The market is acting unsettled again, so thought I’d share a few thoughts.

On October 30th, In the middle of what turned out to be a sharp, deep correction, I wrote:

In comparison with the correction from February of this year, this one, while certainly volatile, has seemed more orderly. That is not always a positive sign as I usually identify a correction culmination with a rally that’s too fast to easily buy. Trying to time the bottom is always extraordinarily difficult, and my few attempts at re-entry have so far been unprofitable. That lack of success plus the recent tendency to close near the bottom of the days range, leads me to believe the correction is not yet done. 

As it turned out, it wasn’t. (Continue from October 30th)

Since we seem to be in a well defined downtrend,  the next level I’m looking at on the SPY (the ETF for the S&P 500) is 253,  which was the lowest point of the Feb. correction.  If achieved, that would represent a further drop of 5% and I would expect stocks to bounce, at least temporarily, from that level. If that level is breached without a fight, the long-term  moving average could be in play, and if achieved would represent a further drop of 12% from current levels and represent, in my opinion, a terrific lower risk opportunity to re-deploy capital.

On December 14th, I followed up:

As I write today (12/14/2018), those levels still look valid. 253, or 2530 on the S&P is a short term target from which I think we bounce at least temporarily. That’s only about 2.5% away so another bad day will get us there. If that level folds, I believe the long term moving average of 238 is the target. That would represent a correction of 19% from the top, and another 7% from here.  Not quite an official bear market, but a meaningful correction. 

So how accurate was the call?  Well, we didn’t get much of a bounce at the 253 level, there was a brief rally attempt on the morning of the 12/17 but prices collapsed by the end of the day, losing 8% over the next six trading days, and reaching as low as 233.76. The fact we didn’t get the bounce when we should have was a clue to further weakness.  Given the steep trajectory of the subsequent freefall, it was not surprising to overshoot my 238 target by 1.78%. That level was, in fact, an excellent buying opportunity, as the S&P gained 26% valley to peak over the next four months.

Which brings us to today. Much of what can be guessed about future price direction can be gleaned from how stocks react given a circumstance. In December, the fact that the SPY gave up the 253 level without a fight was a clue that the market was still very weak.  What I’ve seen over the last week, leads me to believe that this downturn may not be as steep.

First, we were well due for a pullback. The market had completely recouped the losses from the correction. To saunter through the October high without a pause would have been out of character. Markets will typically pull back when they reach a previous high. Trade tensions get the blame but a pullback of some magnitude was probable anyway.

Second, until today, Monday, May 13th, the market had been acting well through the pullback. Specifically, the market had been typically opening lower, then fighting back and closing toward the highs of the day. The degree of today’s fall was a bit surprising because traders seemingly acted as though they weren’t expecting China to retaliate.

Third, Trade issues are not usually as onerous as Fed issues. The market collapsed in the fourth quarter 2018 because of the belief the Fed was determined to keep raising rates despite perceived softness in the US and world economies.  Today, traders know that we are a tweet away from a resolution (or de-escalation), and are loath to miss the potential upside. Trump had little control over the Fed, but has considerable control over trade issues, and has shown in the past he views the stock market as a scorecard, and is unlikely to let things get out of hand. We hope.

Of course, this doesn’t mean straight up from here.  As I write on Monday evening, stock futures indicate slightly up for Tuesday’s open. That doesn’t mean much though as the tone for trading is influenced more by how the market closes. Whether or not the pattern of higher closes resumes tomorrow, I expect choppy trading with little chance of achieving new highs until some level of trade agreement is at hand.

Nearterm, expect headline driven markets trading in a range defined by the near-term high, SPY 294, and the low on March 8th, about SPY 273. The longer the trade dispute lingers, and the stronger the rhetoric, the lower the potential range. A fall to 273 would represent a pullback of about 7% from the highs. That would be enough to get one’s attention, but not enough to change allocation. A couple of closes below that level would cause me to reassess the potential downside. If the tariffs continue through the summer, the negative news alone would likely land us another 10% (plus) correction. We’ll cross that bridge when we come to it.

Finally, we’ve been getting a few questions about IPO’s. Several new issues have hit the market recently with varying levels of success. The main thing to remember is that there are no saints on Wall Street looking out for the common man. If they really think they have a hot IPO on their hands, it will all go to client hedge funds and close associates. So If you are afforded the honor of participating in an IPO (as opposed to buying it after it’s first available for trading), that means they have plenty left to allocate, and it’s probably a dog.

Thanks for reading, your questions and comments are always welcome.