Special report: Capitulation or continuation?

This weekend will feature an interview I did with a BNN reporter today. Tomorrow, I will be on Market Call Tonight at 6:00pm

I thought I would do a super short and sweet reprint of some of the talking points revolving around todays phone interview. You can tune in to BNN tomorrow to hear even more on my market thoughts. But the bottom line is that I view the current market activities as the “beginning of the end”. That is, we are nearing, if not already at, the capitulation bottom regarding the Coronavirus market selloff.

I’m writing this at around noon on Thursday Feb 27th. Perhaps in a few hours we will see if the market can close higher than its lowest point of the day. This may result in a bullish reversal candlestick. We shall see. Here are my point notes from the BNN interview. Short and sweet:

  • Big picture is bullish – evidence: market remains supported by 200 day SMA—even a small short termed break of that SMA is quite acceptable
  • Big picture is bullish – evidence: support at 3000 (SPX) is being held, Again, a short break below is fine.
  • Other bullish evidence: seasonal tendency is bullish to May. Also, sentiment is turning bullish (smart $ buying, dumb $ selling)
  • Short termed picture was bearish just 30 days ago. Sentiment (smart/dumb) was goofy—dumb $ was piling in with 88% confidence!!! Meanwhile…Smart $ was selling hand over fist – only 23% of smart $ was bullish. In January– We raised 12% cash and also bought 6% in precious metals because of these cautious signals.

  • Now that’s reversed per above comment. In the chart above, courtesy sentimentrader.com, Dumb $ (red line) and Smart $ (blue line) are reversing directions. Note the January 20th levels. As is often the case, smart money moves are ahead of the curve. Dumb money loves to buy high and sell low.
  • Also, momentum was overbought – now its settling down. Note the move from overbought to oversold on stochastics, RSI and MACD below.

  • Finally—two gap-downs on the chart this week indicate the potential for a capitulation bottom forming. Gaps are a sign of panic and fear, which often precedes bottoms. Two gaps in one week is very significant.
  • We are legging in starting today. We will reduce cash from 12% to 9% today, then buy more if the market holds next week. Yes, it may fall more, so we keep some powder dry (cash and gold). But it’s highly likely we are at or near the end of the selloff, whether it’s now, or two weeks from now.
  • We will also begin selling some of our precious metals next week if markets hold. Seasonals for them are actually weak this time of the year. We hold them only for risk reduction at this moment.

 

16 Comments

  • Hi Keith,

    Dude this happened FAST! Did we ever get a 10% correction this fast? It does feel like people gave up this morning and some limit orders set a while ago for my dads account went through. He had been waiting for a correction to add his 60% cash pile to a dividend ETF (zdy.ca). This time, I am not waiting for a beautiful chart setup, with VIX at 30, it’s time to buy if you are long-term.

    I personnally bought back the XSP.CA Sp500 shares I had sold during the mad ramp up. It would have been hard to do if I had to preset buy orders at those strong levels of support.

    Some stocks got pulverized and I’m glad I resisted buying them. AC.CA, IFP.CA, ouch.

    Thanks for your blog.

    Reply
    • Matt–I’ve been doing this for 30 years- so yes, there are many times where I’ve seen 10%++ corrections can happen in a matter of days. 1987, 2000, 2008 all had such quick horrifying selloffs.
      It’s all part of the capitulation phase.
      Markets often take the stairs up, and the elevator down!

      Reply
  • I think there’s a decent chance we go down through 3000. Some sectors like Nasdaq and Google are still far above the 200 day ma. I think the market will still suprise with an unexpected further move down through 3000 to flush out the last of the longs

    Reply
  • Hey Keith, I have heard you say many times on BNN that you usually don’t try to catch a bottom, but instead wait about three days from a low point to let things settle out, then start buying. What’s different this time?
    Don (Abbotsford BC)

    Reply
    • Great question Don
      I actually haven’t put my orders in yet today–may wait to the last half hour of trading before doing so. I want to see a reversal candle where the market closes off of its lows by a decent amount. So if the Dow was down 900 pts at its worst at 10:35am, I would like to see it be down say 300 or 400 by near close. Then I will do a leg in. If it stays deeply red, I am not buying.
      Why am I not waiting – per my typical style? Well, I am still going to hold some cash no matter what. But the signs of capitulation are there – enough to allow me to throw a bit into the market if I see any type of swing pattern as described above. Its more of a gamble, but with only 1/4th of my cash, and without touching the gold

      Reply
      • Thx. Keith, and many thx for this blog and the ability to ask you questions.

        Reply
  • If you look at the weekly spx that red candle off the top is called an igniting candle usually followed by more down weeks. If it happens then you have technical damage to the chart which will take some time to repair.

    Reply
  • The scare about the coronavirus virus, which this is all about, will not be over in a week or two. The real scare has just started as it is growing outsde of China and hitting home. I don’t see a move up for some time.
    Paul

    Reply
  • I think the next target could be as low as 2700 on spx now. Patience will get you some better prices.

    Reply
    • Yes we waited–we looked to see a reversal candle, didn’t get it, held off buying

      Reply
  • Hello Keith,
    Great postes today.
    I remember I commented 2 week ago about what migh happend. It looks like it is happening now. The WHO just announce this morning they have raised the risk assessment of the Coronavirus to ‘Very high’….this virus is spreading like wildfire throughout the world….numbers will certainly reach into the hundred thousands, if not milliions. The deat rate is more like 7-8%, not the 2% they have ben saying.
    Panic has NOT set in …give it a few more weeks, when the numbers explode. 1.5 million surgical masks will be given out in Manhattan……this is going to put serious financial strain on many companies who borrowed excessively over the last 10 years with low interest rates.
    S&P 500 going to 2000 …..watch and see.

    Reply

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