Entering the Buy Zone?
I’ll be brief and to the point. The markets are now approaching another potential inflection point. Wise investors will be on the lookout for several important markers in their decision making.
Satisfied a Standard Correction, But Best to Wait
With today’s (Tuesday) selling, down almost 3{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}, the US stock market has now completed a basic A-B-C pattern for a standard 10{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} correction in prices from the highs. The standard involves a hard, shocking first down move, which we saw into point “A” the lows on February 8th. Then we see a partial rebound back up to point “B” which occurred on March 9th. Finally, there is the widely anticipated retest of the lows, now at point “C”. Sometimes, this is where the correction ends forming a tidy double bottom from which investors can start to make new purchases. But more often than not, the double bottom doesn’t hold especially after a historic period of low volatility like we saw in all of 2017.
Today, I see some adjacent evidence that our markets may indeed need to go lower before finding a final low. Here’s what I’m seeing.
- I’m seeing the FAANG stocks that have led this entire bull market higher for the last couple years, see the brunt of selling pressure. As I write, the US stock market is down just shy of 3{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} while Amazon is down 5.6{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}, Netflix is down 5.78{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}, Microsoft down 3.36{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} and so forth. When your market leaders are leading lower, it’s often a good idea to take a wait and see approach before buying anything.
- I’m also seeing the breakout in US Treasury bonds continue to upside. This was not supposed to happen right? But it is, just as the Fed is now aggressively raising interest rates – late to the party as usual. The bond market is a good indicator of investor fear and the continuing strength here indicates that stocks may have more downside as well.
- Technically, if the US stock market were to close where it is now, it would marginally break below the widely watched and quoted, 200 day moving average. For many this average of prices looking back 200 days, marks the trend and a broken trend is reason enough to sell more stocks. There is no magic to the 200 day moving average beyond the self-fulfilling nature of it. So many technical people watch this line, and when price breaks below it, you can see additional selling.
So, all things considered, there is a set up developing for a potential bottom here that could take the markets up and out to all time new highs. But this is not a time for heroics. This is a time to wait and see what happens because this is also that moment on the edge where accidents occur. No need to stick your neck out just for bragging rights.
Our models are still sitting on a pile of cash developed in early February and again in early March (around 40{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} or more now). That is a lot of cash that can be used to buy any number of new positions at now lower discounted prices. Our Net Exposure model finished last week sitting at a -8, the same reading as the previous week giving us little reason to deploy cash yet. So, we’ll sit and watch and know that our exposure to the markets is just about right for this stage of the cycle.
Just a quick update for those who are wondering how we see this.
That’s it for now.
Stay tuned!
Sam Jones
