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 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.