How deep will the current correction go?

July 23, 2021No Comments

Hello, and welcome to the Smart money Dumb money show. I’m your host, Keith Richards, I’m president and chief portfolio manager of ValueTrend Wealth Management. And today we’re going to talk about the recent correction that’s been taking place on worldwide markets, really, but we’ll focus of course, on the North American markets with some emphasis on the S&P 500. I just wanted to answer a question that I know I will be asked really shortly on my blog or perhaps in a response to one of these videos. And that is the correction that began particularly yesterday. It was today’s Tuesday, July the 20th and the 19th. The Monday we saw pretty good correction. The dollar was down some, I think it was around 700 points or so a couple pushing 2% on the major indices one and a half to 2%. And we had seen some weakness in the week or so prior to this stronger down day.

So the question is how low can the market go? Anybody that reads my blog with any regularity will know that on June the third, I think it was of this year the barometer, which is an indicator compilation that I had been using for many, many years comprised of sentiment breadth, trend and other indicators, it gave a very bearish reading. And the interesting thing is that it hadn’t given such a bearish reading since last fall and lo and behold, right after that indication, which was August, I believe of 2020, the market went up and then a month later it gave another still semi bearish reading. It went from two, which anything below three in the barometer is considered bearish and went from two to three. We didn’t August and September and shortly after that, the market did correct quite a bit, actually more than 10% and didn’t recover until November of that year.

So I noted on my July barometer blog, and you can look up my blogs to read the details on this, on the July barometer blog. I made note that we had moved from a two, which is very bearish in June to a three, which is borderline bearish on the barometer. And what’s interesting. That’s exactly the same setup that we got in August and September of 2020. So my prognostication on the July barometer blog was that perhaps we’ll see this same situation again, which is an uptick after the initial, and then the market begins to sell off. And sure enough, I wrote that blog again on the first or second, I believe it was July and here we are on the 20th and we’ve begun a what appears to be a potential corrective period. Now today on the 20th, the market is up I note, but we’ll have to see if that was it.

I did buy some equities yesterday, but I’m largely still holding cash. We’re not aggressively in cash, but we certainly want to hold some. And we’ve reduced our beta a little bit in the portfolio. We believe this correction will be possibly something like what we saw in 2020, which is maybe 10% and maybe not that deep or long. So I just want to bring us right to the S&P 500 chart, because it will probably show you who might be curious as to how low the market could go to a potential scenario that might take place. So let’s, let’s look at a couple of things that I think are important to take note of my little picture over here. So I can actually see the chart on the chart basis itself without looking at any indicators. I want you to notice that there is a support level somewhere near 4,100.

So if the market decides to correct some more, now you can see there’s the beginning of the correction over the past week and a half, right? And it’s come down to somewhere around 4,300, but it could land closer to 41. This is a little over 4,100. The support level would be, and that might be a reasonable target for this correction. I don’t anticipate that this correction is going to be much more than five to 10%. And from its peak near 44 to come down to near 41, you’re talking maybe seven or 8% correction. That would make sense. Another scenario which often happens, if you look at corrections in the past many corrections, like 2018, we saw correction, come right down to the 200 day, a rally, and another correction down to the 200 day moving average, correction there. The market paused there, the 200 day before a larger correction. But many, many corrections that are, would be classified as more minor corrections.

You can see here throughout 2019, we saw several points where the market would touch the 200 day moving average, same with 2020. And here’s the correction I was talking about August of 2020 when I got my original bearish signals. So there’s August, and you can see the market went up just like it did this time from my June bear signal. But as you can see in September a second, somewhat less bear signal in the market did fall quite a bit. Now it didn’t quite touch the 200 day, but it did hit a, a prior support level, which could be similar to what could this time. But I want to make note that the bearometer signal here in the market went up just like it did in August, between August and September, but eventually it started to fall. And here we go again. And so that would possibly suggest that an old support level would become our new target, which in this case would be 4,100.

Or if we go through history, we’ll see that the possible support level could be the 200 day moving average, which brings us closer to 39, 40 therein about. These are always moving numbers, especially the moving average. So don’t get too tied up in 39, 40 could be 39 50 or something like that. Now I want to point out just at the very top of the chart. This is a momentum indicator that uses money. So it’s the momentum of money flow. And you’ll notice when it gets too high and whatever too high might be on the chart. It’s usually around 0.5 on this indicator. It tends to find a reason to have a correction it’s getting there. It’s about 0.41. So, maybe that helped suggest that now is the time of a correction. And the other thing to point out is that, a lot of the momentum indicators that many of us like to look at I’m sure that many of the viewers do, they are very familiar with these indicators.

So the top one is stochastics. The middle pane is RSI there’s indicator. And the bottom one is Mac D, which is a longer term outlook for momentum. And you’ll notice that while the S&P was making new highs, these were either flat or in the RSI’s case, diverging negatively going down the highs were not getting higher on momentum and absolutely getting lower on longer-term indicator, Mac D. So I think all of this spells out that the correction that we are seeing right now, even though on the 20th, as I record this, we’re seeing a little bit of upside in the market. This correction may not be over, and there is a good chance that we could see possibly 49, sorry, 4,100, which is first support, or even as low as the low 39 hundreds, will it go lower than that? Well, anybody’s guess, right?

Anybody could, could make a prognostication, but I really don’t see much deterioration in the charts right now, beyond some short-term overbought money flow and money momentum indicators that suggest that now is the time for a correction. And it’s the seasonal time of the year. Usually August and September actually are two of them months of the year. So all this together, I’m thinking that we’re going to get that 3,900 to 4,100. If that’s what you want to call it, correction on the S&P 500. And I think that those of who hold some cash in some lower beta stocks can take advantage of this a little bit at a time, because you don’t actually know what’s going to happen. There is no crystal ball that I own. Anyways. I would suggest that you leg in a little, at a time, if the market corrects to a one level like yesterday, I bought in for some new clients who came to us, I hadn’t invested their money because I told them, look, the markets look over bought.

They gave me their money a month or so ago. I waited. I bought in yesterday. I thought yesterday was a pretty good point to buy in, but we still hold tons of cash for those clients, for all of our clients, so that if another leg down occurs and I don’t know if it will happen, but if it does probability is we could get down to that 4,100 and another couple of hundred points in the S&P if that happens, I’ll buy some more, but I probably won’t go in with all of my cash. I’ll do it in two or three legs because that’s the prudent and disciplined way of doing things. And by the way, speaking of prudence and discipline, I have a new book out called Smart money, Dumb money, and I am sure that you want to be on the smart money side.

So I encourage you to grab a copy. And in fact, we’ve done a special deal for our clients and our supporters of the blog and these videos. There is on our website, a link you can click and we can send you a signed copy of the book at a discount. So hope you take advantage of that. But either way, that book was written to help you create a discipline of money management, which incorporates technical analysis and structure to how you will leg in and let go of securities just the way we’re talking right now. So thank you very much for watching this video and I’ll be back in the proper studio today. I’m doing this out of my home in the next video. I hope either way, you have a great trading week and we hope to see you on next week’s video.

 

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