2018_12_28 — “A Bottoming Process — In Loose Technical Terms”
December 28, 2018
A Bottoming Process — In Loose Technical Terms
A Bottoming Process — in loose technical terms
- U.S. stock indices are in a bottoming process
- If you feel compelled to buy now, buy quality names, not junk
TUESDAY: On Tuesday of this week, the S&P500’s 200-week moving average was met to the down side, with U.S. stock market indices down approximately -15% to -20% from their peaks. The S&P500 was within the zone of the 200 week moving average, around 2347. We could see a market washout that drives below the 200-week average; either way, it will probably take multiple weeks for a bottom to form. Nonetheless, the big washout has transpired although markets could go lower with fast machine driven trading, spiked lows, panics, or bad news. Many long-term models are still negative.
WEDNESDAY: We came down to the 200 week moving average and bounced. On a weekly basis, looking at the big picture, we took a good comeuppance with a ripping bear market rally on Wednesday; however, if it is too good to be true, it usually is. Bear market rallies are notorious for ripping a trader’s face off; they are vicious and furious. In fast and furious bear rallies, often the lousy junk stocks surge the most; the bottom negative names have the most prominent rallies; e.g., cyclical industries tend to participate here.
THURSDAY: Short-term indicators turn before long-term indicators. Typical corrections of 10% or more usually see W formations with internal lows that find support and then back and fill with rallies to trend lines, followed by retracements or undercuts of previous lows. This back and fill process can easily take a few months creating the feeling of multiple false starts and panic declines as the market rallies to resistance (shorter-term moving averages) and falls to or through technical support levels (longer-term moving averages). If 2100 on the S&P500 gets violated, we could see more capitulation and another selling wave; stocks in such a situation may descend to trip limit sell orders. At the moment though, a record number of stocks are already at 200 day lows. This is when one wants a sage and experienced advisor to show their mettle and guide one towards a long-term perspective.
THE REST OF THE YEAR: From a short term perspective, there are a lot of wiggles and squiggles in the market. If you feel compelled to buy something now, try to focus on quality names. Quality companies tend to bottom (price wise) before lousy companies do.
Michael Ashley Schulman, CFA
Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The views and opinions referenced are as of the date of initial publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each person’s or investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.