The battle plan

Today, I’ve written a longer blog. I hope you find the time it takes to read it enlightening.  I’d like to look a bit closer at the last two major stock market crashes. Specifically we’ll look at the 2000-2001 crash and the 2008-2010 crash. Are there any patterns in these crashes that might offer clues to how this one might play out?

 

9-11, Tech bubble. Two for the price of one!

 

The 2001 crash began with an overbought, over concentrated (tech stocks) and overvalued market looking for a reason to fall. One of the primary triggers of the crash was the failure of Nortel – the must-own poster boy that had lead the tech charge during the final 5 years of the bull market. During the early 1990’s, it was a pretty “normal” bull market. In the 1990’s, we got new clients who didn’t like their GIC returns at the banks. They were buying mutual funds and stocks – we called our prospective clients “GIC refugee’s”.

When Bell split Nortel out of its holdings, the company started posting fantastic earnings growth. Clients who were normally conservative investors wanted in on that stock, and its kin. I had a diversified approach at the time. Yes, I had Nortel. But I also held “safe” stocks like Canadian banks, US consumer staples and utilities. These stocks literally didn’t move. Some went down due to moneyflow into the tech sector. Clients didn’t care for that diversification into non-rising stocks – it didn’t matter that they were good companies with actual earnings, unlike the fast rising tech stocks.  I had clients literally order me (I wasn’t a discretionary manager, I was an Investment Advisor) to sell those stocks and buy additional tech stocks of all types. Of course, the market peaked and stocks fell. At first, the defensive stocks like those banks etc did hold their own. Just like the current market up until 2 weeks ago, when bonds and gold etc held their own.

But then came some gasoline to stoke that fire. Note the period in September 2001. Until then, the market was selling off with peaks and troughs, as seen by my first circled section on the chart. The terrorist acts of 9-11 changed that from an orderly bear market into a limit-down (NYSE and TSX limits came in, just as they have lately) crash. Just like today, gold etc sold off. Nothing was safe.

Markets rebounded off of the lows of the 1998 Asian-contagion selloff (horizontal line on the chart, noted by the right-most circle). That rebound lasted a few months – until it washed out again and bottomed July 2002.

 

Another two for one sale: The banking collapse & oil crash of 2008-2009

Does anyone recall what WTI oil was trading at in 2008 when peak-oil theory (the failure of energy production to keep up with demand) was thought as factual? Do you remember what happened after that? The chart below shows you how oil fell from $145 to $35. Um, that was big. Shale production came onside which added to supply. Plus there was that annoying recession brought about by the sub-prime mortgage crises and banking collapse reducing demand. So down it fell.

 

Here’s the SPX in 2008/9

Note that in 2008, the market battled with the oil meltdown just like today. It also watched Lehman fold, and other banks survival-merging (Merrill, etc) or being bailed out. “Too big to fail” was the lingo. Just like in 2001, we saw limit-downs on the market. And just like in 2001, we saw support come in at a prior low point – noted by my horizontal red support line going back to 2003. Finally, just like in 2001, it bounced, then failed and formed a candlestick reversal pattern (bullish engulfing) before moving into the most recent great bull market. Head & shoulders complex bottom that time.

Commonality: Both times we had a one-two punch of  terrorist attack / oil falling – and a market catastrophe (tech bubble/ banking collapse). Both times we had former support from a couple of years prior giving us a tradable rally. Both times we got one final lower washout after that tradable rally, then back to our regularly scheduled bull market programing. Sorry for the inconvenience, folks.

 

Two for one sale of 2020: Oil and Coronavirus

Coronavirus has had a massive impact on our lives and on the economy. Today, my lovely assistant Cindy asked me if I can draw conclusions from the prior two crashes, given how everyone is closing stores etc. I told her that every crash is led by something different, and its always feeling like you cant compare this to other times. Its true that this is different. But so was 2001. I mean, we became involved in a terrorist war that was on our home soil. We’d never experienced anything like the twin towers coming down. It couldn’t happen here, could it? It did!! Your neighbor could be the guy who you see put his garbage pail out like you do on Friday, then blows up the CN tower the next day. You cant fight an unseen enemy. Or so we thought. Plus, the largest capitalized stocks in the world (tech) fell about 80%!!!!!

In 2009 we witnessed something we’d never seen before. Like in 2001, it was different. The banks were collapsing. I mean, collapsing!!! People were walking away from their houses and declaring bankruptcy. Your house went from the rock-solid investment to an unsalable asset unless you sold at half price from the year prior. Major recession. And then oil went from $145 to $35–an 80% meltdown (which has never been fully recovered).

In both cases, and in the current market- it was differing circumstances, never seen before. But human nature remains the same, market participants react the same. And then, things get better. Lets look at the current chart patterns for comparison to see when we might get the tradable rally like in 2001 and 2009. On the chart below, I’ve noted that, so long as 2350 is held by the SPX in the next few days, we’ll get that tradable rally. The 2350 support, like in prior crashes, comes in at a support level from a prior selloff – in this case, December 2018.

Conclusion

If the SPX holds 2350 for the next week, ValueTrend will step in for a tradable rally. It wouldn’t surprise me to see 15% or more upside – possibly back to that 2600-2700  area of prior support. Wait before acting. This level must hold. Thereafter, I’d be surprised if we didn’t have a final washout, based on prior patterns. But that washout wont likely last long. I’m looking for a lifetime opportunity to trade that final washout for massive profits. But this is now, and the best strategy for our way of doing things is to play a rally after evidence of 2350 holding, then see what happens.

35 Comments

  • Looks like 2350 will not hold
    Experts expect next level down will washout SPY to 1885

    Oh my goodness … more pain before any gain

    Tell me there are very wrong

    Reply
    • Nobody is right or wrong about the future Don. My strategy involves proof of 2350 holding for a week. If it does, I buy and look for a trade out in a couple of seeks. If it doenst hold, I don’t buy. I have 14-15% cash (wish I had more) looking for a home on the right signal.
      No sense guessing. Follow a plan.

      Reply
  • Can you clarify or explain what you mean by this statement” I’m looking for a lifetime opportunity to trade that final washout for massive profits?”

    Reply
    • If history repeats–there will be a tradable rally, buy if you wish if support holds per the blog (2350), then sell into it, then wait for a final washout. Buy on that, and assuming history repeats, back to the bull, where you bought at low prices and see strong profits on your 2020 purchase over the coming year.

      Reply
      • Any concerns that the length of the situation is an issue? ie. this situation is a much longer event that we haven’t even begun to control?

        Reply
        • Thats a good question Wendy
          The typical bear cycle is a few months (3-8) down, then a rebuild over a year – which you can see on the two charts here, plus on the 1929 chart which I didn’t post. This one differs in how rapid it fell. So my thoughts are that this one will be shorter than say a 12- 18 month total peak/trough/recovery cycle. I think it might look something like this: peak February 2020. First decline to this date (March). Tradable rally (as happened on all three prior crashes) into April. Then a breakdown for a final meltdown as investors realize the virus isn’t going away as fast as hoped. That meltdown might end up troughing in the summer or fall. That will be the big opportunity for buying and holding for a way longer period–looking for big profits into 2021.
          So my rough and approximate game plan is to buy a bit next week (assuming 2350 holds)–sell that plus other holdings perhaps in the SPX 2600-2700 zone in (?) April, then re-buy when the market shows signs of the washout stage basing. Cant plan on that until it happens but very likely the neartermed pop is tradeable. One day at a time….

          Reply
  • I came across the following video regarding the resemblance of this market compared to 1929, rather than more recent corrections.

    https://www.youtube.com/watch?v=9b1tE5uAatM&feature=youtu.be

    It also suggests a tradable rally is coming, but the following washout is severe, and not a short term event that you would want to buy. I assume you will use the same or similar methods to determine the buy point on the wash out, which may not be for a while if this observation is correct.

    Reply
    • Yes Joe I wont guess the bottom. Keep in mind that the author of the video has made an analysis based on a historic pattern like my own. Patterns dont precisely mirror themselves–you can see that between the 2001 and 2009 charts. Both did a tradeable rally, one rally stayed high for months and the other quickly reversed down. So its a generalized pattern not a mirror pattern I am looking for. Getting back to the author of the video’s comments– neither of us, or anyone else, really knows what will happen. So to your point, you play it by ear and try to follow your rules. Its a dynamic process. For example, I’ll admit that watching 2850 get cracked (something I spoke of in earlier blogs as an important support point) was pretty scary. Here we are 500 points lower–something that I didn’t expect.
      Almost anything can happen. To me, it looks like the selloff is becoming exhausted. All of my indicators say this. But, who can really predict the exact bottom? As we’ve seen, a panicking market pays little attention to old support levels. All I can say for sure is that it wont go to zero, and some day we will look back at this time as one of the 4 great buying opportunities in history (1929, 2001, 2009, 2020!).

      Reply
  • Thank you Keith for the excellent demonstrations.
    I check for your Blogs daily.
    If 2350 holds, do you still wait 3 trading days for confirmation?
    Take good care, bob.

    Reply
    • Yes Bob, I need to see 2350-ish hold until next week, minimum 3 days. Id rather buy on the way up than guess the bottom

      Reply
  • Hi Keith,

    Thanks for the plan.

    I had wondered about using your Short Term Trading System to time the buy off the 2350 low.

    However RSI is not oversold at the moment.

    What are your thoughts?

    Reply
    • Paul–on the short termed system which uses a daily chart, 14 bar RSI it is oversold – problem being that at times like this its going to show oversold for a while

      Reply
  • Hi Keith,
    If we do get a tradeable rally, it will be a geat time to sell, as you mentioned. I think the bottom will be when large companies started declaring bankrupties (hotels, restrauant chains, manufacturing plants, and other large businesses) and the unemployement numbers in the U.S will approach 10-20% that is when we will have a bottom….when the world looks like it’s going to end…….as you mentioned nobody knows the bottom, yet with number of infections exploding in the U.S and throughout the world, we might just be headed for a depression. I will go out on a limb and put the S&P500 below 2000 at some point in the next 6-8 months…how low, nobody knows.
    The news will continue to get worse, we are still at the begining of this virus spread, especially in the U.S where they were very, very late in implementing social distancing and from what I have been told by family, most Americans are not abiding by this social norm.
    I must admit, it is so, so, so tempting to buy into some of these really cheap stocks in great companies.

    Reply
  • Do you think oil will follow this same pattern. Thanks for all the great charts and advice!

    Reply
    • I’ll cover oil on a blog soon. Its not quite the same pattern as the SPX and it has its own issues (the Saudi/Russia battle)

      Reply
  • Hi Keith- It totally baffles me why no one on BNN ever mentions SH-N. It is liquid and easy to trade. It goes up the same as the S&P 500 goes down. I have used this in 2008-9 and again in 2020 and it works perfectly to negate losses- or to actually make money in this environment. I know that you have mentioned this before but again, anything I read or anyone I see on BNN NEVER mentions this.

    Reply
  • If your prediction does come true and we end up with a short 15% rally, which you have deployed much of your cash into, help us readers understand what an ideal scenario and portfolio would look like after you sell into that rally. I expect low Beta, dividend bearing, perhaps consumer staples and cash. How much cash is practical? How much did you have in 2001 and 2008? What type of assets did you ride the correction down with, knowing you did not go 100% cash. And if you would….. comment why not 100% cash.
    Thanks for leading us through this stressful but potentially lucrative time.

    Reply
    • I expect to buy shorter viewed stocks next week, then sell. Then wait for a bigger pullback. Then, we buy good stocks with longer termed horizons including dividend stocks, but also great companies like AMZN, GOOGL, MSFT, in the growth sector. Who will do well in a recovery? That’s going to be our pondering as we look for candidates. First thing first–the rally.

      Reply
      • Thanks Keith. After the pullback buying good long term stocks, dividend paying plus a mix in the growth sector makes sense.
        Now to the 2nd part of my question if you could., dealing with cash, and I know there is no absolute answer but one that gives general guidance.
        i) why is it not a prudent idea to sell 100% into cash at that sell point?
        ii) given it is not prudent, what % of ones portfolio is appropriate to move into cash awaiting the pullback?
        iii) what type of stock/sector is prudent to hold through the pullback? Dividend paying blue chip comes to mind, but others???
        Thanks Keith and I have been sharing your blog comments to friends and family who are nervous. We’ve been here in the past and have come out the other end.

        Reply
        • Hi Daddyo
          Well, in return, thanks for passing on the blogs. I feel that this is a society situation. We need to work together and share info in any way we can. Doing what i can through this highly stressful period–stressful for ALL of us!!!!

          We’re looking at reducing exposure to the most vulnerable areas on a rally (which REALLY doesn’t seem to want to happen!!!)- on the lineup are energy and industrial names. I don’t hold any – but things like airlines are a bit scary right now.
          Buying? Well, at some point we will look to buy. I have decided to hold off on buying on a rally for now. But there are some stocks I do eventually want to pick up. I think beyond the dividend payers, you can look at tech stocks. Some of the FANGs will be outstanding. Also–for now, think Stay At Home stocks, utilities, staples. Netflix, social networking, etc.

          Reply
          • Maybe a topic for an upcoming blog could be the following.
            Look at sectors to unload in a rally, those to buy and hold during more pull back and those sectors like FANG that likely will be sectors to buy after further correction….. and why.
            Enlighten us why a sector may be impacted by this current economy. For example:
            i) airlines is obvious they won’t have much revenue stream and it will take a long time before travel is permitted or desired. So unload and stay away even after another pull back.
            ii) Banks is not so obvious why they have been hammered. Less margins when rates are low, defaults will be higher as clients can’t pay will certainly impact profits. What about wealth management side, retail banking side, US vs Cdn. I’d like to understand short & long term risk of that sector.
            iii) Telecom sector- they should still get revenue so why has telecom been hit. With their dividends and business model I would think that sector should be a buy. Will their dividends be at risk?
            iv) online shopping the likes of Amazon and shopify come to mind might flourish in this market where we stay away from bricks & morter. At least one of these companies has had a dramatic retraction but is it warranted in this economy?
            v) Health care- ???

            In summary I think a whole blog edition on this topic may be enlighting for your readers.
            Cheers

          • Thanks Dayyo–I’m doing a mini-version of that idea today

  • What will you do if the S&P 500 drops below 2350. Will you raise more cash or short the index?

    Reply
    • Hard to be hard and fast these days but, likely yes–3 day rule pending of course

      Reply
  • Hi Keith,

    My “canary in the coal mine” presently is the the extent of derivative products that nobody seems to be talking about. Some estimate the global value of these synthetic products to be as high as $700 Trillion, others as low as $20 Trillion. I am aware that Duetsche Bank has been one of the banks that has been more aggressive with such products, and they reported today that they could be “materially impacted” Could I please ask what your thoughts are on this and whether you see this fold into the technicals of the market?

    Thank you in advance,

    Chris

    Reply
    • Chris–anything that can cause massive dumping or covering of underlying positions scares me to death. Charts won’t tell us ahead of time but they will show volume increases and gaps etc

      Reply
  • As per your earlier comment in think the selloff looks tired. Also look to the Dow transports and Russel. They are at the same double bottom and both have held. They used to be seen as leaders. In addition both are right at their 200 month moving averages. So it’s possible the S&P does an under over move at 2350 and next week rallies. This would of course punish traders that went short when 2350 broke. In addition the us dollar index is at a double top.

    More generally I think next week the panic will have started to die down as people slowly getting back to normal. The media is running out of overly shocking scary headlines. The ridiculous grocery hoarding will have come to an end as well and people are emerging from self isolation.

    Reply
    • Thanks Dave (new handle I see!)
      The other thought is that the virus, and thus the isolation stuff, will get worse before it gets better. I think we’re on the same page re a rally (which is really taking its time making an appearance….) but thereafter, not likely to stick until a final washout.
      Re: Predicting turning points, it’s pretty hard to use traditional analytics to make accurate calls right now. It’s more horseshoes and handgrenades. You know, close, but not precise.
      Hopefully our respective spider-senses will kick in!

      Reply
  • Thanks Keith….at least now I know that I’m not alone. Be well!

    Reply
  • I am with you on a rally & retest. My question is do you think the USD will remain strong during the reaction rally and during rally off of the retest. I am very high in cash north of 60%, you would probably say to high, anyway I have a lot of shopping to do. I plan to use this opportunity, the short term rally & long term run to reconstruct my portfolio. My question is, what are your thoughts on the currencies. I am a Canadian with mostly CDND and like to use ETFs, so hedge or not to hedge and against what regions?

    Thank you
    Carey

    Reply
    • I think I’ll blog on the dollar–thanks for the inspiration. I will note that the lowest I’ve seen the CDN/USD spread was January 2016, which is when it hit 1.45. Guess where we are now? You got it…1.45
      This old high represents resistance. Will it fail or will it blow through? I’ll explore that on a blog. But here’s the hint: energy.

      Reply
  • Hi Keith,

    I’m curious as to which sectors will see the most institutional interest when we finally do see a bottom? After a severe downturn such as this where are the safe havens that you believe will see the most interest when big money returns to the market?

    Thank you,
    Garth

    Reply
    • Large capped quality stocks for sure- institutions can’t buy the thin small capped stuff. Technology (the “good” companies) are the new quality companies (vs Coca cola etc of the past)–they will only grow in this age of online and tech reliance
      Beyond that, the consumer staples like Coca cola and JNJ (we own) that are survivors will catch a bid
      Plus you might expect high dividend stocks — some very good companies that won’t miss a dividend payment are trading to reflect goofy yields. You can bet that these will be snatched up

      Reply

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