Stocks tumbled to end the week as suspect earnings from the bellwether tech companies did nothing to ease investors' minds over the current economic condition. The Dow lost 939-points on Friday with the volatile Nasdaq taking the biggest hit with a 4.2% loss. It was indiscriminate selling that tends to come toward the end of a move, but that doesn't mean the lows are in. It's just that we can expect to see some sizable counter rallies as the indices get over sold and investors get overly bearish, but they can be traps.
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Remember the positive outside reversal day that we saw on the small caps / DWCPF chart on Thursday? It is not necessarily negated by a down day. The problem was, Friday turned into a negative outside reversal day. Now this sounds bad but it could also be an indication of a change coming. The question is, what kind of change - a counter rally, or a break down to another leg lower?
Let's take a look at a couple of charts from Ciovacco Capital Management. They shows set ups of prior bear markets where a group of moving averages converged and eventually crossed, signaling the big change in character for the markets back then.
The red boxes I drew in show those convergences, which eventually turned rising moving averages into falling ones. I'll show the current chart below these next two but notice on this 1998 - 2002 chart, above that orange horizontal line the bull market was teetering between remaining a bull market and converting into a bear market where the averages all rolled over and eventually the faster moving averages crossed below the slower averages.
Source: Ciovacco Capital Management
It eventually broke down and there were an additional 42% in losses for the S&P 500, so trying to pick a bottom in 2000 or 2001 turned out to be a big mistake.
The 2007 - 2009 bear market saw a similar set up where the moving averages all rolled over, and again eventually the faster moving averages crossed below he slower ones. And after falling below that orange horizontal line, the S&P lost another 51%.
Source: Ciovacco Capital Management
In today's chart we don't quite have all of the crossovers of the averages yet, but they do have to get more bunched together before they cross, and that could be the stage we are in now. Or, perhaps stocks start heading higher and they don't all cross, which is a possibility, but the takeaway here is that we are getting warnings that we have seen a couple of times before and we should be aware of the possibility of more bad things occurring. It could be telling us that we are just in the early stages of a new bear market that could get much worse. Looking at the prior bear markets above, it meant it wasn't too late to sell while they were in a similar situation as we see now on this chart.
Source: Ciovacco Capital Management
I've mentioned this a thousand times, but we also tend to see some of the biggest rallies during bear markets, which makes for very appealing trading set ups, but also a very dangerous situation if you're wrong. There is money to be made if you can take advantage of the counter rallies in a bear market, or you can go right into defensive mode and wait for a sign that all is clear, which could take a while and you never know exactly when the lows will be made.
The decline off of the late 2007 market peak that preceded the 2008 bear market looks pretty similar to the current situation. But look what happened after the initial 18% loss off those highs that ended in March: We saw a two and half month rally that gained about 12%. That 2.5 months would certainly lull you into a false sense of security, assuming the lows are in and a bull market is back, but in mid-May the rug got pulled out from under the market again, and that cycle continued into March of 2009 before we finally saw a low.
Side note: That decline from October 2007 until March of 2008 looks eerily similar to what we've just gone through when the Nasdaq and small caps were peaking last November, while the S&P 500 peaked in early January of this year.
The market has changed over the years. As Warren Buffett and Charlie Munger of Berkshire Hathaway discussed recently, the stock market has become less about investing and more about algorithm trading programs battling other algorithm programs, and investors are caught in the middle. They were putting it down suggesting that Wall Street has become more of a casino, but I think that has always been the case.
There was a classic book written in the 1920's called Reminiscences of a Stock Operator which was a fiction depiction of a real trader named Jesse Livermore who learned how to read the ticker tape looking for patterns in prices, so it is nothing new to try to figure out which way stocks are going to move in the short term, rather than just buy and hold/
Some people prefer the timing angle while others like Buffett buy and hold through any turmoil and volatility might throw at the market. So you have some choices in a market like this. You can take the Buffett approach and hold onto stocks knowing the road will eventually get very bumpy. Or you can sell and get defensive and wait for the air to clear in this bearish environment. Or you can try to time what will likely be big moves in both directions, but leaning on the side of caution during this change in character in the market that we are seeing this year.
I don't think there is any correct answer. It's more a question of risk tolerance and staying in your comfort zone. My thoughts are, I'll expect the worst, but understand there are trading opportunities coming, although they aren't always easy to play. Our two IFT limit per month, and early daily transaction deadline will also get in the way.
Typically after a Friday like we just had, the market will fall further at some point on Monday, regardless if the futures were up or down overnight, but with a higher probability of a reversal later on Monday or on Turnaround Tuesday. We are certainly in a bearish environment so the reaction may not be the same as we might expect after a sell off on a Friday in a bull market.
The S&P 500 (C-fund) closed just slightly above the February low, and I suppose it is a little surprising that the market really hasn't gone any lower than that over these last two months. It still has time to do so, and the chart may be telling us that is about to happen, but if that happens, we could also see a snap back rally soon as well. Based on the prior 2022 action, here's a possible short-tem scenario; that final red arrow push higher is most likely just a move to a lower high and not a bottom, although nothing is out of the question. The Presidential mid-term cycle suggests that the average low in a President's 2nd year in office comes in mid-September so the likelihood of this being the bottom for the year is low, but we could still get a bounce in the short-term.
I posted the DWCPF (S-fund / small caps) chart up above, and I won't even show the EFA (I-fund) and BND (bonds / F-fund) for they are equally ugly, if not more so.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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It's that time of year as the market is now entering the historically weaker 6 month period of the year (May - October.) That's where "Sell in May, and go away" comes from. October is part of that 6-month period, probably because there have been several major market crashes in October, but overall it hasn't been a bad month, so I'd say May - September are part of the 5-month trouble period for stocks historically.
Chart provided courtesy of [url]www.sentimentrader.com
[/URL]
But we are coming off a brutal four months for stocks, and perhaps we are more due for a bounce? The bear market may continue, and it could get uglier, but market timers have to be on their toes to take advantage of volatility. That said, if you're more of a defensive, less active investor, this may not be the best place to try anything too aggressive.
Chart provided courtesy of [url]www.sentimentrader.com
[/URL]
Remember the positive outside reversal day that we saw on the small caps / DWCPF chart on Thursday? It is not necessarily negated by a down day. The problem was, Friday turned into a negative outside reversal day. Now this sounds bad but it could also be an indication of a change coming. The question is, what kind of change - a counter rally, or a break down to another leg lower?
Let's take a look at a couple of charts from Ciovacco Capital Management. They shows set ups of prior bear markets where a group of moving averages converged and eventually crossed, signaling the big change in character for the markets back then.
The red boxes I drew in show those convergences, which eventually turned rising moving averages into falling ones. I'll show the current chart below these next two but notice on this 1998 - 2002 chart, above that orange horizontal line the bull market was teetering between remaining a bull market and converting into a bear market where the averages all rolled over and eventually the faster moving averages crossed below the slower averages.
Source: Ciovacco Capital Management
It eventually broke down and there were an additional 42% in losses for the S&P 500, so trying to pick a bottom in 2000 or 2001 turned out to be a big mistake.
The 2007 - 2009 bear market saw a similar set up where the moving averages all rolled over, and again eventually the faster moving averages crossed below he slower ones. And after falling below that orange horizontal line, the S&P lost another 51%.
Source: Ciovacco Capital Management
In today's chart we don't quite have all of the crossovers of the averages yet, but they do have to get more bunched together before they cross, and that could be the stage we are in now. Or, perhaps stocks start heading higher and they don't all cross, which is a possibility, but the takeaway here is that we are getting warnings that we have seen a couple of times before and we should be aware of the possibility of more bad things occurring. It could be telling us that we are just in the early stages of a new bear market that could get much worse. Looking at the prior bear markets above, it meant it wasn't too late to sell while they were in a similar situation as we see now on this chart.
Source: Ciovacco Capital Management
I've mentioned this a thousand times, but we also tend to see some of the biggest rallies during bear markets, which makes for very appealing trading set ups, but also a very dangerous situation if you're wrong. There is money to be made if you can take advantage of the counter rallies in a bear market, or you can go right into defensive mode and wait for a sign that all is clear, which could take a while and you never know exactly when the lows will be made.
The decline off of the late 2007 market peak that preceded the 2008 bear market looks pretty similar to the current situation. But look what happened after the initial 18% loss off those highs that ended in March: We saw a two and half month rally that gained about 12%. That 2.5 months would certainly lull you into a false sense of security, assuming the lows are in and a bull market is back, but in mid-May the rug got pulled out from under the market again, and that cycle continued into March of 2009 before we finally saw a low.
Side note: That decline from October 2007 until March of 2008 looks eerily similar to what we've just gone through when the Nasdaq and small caps were peaking last November, while the S&P 500 peaked in early January of this year.
The market has changed over the years. As Warren Buffett and Charlie Munger of Berkshire Hathaway discussed recently, the stock market has become less about investing and more about algorithm trading programs battling other algorithm programs, and investors are caught in the middle. They were putting it down suggesting that Wall Street has become more of a casino, but I think that has always been the case.
There was a classic book written in the 1920's called Reminiscences of a Stock Operator which was a fiction depiction of a real trader named Jesse Livermore who learned how to read the ticker tape looking for patterns in prices, so it is nothing new to try to figure out which way stocks are going to move in the short term, rather than just buy and hold/
Some people prefer the timing angle while others like Buffett buy and hold through any turmoil and volatility might throw at the market. So you have some choices in a market like this. You can take the Buffett approach and hold onto stocks knowing the road will eventually get very bumpy. Or you can sell and get defensive and wait for the air to clear in this bearish environment. Or you can try to time what will likely be big moves in both directions, but leaning on the side of caution during this change in character in the market that we are seeing this year.
I don't think there is any correct answer. It's more a question of risk tolerance and staying in your comfort zone. My thoughts are, I'll expect the worst, but understand there are trading opportunities coming, although they aren't always easy to play. Our two IFT limit per month, and early daily transaction deadline will also get in the way.
Typically after a Friday like we just had, the market will fall further at some point on Monday, regardless if the futures were up or down overnight, but with a higher probability of a reversal later on Monday or on Turnaround Tuesday. We are certainly in a bearish environment so the reaction may not be the same as we might expect after a sell off on a Friday in a bull market.
The S&P 500 (C-fund) closed just slightly above the February low, and I suppose it is a little surprising that the market really hasn't gone any lower than that over these last two months. It still has time to do so, and the chart may be telling us that is about to happen, but if that happens, we could also see a snap back rally soon as well. Based on the prior 2022 action, here's a possible short-tem scenario; that final red arrow push higher is most likely just a move to a lower high and not a bottom, although nothing is out of the question. The Presidential mid-term cycle suggests that the average low in a President's 2nd year in office comes in mid-September so the likelihood of this being the bottom for the year is low, but we could still get a bounce in the short-term.
I posted the DWCPF (S-fund / small caps) chart up above, and I won't even show the EFA (I-fund) and BND (bonds / F-fund) for they are equally ugly, if not more so.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
