Toronto MoneyShow: Metro Convention Ctr. Thursday October 16, 2014. 3:30PM. I’ll be giving a special presentation entitled The Great Rotation on Thursday October 16th at 3:30pm where I will reveal how to identify 2015’s market outperforming stocks, along with tips on avoiding the losing stocks and sectors.
Readers of this blog will attest to the fact that I prefer using pragmatic rules when making investment decisions. For example, I recommend buying after a breakout from a consolidation pattern – I do not assume that the market will breakout in a given direction while it trades within the consolidation pattern. I also tend to use confirmations like the “3 bar” rule after a breakout, and I like looking for “hooks” on momentum indicators rather than just looking at oversold/bought levels. I tend to buy bounces off of trendlines, rather than buying on a trendline. Many of these quantitative rules are discussed in my book Sideways.
I’d like to shares some observations of the markets at this juncture. Then, I’d like to offer a subjective point of view–an opinion based less on quantitative facts, and more on an instinct developed over 25 years of stock trading experience. Sometimes a gut feeling helps to fill in the blanks when predicting a market.
An analysis of the above chart will allow us to observe that the former trend channel on the daily chart of the S&P500 has been broken. Minor support at 1930 was broken on Friday, and the market found support at its last low point at just over 1900. As I have noted in the past – the 1900 level is significant due to the intersection of the last low and the 200 day MA. While we were all eating Thanks Giving dinner yesterday, the S&P 500 broke that important 1900 support level.
Momentum studies (stochastics, RSI, MACD) are significantly oversold, but show no sign of hooking up from their currently oversold positions. Cumulative moneyflow (bottom pane) remains in an uptrend, but penetrated the trendline yesterday. The money flow oscillator (top pane) shows an oversold condition but no positive hookup. Note the massive candlesticks over the past 2 weeks indicative of large daily volatility – especially last week as the minor support level of 1930 fought to hold out.
Now that the S&P500 has cracked 1900, the market may be in for a fast & furious decline into the lower end of my noted 1850-1880 support zone. The ultimate support may be the old low of 1820.
On the positive side, cyclical factors such as the end of the seasonal period of weakness (October), the Presidential cycle (4th quarter of the second term is often bullish) suggest that the current period of weakness may be over within 2 weeks. Also positive -The VIX came off of its historical low point last week (red horizontal “sell ”line), and is midway to its typical high point (green horizontal “buy” line). The irrational exuberance is dissipating.
So what’s my less objective, “gut feel” of where markets will go next? Well, as I’ll outline at the MoneyShow this Thursday- my gut feel is that we are very, very close to a low point on the major stock markets. While my favourite sentiment indicators (smart money/ dumb money contrasts – not shown) are not yet suggesting a turnaround, a casual observation of bearish newspaper and investor forum chatter gives me a contrarian’s level of confidence of an approaching bottom. I won’t circle a day on the calendar for you, but my gut tells me its a matter of days, not weeks, before we see a final capitulation washout. The VIX movement of late is also encouraging.
I recently bet my friend a beer that this market will bottom well before the end of this month.
No matter when the market decides to finally turn, I’d like to invite you to join me at the MoneyShow – where I’ll be presenting some fresh stock and sector ideas for investors to consider for the coming year. Hope to see you there !
Really appreciate your blog comments at all times. My questions are trying to understand the mind of a professional. You have been open about some of your trades in the past. From that knowledge I would like to ask 1) if during such times as this, is there a point at which you lighten up on some equities? With PPL being way overbought by your own comments and now down 20% or so, is this something that should have been traded out and replaced later or is it best simply to hold and look the other way? 2) On a newer purchase that drops below cost, does a sell rule kick in at some point regardless of fundamentals etc…and I am thinking of ECA?
Really looking forward to your presentation but I understand those of us online will have to wait until Nov. 4 hear it. Worth the wait I am sure. Thanks for your comments.
Terry: the quick and dirty: We see the pipelines as holding their weekly trendlines–all is fine –BTW, pipelines will eventually BENEFIT from lower oil prices–more usage comes from lower prices – so them being simply a gateway, and not a producer, is a good thing. We bought the pipes 2 years ago–and look at a multi-year hold on them.
ECA–we are below our cost now. The stock is now right back into its old base–which is the base that broke out and inspired us to buy….so the downside is for it to go as low as $18–or it could hang at $20 for a while. We are going to hold for now. However, if it doesn’t break out, we may sell–we’ll play it by ear.