Boy, I miss the good ol’ days… when “buy the dips” was the only strategy you needed and everyone was trying to guess which FAANG stock would be the next to a trillion-dollar market cap. You know, those good ol’ days from… oh… around two months ago. I, for one, am not a fan of this brave new world, but since we cannot ever control the market, we must try to adapt to whatever it throws at us instead. Unfortunately, I did believe that the broad stock market was set up quite well coming into Monday after selling pressure appeared to dry up last Thursday and the major averages bounced for a couple of days off of support. Yet, the complete lack of follow-through on the upside was disappointing to say the least and that has really ramped up concern once again among investors who have stayed tuned in during this holiday-shortened week.
Here are just a few of the headlines I came across yesterday when glancing at the major financial news sites:
“As the stock market and economy are set to skid, Goldman says cash will be king.”…MarketWatch
“Hedge-fund boss who predicted ’87 crash says get ready for some ‘really scary moments.'”…MarketWatch
“Morgan Stanley Keeps Announcing the Arrival of a Bear Market, and Now Stock Prices Are Starting to Agree.”…Fortune
“The Dow may drop another 2,000 points before the stock market selling is done: CNBC CFO survey.”…CNBC
“BofA says stocks are going down in 2019.”…Yahoo! Finance
“Cramer: ‘You’ll wish you sold at these prices’ if the Fed hikes rates in December.”…CNBC
Yikes! Save us, Santa! Those are indeed some scary looking projections, but they are also the kind of headlines we expect to see near a major market bottom. And this does still appear to us to be a bottoming process even if it may seem like there’s no possible way stocks can move higher from here. We deal in probabilities and the balance of evidence remains in favor of getting a rally very soon. Those headlines above could very well be right and we could be wrong; that’s the nature of trying to predict the future and taking a firm stance on where you think the stock market will go. Yet, even with this week’s recent tech-led sell-off there have been some promising signs that have prevented us from losing all hope:
Most major indices remain above their late October intraday lows, including the S&P 500, Russell 2000, Russell 3000, DJIA, DJTA, SOX (semiconductors), and the NASDAQ Biotechnology Index.
Most breadth indicators I monitor remain above their recent low points, meaning there has not been a further deterioration under the surface of the market during this most recent leg down.
Several former tech leaders bounced hard off of their lows yesterday, with most closing well above those lows (AMZN, NVDA, AMD, NFLX, SQ, GOOG, FB, etc.).
While the NASDAQ Composite made a lower low compared to its late October low, it did so with less downside momentum once again, which is considered a positive divergence (see page 6).
The NASDAQ Composite bounced off of a long-term support trendline yesterday that goes back to the 2009 low (see page 5).
Apple, the biggest stock in the market, bounced off its own long-term support trendline yesterday that dates back to 2009 (see page 7).
The stocks in the Russell 3000 are already down an average of 27.7% from their respective 52-week highs, one of the lowest readings in years.
The NASDAQ has also triggered the “buy, cry, die” indicator chronicled in one of my favorite books on trading the markets, namely Insider Buy Superstocks written by Jesse Stine:
A favorable risk/reward setup can occur when a stock in a multi-month uptrend declines and makes three lower lows within a short period of time (usually within 4 to 5 weeks). My rule of thumb is to look for a stock (or the market) to make three lower lows with the third low ideally even slightly below the trend of the first two. This is my “BCD (Buy, Cry, Die) setup” From a sentiment standpoint, “bottom picking” investors trying to time the stock’s bottom BUY the first spike lower. At the second lower spike, these new investors CRY in anguish. At the third and final lower spike, they DIE and sell their shares in exasperation. The third spike lower is precisely where you want to be waiting with open arms. I’ve seen hundreds of stocks rocket out of such triple oversold conditions. Things in life tend to come in threes. Stock patterns are no different.
Based on that description, it appears to me like a “BCD” pattern in the NASDAQ and there certainly seems to be a sense of exasperation and resignation present across pundits and the media alike.
So, to conclude, while the market continues to cause stress, we do not believe we have reached a point where all is lost. Stocks do need to rally very soon in order to prevent further technical damage from which it will be more difficult to rebound, but nothing so far has occurred that the market can’t repair with some near-term strength.