I’m as stunned as everyone is. I would never have thought we could be down 3,500 Dow points from last week. 1,000 points, yes. 3,500 points, no way. In fact, I did forecast a steep and deep drop of 1,000 points during late February and wrote this two weeks ago:
“Short term, the model shows another dip soon. Before the end of the month the Dow Jones Industrial Average could begin another 1,000 point retracement (price adjustment) to the ascending pink line support, just like it did two weeks ago.
If you want to take some profits, now would be a good time. I would especially recommend this on any leveraged products you might own. In addition, you can take advantage of adding to or initiating new positions at likely lower levels.
I think this will be another steep and deep affair just like two weeks ago with another surge higher from the buy zone in early March. The projected short term reversals are the red and green circles I drew on the charts. The price forecast is drawn in white.”
A 1,000 point drop was in the forecast model but obviously the coronavirus fears exacerbated the steep and deep part, to say the least.
Maybe all the selling is overdone, maybe it isn’t. I don’t know. I do know this doesn’t look or feel like 1987, 2000 or 2008. This is more of an external or exogenous event where the economic cost is totally unknown. Unknowns cause fear. Fear causes selling. There is a lot of fear going around..and short selling. Hopefully, as more data becomes available, we can get a better handle on the implications and the markets will have an opportunity to stabilize.
I guess the real question is whether or not this leads us into the next recession early. Who knows? I certainly don’t. How does one measure the costs of a pandemic? Will it even be a pandemic. There are just too many unknowns.
I suppose another big question is what to do now. Do we sell? Do we buy? Do we wait?
I’m in wait mode. Part of me thinks this is way overdone and overhyped. But, there really is no way of knowing. There is something off about the timing and depth of the sell off that makes me wonder. It feels like manipulation. It looked like controlled selling. Something stinks. Maybe I’m just thinking too much.
I’m not selling. I didn’t even follow my own advice to sell two weeks ago. I’m still fully loaded with stocks and ETF’s, 48 to be exact. I think selling into the volatility last week would have been madness. Trimming two weeks ago would have been smart. If only I was smart enough to listen to myself.
I think, at this point, it’s more prudent to wait it out. The damage may be done and all we can really do is look for the probable levels that could support price and try to identify a bottoming process.
Right now I think we need to look to the broader market and not individual securities to identify any bottoming. If the broader market bottoms most of the individual companies we own should follow suit.
Broader Market Review
The broader market had a huge reversal off the extreme lows on Friday in the last few minutes of trading. With 15 minutes to close the Dow rallied over 650 points to close down 357. That is little solace but offers a glimmer of hope, unless it was just short sellers covering their ass before the weekend.
Let’s examine Friday’s last minute broader market reversal from the depths of anxiety by taking a closer look at some index and sector ETF’s.
On Friday, the S&P 500 Index ETF (SPY) cascaded right down into the January 2018 peak and that’s exactly where it began to reverse higher in the final minutes of trading. This is almost the exact mid way point (common reversal area) between the low of December 2018 and the recent high made just one week ago. Also, this is where the recent October/February expansion began. It’s also just below where the December 2018/May 2019 expansion ended. It’s also right at the lower band of the 22 month consolidation zone. If it’s going to bottom this is a very logical place to do it.
SPDR’s S&P 500 Trust Series ETF (SPY)
The Dow Jones Industrial Average ETF (DIA) has a similar look. It also reversed Friday right at the lower band of it’s 22 month consolidation zone and exactly at the mid way point of the expansion from December 2018 to last weeks all time highs. It did come in a little deeper than SPY but that is just a reflection of being slightly out of alignment and overextended at the peak last week vs SPY. Like SPY, this is a very logical place to bottom.
SPDR Dow Jones Industrial Average ETF (DIA)
Looking at the Nasdaq ETF (QQQ) the retracement actually looks normal relative to the longer expansion from December 2018 to the recent high from a week ago. While a normal retracement is midway down the most recent ramp higher this retracement is almost midway down the longer ramp from December 2018. The Q’s closed just above the top band of the 22 month consolidation zone. A much lower retracement than expected but another very logical place to bottom.
Invesco QQQTrust Ser 1 (QQQ)
Drilling a little deeper, the technology sector ETF (XLK) actually closed positive, gaining .76%. This is an important sector to look at as it has been the main driver of the broader market indexes. Friday’s sell off took this under the old 22 month ceiling that was crossed over in November last year before the late thrust higher into the close Friday to finish above the old ceiling and in positive territory. Another logical place to bottom.
SPDR’s Select Sector Technology ETF (XLK)
The financial sector ETF (XLF) got slammed as well trading right back down into the lower band of the consolidation period from early 2018. At a similar point during the cycle in 2016, financials sold off 10% before bottoming and ripping higher. So, considering the coronavirus influence pressuring the drop we can consider this to be another logical place to bottom.
SPDR’s Select Sector Financial ETF (XLF)
And finally, going just a bit deeper, a look at the technology subsector that has been leading the way, in both directions, for quite some time. Semiconductors lead the way down in October 2018 and led the way up at the expansion cross over last October/November. SMH, the Semiconductor ETF closed up 2% on Friday after reversing higher in the final minutes right on the old 22 month ceiling that it had crossed over last October. Another logical place to bottom.
VanEck Vectors Semiconductor ETF (SMH)
While I never thought we would retest these lows this soon it might be the final “let’s fool them all one last time before we take this market much higher”. Remember, price action is designed to fool as many people as possible as often as possible. Price action is doing its job well.
Let’s not forget the chart of “Percentage Stocks Above Their 200 Day Moving Average”. I shared this chart in January of 2019 right after the December 24, 2018 low. That was the last time the percentage of stocks above their 200 day moving average fell below 20%. It actually fell to 7.5% on December 26th. What happened next? Stocks began to rip higher.
% Stocks Above Their 200 Day Moving Average
This chart with the SPY comparison shows that every time this reading falls below 20%, stocks rally. I’m not talking small rallies. I’m talking serious rallies. It happened at the bottom in 1988, 1995, 1998, 2002, 2009, 2011, 2016 and late 2018. The current reading is 21.35% but got as low as 17.82% on Friday. Maybe it needs to get a little lower but this has been a consistent spark to attract serious flows back into the equity market. Will it happen again?
My longer term bullish outlook remains the same with a slight caveat. The caveat is caution. The coronavirus outcome is so unpredictable that we must be careful. If we get a bounce soon, which I would expect, it might be a good idea to trim some positions and/or put on some short term hedges like PSQ, SH or even SQQQ.
I really believe this whole thing is overdone and I want to consider it a temporary cycle disruptor but until we see the broader market stabilize and bottom we really won’t know. So, while the broader market, technology, financials and semiconductors are all aligned on top of strong support zones and positioned at very logical places to bottom I would remain cautious as we are dealing with unprecedented possibilities that the market is trying to quantify.
Stay Safe and Healthy,
Don