Break In: Friday's Decline
I'm going to break in here before heading off to my conference and briefly discuss what I think has happened the last few days in the markets. There are all sorts of explanations on why stocks have declined, many of them involving emerging markets. If you're interested you can read about some of it here, here, here and perhaps the best explanation which is that all the turmoil may be one gigantic hedge fund short squeeze. I think I like that the best because it may fit the closest to my interpretation of what's been happening. I'll list my thoughts below.
1. First thing to remember is the turmoil in emerging markets and certain issues at home like retail sales have been out there for awhile. Stocks surged forward in December as investors scrambled to lock in their year. All these problems didn't seem to matter until this week. Now it does. Stocks have now basically given back that December melt up. The S&P 500 {we show it's representative ETF, SPY, above} is down for the year now about 3%.
2. Markets have been technically over bought by our work for some time. We've started to see some cracks in that over bought level now but we are not any where near over sold levels in any of the time frames we follow. That doesn't necessarily mean that stocks will continue a straight path lower. Stocks can correct by time as well as price.
3. Some are pointing out that the S&P 500 has broken down through its 50 day moving average for the first time since October. I think it's less important that it broke this than how the market reacts to the fact that it happened. More important to me is that the market has now moved back into the trading range that it created in November and early December. We will see how it reacts to these previous support and resistance levels for clues to future movement. Because this is a less established range, there is a higher probability that stocks could move through its support. By our work there's a stronger level of support around 1700 on the index. If the decline has further legs then probability suggests that the 1700 range is the more likely level for stocks to find support. That would shave roughly another 5% off of the index if it fell to those levels. Please note that there is no guarantee that any of these events might occur or that any of my analysis is correct.
4. I posted this on January 17th as part of a discussion regarding valuation:
Probability analysis leads me to think that we will see at least one decline this year in the market in the 10-20% range. It's been a long time since we've seen something like this. Probability suggests that since normal market volatility is somewhere close to 10%, it is reasonable to suggest that we could revert to the mean at some point this year.
While there is no crystal ball that will tell us how low we could go, investors shouldn't be surprised that we are seeing some sort of correction. Trading in the 1,800's meant that the S&P 500 had very little valuation "give" in the event something spooked the herd. When the "risk off" moment came this pillar wasn't there. Sometimes it's simply time for the markets to go down and that's a pretty large run up in prices we saw last year. While we don't know for certain where this might take us, one thing that is certain is that the tone and character of the markets have changed in 2014. Volatility seems to be coming back. Investors are not fond of it but we need it at certain times for markets to find their balance.
5. My own longer term view is that economic growth here in the US is strong enough for stock prices to advance. It may not be in a straight line like we've seen 2012 and the past few days may be telling us that the markets need some time now to consolidate those gains. But looking out at the bigger picture and for reasons I'll discuss in my upcoming client letter, I think the foundations have been laid for stronger economic growth in the next few years. Stronger growth also suggests that stock prices could advance longer term. Stocks may not move higher right away and we may need some backing and filling now but from my perch and based on what we know today, probability suggests that declines {particularly if they allow the market to get over sold} should be bought. I'll let you know if I change my mind about that.
*Long ETFs related to the S&P 500 in client and personal accounts.
2. Markets have been technically over bought by our work for some time. We've started to see some cracks in that over bought level now but we are not any where near over sold levels in any of the time frames we follow. That doesn't necessarily mean that stocks will continue a straight path lower. Stocks can correct by time as well as price.
3. Some are pointing out that the S&P 500 has broken down through its 50 day moving average for the first time since October. I think it's less important that it broke this than how the market reacts to the fact that it happened. More important to me is that the market has now moved back into the trading range that it created in November and early December. We will see how it reacts to these previous support and resistance levels for clues to future movement. Because this is a less established range, there is a higher probability that stocks could move through its support. By our work there's a stronger level of support around 1700 on the index. If the decline has further legs then probability suggests that the 1700 range is the more likely level for stocks to find support. That would shave roughly another 5% off of the index if it fell to those levels. Please note that there is no guarantee that any of these events might occur or that any of my analysis is correct.
4. I posted this on January 17th as part of a discussion regarding valuation:
Probability analysis leads me to think that we will see at least one decline this year in the market in the 10-20% range. It's been a long time since we've seen something like this. Probability suggests that since normal market volatility is somewhere close to 10%, it is reasonable to suggest that we could revert to the mean at some point this year.
While there is no crystal ball that will tell us how low we could go, investors shouldn't be surprised that we are seeing some sort of correction. Trading in the 1,800's meant that the S&P 500 had very little valuation "give" in the event something spooked the herd. When the "risk off" moment came this pillar wasn't there. Sometimes it's simply time for the markets to go down and that's a pretty large run up in prices we saw last year. While we don't know for certain where this might take us, one thing that is certain is that the tone and character of the markets have changed in 2014. Volatility seems to be coming back. Investors are not fond of it but we need it at certain times for markets to find their balance.
5. My own longer term view is that economic growth here in the US is strong enough for stock prices to advance. It may not be in a straight line like we've seen 2012 and the past few days may be telling us that the markets need some time now to consolidate those gains. But looking out at the bigger picture and for reasons I'll discuss in my upcoming client letter, I think the foundations have been laid for stronger economic growth in the next few years. Stronger growth also suggests that stock prices could advance longer term. Stocks may not move higher right away and we may need some backing and filling now but from my perch and based on what we know today, probability suggests that declines {particularly if they allow the market to get over sold} should be bought. I'll let you know if I change my mind about that.
*Long ETFs related to the S&P 500 in client and personal accounts.
posted by CR English at 10:03 AM
<< Home