Just a short addendum to the blog I posted yesterday. I noted that I was on the hunt to buy some stocks during the market selloff, and suggested I would start with one leg into the market yesterday. One of the qualifications we set before buying was a reversal pattern off of technical support. That support level came in around 3000. Because the market continued to sell off during the day yesterday (Thursday February 27th), our reversal qualification was NOT met. As such, we DID NOT buy any stocks yesterday.
Our comments regarding this selloff, however, remain the same. Stock markets will either prove to bottom in the coming week or so, or not.
There are two potentials here:
- If we see a bullish reversal pattern, backed by a Bear-o-meter buy signal (which we will be reading on Monday), we will invest our cash and eventually sell some of the gold/silver holdings in the platform. There is strong potential that this market is in washout phase. For those interested in what a reversal pattern looks like, below is a diagram of some of the “candlestick” patterns that we look for. In particular, hammer, doji and engulfing patterns strongly coincide with market reversals.
- However, if the S&P 500 remains below 3000 for too long, it would suggest the potential for further downside. Our discipline is to sell upon a break of the 200 day Simple Moving Average (SMA) – circled on the chart below- and a break of technical support if it lasts for more than a few days. This strategy sometimes whipsaws us, but it worked wonders for us in the 2008-9 crash where markets fell 50% and didn’t recover until mid – 2013 (the ValueTrend Equity Platform/ VTEP fell only 17% and recovered fully near the end of 2009). It also worked well for us in the 2011 selloff where markets fell 20%+, while the VTEP fell only 7% and recovered quickly from that small pullback. If the S&P 500 level remains below 3000 as of Wednesday of next week, we will leg a bit more cash out.
- We will do this one step at a time. If the market is in a bear (debatable), it will have counter-trend rallies. We leg-out into rallies in a bear market. Support levels at 2850, 2750 and 2550 (rounded off) are the levels to watch on the downside.
At this juncture, our “bet” is that we will see a reversal pattern shortly. The signs of market capitulation are high – and 9/10 times this leads into a market bottom. But, our discipline trumps an opinion. Readers of this blog know that we raised cash and bought precious metals a month ago – ahead of the crowd. Clearly, this won’t eliminate market risk, but it puts us well ahead of the buy/hold gang. When we re-deploy that cash into stocks, it will be in accordance to rules that have saved our clients from much of the market volatility in the past.
In either case, we view this market as opportunistic. After all, these situations change. Those with a plan, tend to profit from such developments. Part of my plan is to review the risk/reward potential via the Bear-o-meter. I’ll do that, and post the results on Monday. I strongly recommend you tune in for that one. Bear-o-meter readings are particularly valuable during moments of extreme bullishness or bearishness. They help provide insight into the timing of a reversal.
Finally – For what it’s worth, we hear that Warren Buffett has been buying this week. Ever the contrarian value guy, he bought a chunk of airliner DAL recently. He’s not a market timer, but he is a pretty smart guy.