rush once sang in their hit “Tom Sawyer”–“His mind is not for rent, to any God or Government”.
As a skeptic, I subscribe to Skeptic Magazine– which is a science magazine dedicated to critical scientific analysis of common beliefs. The magazine continues to cause me to pause when I hear opinions and rhetoric spewed by the media, government or ordinary people.
One example of such rhetoric is the recent Trumping of the “flattening curve” in COVID-19 cases. It’s likely that the biggest impact of this virus is the psychological effects. Yes, the curve may show some signs of abating. But it’s early, and the show ain’t over yet. I’ve heard from a reliable source who worked in the insurance industry in statistical programing that the reality behind this disease is very far from being predictable. Hopes of a relatively quick returning to normal life, and the development and distribution of a vaccine, may be well ahead of reality. Yet, the government has an ulterior motive of offering hope. So hope is given.
A side effect of that hope is a stock market rally – like now. Is the current rally “Wave B” of Elliott Wave Theory…aka.. the counter trend rally? If you subscribe to our newsletter, you will have read my thoughts on that potential. I also pondered on that idea on this blog.
Aside from EWT, there is the good old psychological makings of a bear and bull market. Below is a chart taken from The Visual Capitalist website illustrating that cycle. I circled where we may be within that cycle in yellow. That is, a denial rally within the greater context of a bear market that has yet to play out fully.
I’m not saying that I know that we are in Wave “B” or in the “Denial” phase per the charts above. I’m not saying that I have any true insight on the flattening of the virus curve, or the timing before life and the economy returns to normal. But I do know about technical analysis of stock trends.
Technical analysis offers tools to look for clues as to when we actually complete a bottom. One such tool is market breadth aka, market participation. Some research done by Sentimentrader.com lines up with similar research done by JC Parets, an American stock trader. They suggest that bear market bottom can be signalled by breadth. One such breadth indicator is the % of stocks in the SPX over their 200 day Simple Moving Averages. Followers of my Bear-o-meter know that I use the % over their 50 day SMA’s as one of my factors. The argument by Sentimentrader and Perets regarding the 200 day SMA is that it’s more of a macro, longer termed view on the markets health. The 50 day version that I use is more of a near termed signal.
Sentimentrader suggests looking for a move back above 20% of all stocks on the SPX over their 200 day SMA’s. Parets suggests a move over 15% of all stocks in the SPX breaking above the 200 day SMA will suffice. I’ve used the 15% point on the chart below for the lower horizontal line. Like my usage of the 50-day version of this indicator, I placed a horizontal line at points of theoretical “overbought/ oversold” levels.
Notice the head-fake when the indicator moved back to 15 in early March. The indicator went on to crater in the mid-March low. Only 1.25% of stocks on the SPX were above their 200 day SMA’s that day. Yikes! Now, the indicator is back to about 12%. So its getting there. The question is, will the rally we are seeing today (and yesterday) continue long enough to break that 15% barrier? We shall see.
Between the technical resistance points I recommended you watch on yesterday’s blog, and market breadth indicators like the % of stocks over their 200 day SMA discussed today, we have some indicators that might confirm a basing action. Remember, a base (sideways) period would be healthy for the market to complete a bear.
I’ll keep posting my thoughts on this blog. It’s great to read your market input in the comments section. So don’t hold back!
23 Comments
Hey Keith, thanks for sharing all your thoughts with us. Find it very educational for a novice investor like myself. What are your feelings on gold, by looking at the chart there might be a set up for a reverse head and shoulder pattern which should be bullish and we’re also getting close to seasonal strength…..
It looks like it will head to its old high near $1800. From there, I dont have an opinion on whether it breaks or not.
Nobody knows anything as this isnt as simple as the Fed calming markets down when there is China growth fears and an oil crash happened in 2016. If the virus gets worse, markets will go down more. If the virus starts to get contained, markets will go up. You either believe the flattening is happening or it’s all false lies from governments.
Thanks Keith.
I’ve been pondering the pattern, and the likely path of the virus going forward. I’m wondering if you could comment on the probability that this replicates the 1929-1932 “grind lower”. So far, seems to follow the pattern you articulate in this blog. But that was followed by as series of “head fakes” until it finally bottomed.
Hard to say Larry–but that could happen. My own two cents worth (which may be worth even less than that, considering the drop in Canadian currency value) is that things happen much faster these days. So a bottom wash could happen in a month, or two. We do have some fast acting government action going on, unlike in 1929.
But, who really knows?
I would like to add to your cautious tone Keith. I’m not going to talk about charts though, I am going to ask your followers to consider the following points: do you trust your government to do the right thing? what happens when weather turns nice & governments relax (prematurely I’m guessing) stay at home orders? Do you realize that one health care worker who was found positive & refuse to go back to work until retested although she showed no signs, when retest 21 days later still tested positive? What if, and this is no longer a what if, what if our pets (dogs, cats, etc.) become infected? how do we control them from spreading the virus? stay at home orders? What happens when wave 2 hits? sure we will have more masks, more PPEs, will we have as many first responders or health care givers? How do markets continue straight up? Sorry Keith, today has been a long day, I’m on my second glass of wine and just don’t have the fortitude to proof read this, apologies. I appreciate the efforts you make to educate and direct people on the pit falls of investing. I don’t always agree with everything you say, but I do more often than not and you are not afraid to post rebuttals, credit to you. This is not rebuttal you are right to warn investors!
Carey
Thanks Carey. Gotta admit my weekend wine consumption is up now, too!
But hey, at least you can get it delivered now!
We may not be at the bottom yet but why try and time the exact bottom. Your already getting some quality stocks at good prices. It’s like seeing your favorite shoes go on sale at say 30%. You’ve always wanted those shoes but you thought they were way too expensive before. Do you agonize and wait for them to drop another 10%? What’s likely to happen is those shoes will either be sold out next week or will go back to regular price. And good quality stocks are even better some pay a dividend while you wait.
I get it Dave, and you may be very right. I’m the cautious type. And I’m looking at history, which might not even be a good guideline. Truth is, this is pretty one-off as far as crises compare. Perhaps 1929 was the only other time we had similar unemployment. But, we have the Fed going at it this time, which makes it different in a positive way. Yet….I wonder. I’ve been asking myself if the market justifies its old levels of 3400. No way. It didn’t justify them in Feb, and it certainly doesn’t now, no matter how bullish you are. So, given all of the forward earnings projections we can guess at (and man, it’s just a guess!!), where should the SPX be right now? 3000? 2800?
We sold a bunch of stocks in the past 3 trading days as markets rallied, going from 15% cash to 30% cash as of yesterday. What did we give up…5% potential upside if the market goes up another 100 points….?
History suggests a reasonable chance of a 3rd wave down. It may not happen. This could be a one and done. Fine. But I feel I’m not missing much upside vs. that risk. At least from this vantage point.
Hi Keith, Could the rally this week be a lot of retail investors who are anxious to get back in the market? I get the impression most institutional investors are still cautious and many believe the market will retest the bottom before we get the genuine rally. However the question a lot of retail investors have right now is should they start buying stocks now or wait and see. Couldn’t company earnings completely revalue stock prices as they come out?
Linsay- your last sentence is one of the worries. Will corporations come out with ANY guidance whatsoever? Probably not! Uncertain answers may not be taken kindly by stock players….
So, yours is THE question that everyone has–re–when to buy. And there is NO answer to it…yet.
I’m not doing this, but, heard this on a money manager podcast this morning..somebody said that if you invested 1/10th per week of your cash for the next 10 weeks, you probably won’t be too wrong, given the nature of dollar-cost averaging
Keith – I don’t know the money manager, but perhaps you should follow, in principle, what he says. At least it’s grounded in the humble admittance that one cannot time the markets. It would be better than the twice per week toil you’ve been demonstrating on here since the pandemic. It’s obvious that you’ve been warring in your head on what portfolio management steps to take despite your deep foundation of technical analysis. I believe you’re an intellectually honest individual who strives to do right by his clients even though there’s been a time or two where my comments have not been posted probably because my raw rational criticism runs contrary to your emotions. Here’s what my research states covering 120,000 months of data points of various firms in various industries: Time is the friend of the investor who invests in quality businesses. If you invest 1/38th of your cash for the next 8 months in quality businesses, you will do more than fine. No toil associated with my strategy; just 1000s and 1000s of months of data factored with a reasonable margin of safety.
David–no sense reading this or any Technical Analysis blog if you don’t ascribe to it.
BTW–the only time I do not post a comment is when it is, IMO, abusive, argumentative, unnecessary, unhelpful, or of no interest to my readers- who do tend to use Technical’s in their decision making process.
I don’t tend to post aggressive criticisms of TA (although I am always open to specific questions presented in an atmosphere of open learning and discussion) any more than will I go onto a blog site espousing something I don’t ascribe to (eg- mutual funds) and post my critical input on that investment strategy. Why bother?
Anyhow, thanks for the input.
2.3 trillion on new stimulus money this morning is certain a lot of money to help weak companies stay alive and can justify some of this rally, but I’m looking at price action and some of the worst sectors have gone straight up over 12 days and I’m selling some of my positions, assuming this is one of those bear market counter rallies. Some losses, some gains.
Can’t wait to see what happens from here.
Interesting comparison Keith. Keep up the good work.
Hi Keith, I just checked the SPX over their 200 days SMA’s. this morning and were at 15.05%.
Sentimentrader suggests looking for a move back above 20% of all stocks on the SPX over their 200 days SMA’s.
The 50-day version is at 15.64%.
Perhaps, we see what the next few days look like before putting some money to work.
What are your thoughts?
Al–this is EXACTLY what I was writing about. Don’t predict. Do react…
Your blogs always give me more to think about. I go to Bnn and this blog often and have for a handful of years–and what a big help it has been in that I tend to invest more patiently.
These days, I’m a buyer but only a bit at a time and based on the belief that this too shall pass. P/Es will change but I doubt for that long. I have time and cash.
$SPX on the weekly chart: Full STO and RSI are hooking up.
Daily chart: MA50 coming down at 2900, Full STO turning down?
Ichimoku cloud: Daily resistance max at 2900 and weekly resistance at 2900.
Economic news are really bad, can’t be worse, but the central banks are there for us (or them?).
My bet, base on the charts of the last financial crisis (2007-2011): the bottom was at 2200, short term we are going down and I will be a buyer on every negative day. And keep my gold and gold miners for the ride in the gold world.
That sounds like the rational answer, when you have no idea which way the mkt willl jump.
Better to be 1/2 right, than all wrong. I’m inching into utilities and telcos.
Good way of approaching this situation
Hello Keith….Happy Easter,
I was thinking where the S&P500 might finally finda a bottom. The S&P500 had a closing high of
3386 back in February.
Everyone would agree, it was in bubble territory…and probably should have peeked out at around
3200 (approx.)…….
40% retracement = 1920
50% retracement = 1600
So, I decided to add the two and divide by 2 = 1760 seems to be around what it should bottom at.
The caviate being the Fed. Although I do agree with some of thier actions, I think they are going way overboard to prop up the markets. It seems since 2008/09 the markets have been on life support with QE1, QE2, QE3, etc….so much for free capital markets!
I was shocked when the Fed was lowering interest rates in 2019 with the lowest unemplyement in 50 years. The U.S economy was on rocket fuel, with the added fuel of lower corporate taxes, and the repatriation of Corporate money abroad, permit by the Trump administration. The Fed should have been raising rates, not lowering them. It boggles my mind why Canada and the U.S spend, spend, spend when they should be saving for when a recession comes, that is when you spend to offset the effects of a recession……they got it backwards.
At this point, I will go with 1760 on the S&P500…….it’s anyones guess…..that is mine.
Thanks Ray
I totally agree with your assessment of the government fiscal policy pre-COVID-19 panic.
On the US side, you had a megalomaniac who was trying to ensure re-election through needlessly pushing the Fed to keep rates low despite a strong economy
On the Canadian side, you had a megalomaniac buying votes throwing money to immigration & lobby groups (Aga Khan), financially & otherwise supporting vote-motivated private corporations (BBD, SNC, etc) along with influential media bribes, and other special interest groups