Special report: When to enter the market again

October 19, 20187 Comments

I’ll assume you paid attention to my blogs and/ or BNN cautionary stance over the summer – or made that decision on your own accord. If so – you likely raised cash a few months back and reduced some of the recent market pain on your portfolio. However – you may have a question. The question being – “When do I re-deploy my cash? “

To answer this question, I might like to reiterate something I noted on this blog posted last week. As I discussed in that blog, the market was overbought coming into 2018, and subsequently raising a bit of cash was the “easy” part. This, especially as the “Sell in May” seasonal time approached. Deciding when to step back in is the harder decision. As I noted: “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. I’m 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”

 

Let’s take a look at recent action to see if we can’t figure out how close to the market bottom we are. Below is a daily S&P 500 chart. I usually like to look at weekly charts for a bigger scale look at markets. But we are trying to refine an entry. So let’s see what a shorter termed viewpoint might offer.

On the chart, you will note that cumulative moneyflow (bottom pane) has been trending up since the market broke out of a sideways consolidation in late 2015. Lately, there has been a slight interruption in this moneyflow, which you might expect in a sharp selloff. Money is using the out-door at this time. Moneyflow momentum – the top pane, verifies this. But this is short termed stuff, not likely a trend. We will also note that the market temporarily punctured the lower trend channel line. Again – this can happen in extreme situations—as it did to the upside in January, just before the recent sideways market. Again, no concerns here (or, in millennial speak, “no worries, not a problem, perfect”). MACD, RSI and stochastics are oversold across the board. That’s normal, and bullish.

 

Like a toilet seat

Finally, note the circles on the chart. Black circles are complex bottoms, red circles indicate more V-like reversals. You can see, even in this very small time period, markets experience more complex bottoms than V-reversals. As such, I feel I should bet with the odds that there would be volatility before a true reversal. Think “up and down like a toilet seat”- that is how the market often puts its (pardon the pun) bottoms in. Each day offers a whole new ballgame – up, down, up down.

So far, it does seem to be a choppy pattern, but there is a dominant low on October 18th that may in fact be an “engulfing” candle—indicative of a reversal. The chart below is a closeup view of the recent choppy action. If the market continues to stay above the low set on October 11th (2710 intra-day, 2730 close), it may be assumed we are experiencing a “V-reversal”. If it chops around a bit more and possibly even enters into the low 2700’s, it may be assumed that we are basing, ready to break out after a complex bottom pattern finishes (eg rectangle, double bottom, etc). Note the spike below the 200 day SMA – since resolved.

As an aside, I pulled up sentimentrader’ s “Optix matrix” – which gives us a sentiment reading on all 16 of the major US sectors. (using collective sentiment indicators unique to each sector). You may be interested to know that 15 of the 16 sectors are in “bullish/too pessimistic” zones. This means that investors hate most everything out there. Only Utilities are loved. Remember, bearish sentiment is a contrarian indicator. The fact that 15/16 sectors are not feeling the love means that the time is near for a turnaround.

 

My call

My call is for a market reversal by the end of the month. It is quite possible that October 11th was “the bottom”, but I will not discount a second run at that level, or possibly slightly lower. Odds are in favor of a bullish reversal coming very shortly, even if we see continued chop over the next one-two weeks. I expect to start buying in the next two to three weeks. Possibly sooner.

7 Comments

  • As you know energy stocks have been hammered, yet oil as held up well, except for WCS. Most of these stocks are trading lower than when oil was in the $30 to $40/dollar range. Is there a potential good trade here or is this a lost cause?

    Reply
    • Dave–its mostly the CDN producers. If you look at a basket of the oil and gas major producers in the USA they have vastly outperformed our stocks–check out the IEO-US chart.
      I provided some explanation for that difference on my pipeline commentary-https://www.valuetrend.ca/canadian-pipelines-worthy-a-position/
      -similar challenges for the producers in Canada when the Gov’t is doing its best to make it unfavorable for these companies to invest in new projects–Suncor CEO made sharp commentary on this about a year ago.

      Reply
  • Hello Kieth,
    Thank you for the analysis you provided.
    Something tells me (gut feeling) this market wants to go lower, much lower (S&P500) to about 2550. I think the market needs a serious reset (wash out the weak hands). The big institutions will not commit serious amounts of money to long positions, unless they can get (big cap stocks) for a cheaper price. The upside to this market is limited, as there is alot of money waiting to exit when the S&P500 reaches close to 2900 or less.
    The 10 year bond yield keeps creeping up, which will put a lid on the market, then there is China (slowing economy) their market is now down 10% including the rest of the world, mid-term elections, and geo-political risk, all this will limit any upside, and I think the big institutions will use any excuse to drive this market lower, in order to pick up shares at a cheaper valuation. We’ve had a incredible 9 year run in the stock market, I think we are due for a big reset to maybe 2550 S&P 500, it this does happen, I think this will remain a trading market with volatility being the norm.
    At 3.7% unemployment, the U.S will begin seeing rapid inflation, not seen in many decades. Though in Tariffs, and prices are going way up. Housing sales are falling, auto sales are falling, which are the first signs of an overheated economy, which had 9 years of easy money (quantitative easing).
    The punch bowl has been removed.

    Reply
  • The weekly chart of the S&p doesn’t Lok bad at all. People are freaking out looking at the daily charts that show supposed bear flags

    Reply
    • I don’t place much faith in flags as a directional indicator – they are kind of “after the fact”

      Reply

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