Weekend Strategy Review March 1, 2020
Posted by OMS at March 1st, 2020
The markets fell hard again on Friday, with the Dow dropping over 1,000 points to 24,681 during the morning session. However, about an hour before the close, two serious Buy Programs kicked in causing a rally that carried the Industrials back to the 25,409 level, down ‘only’ 357 points. The Dow was down 3,583 points for the week. The NASDAQ rallied to finish fractionally lower on Friday but was down over 1,000 points for the week. Wow! What a week.
Bear markets always decline faster than most people think. That’s why we pay a lot of attention to the early indicators, such as the sentiment readings whenever the wave structure suggests a top of Major significance is approaching. This top was no different than the tops made 1987, 2000 or 2007. All were preceded by wave counts and sentiment reading that suggested the markets were at EXTREME levels of optimism. This time, it was not only the hedge fund and Mutual Fund managers who got it wrong, it was the small traders as well. A few weeks ago, I mentioned that small traders were buying calls at historically record levels. Extreme bullish optimism like we saw a few weeks ago is NEVER rewarded.
But now that these optimistic investors have been hammered, we need to step back this weekend and re-asses where we are. So, I want you to calm down, and think about a few things.
Firstly, this is no longer a Bull Market. The Bull is dead. It’s in the past. How do we know this? Well, once the current decline broke below the 3 October low of 25,745, Elliott Wave Theory says the decline can no longer be considered a part of a corrective pattern. It MUST be something else. The most likely scenario is that it’s part, or all of Wave 1 down in a new Bear Market. So, until proven otherwise, all trades that we make for the foreseeable future MUST be made keeping this in mind. When we were in a Bull Market, we could always count on a rally to help us if we made a wrong decision on a stock. This is no longer the case. Now we MUST view all rallies as suspect and look to fade them. Now the safer bet is the short side.
Secondly, NO Bear Market goes straight down. Yeah, I know that this Bear feels like it’s collapsing, but it isn’t. It’s just doing its thing aided by panic of the corona virus. But just like day follows the night, stocks will begin to rebound in a Wave 2 once Wave 1 down completes. This will happen! The only question is when?
OK, so let’s talk about this. As I mentioned above, I saw two significant Buy Programs kick in late Friday. They caused the Dow to rally over 500 points from when they started. These Buy Programs are generated by large institutional investors…the ‘smart money’. Odds are they were looking at the P/C ratios that were the exact opposite of what we were seeing back in late January / early February. For example, back on 16 January, the percentage of stocks at new 52-week highs was 97.5 percent. On Friday, that number was down to 0.82 percent. The Sentiment of S&P traders was at 92 percent Bulls back in mid-January. Last night it declined to 9 percent Bulls. The Volatility Index (VIX) was close to an extreme low, 13.7 on Valentine’s Day. Yesterday it spiked at 49.8, its highest level since February 2018. Yikes!!! This is Wall Street telling you …. the sky is falling! No, get real. The sky is NOT falling. We’re just experiencing Major Wave 1 down.
Wave 1 down may not be complete. We could see some backing and filling as we move into the early part of next week. But I believe that most of the damage of Wave 1 down had been done. One of the reasons I say this is because the two Buy Programs that kicked in late Friday cause a Hammer Candlestick Pattern to form on all the major indexes. This pattern together with the extremely low readings of investor confidence suggests a bottom is approaching.
The only concern I have now is has Wave 1 down been completed or is Friday’s late rally only the completion of wave 3 down within Wave 1 down? If the latter is the case, wave 4 up could rally the Dow back to the 26,000 level before wave 5 down drops the Dow back below Friday’s low of 24,681. Right now, I believe the odds favor a bounce, but if the market timing indicators remain negative, I wouldn’t get too excited about any rally.
What I would get excited about is a rally that would turn the timing indicators positive. If this happens it would suggest that Major Wave 2 up is starting. Based on the current wave structure, Wave 2 up has the potential to carry the Dow back to the 28,00 level. I’ll have a better feel for this once I see where and how Wave 1 down completes.
At this point, I feel very comfortable being on the sidelines. As a minimum, I want to see the indicators on the 30-min bars turn positive. If they do, they suggest that wave 4 up of Wave 5 down or possibly Major Wave 2 up is underway. Both waves could be tradable rallies on the short-term bars. But you need to recognize that both scenarios will be counter trend rallies, so don’t get too comfortable.
One other thing: the current decline triggered by the coronavirus has been exasperated by computerized program trading and the fact that traders can now exit or enter positions without paying a commission. Unlike people, when a computer sees an indicator turn negative, it immediately sells its position. So now with hundreds of thousands, maybe millions of computers in the world programmed to sell on an indicator turn, things happen quickly. Also, even though brokerage commissions have been low for several years, now they are non-existent. Paying a low commission used to be a psychological factor more than anything else. But it was there. Now, even that small factor is gone. Investors (and computers) will sell in a heartbeat. So, make sure you understand this. Also, remember that while just about all the action during the past few weeks has been to the downside, this too can change quickly. Rallies in a Bear Market happen fast because once a rally starts, short trades will begin to cover their positions in mass adding fuel to the rally. This is what I will be looking to happen next week.
Bottom Line: Don’t panic! A bottom (at least a short term bottom) is likely at hand. This is NOT the time to be selling stocks. The time to be selling was a few weeks ago when the indicators turned negative. Not now! If the market begins to rally next week, watch the 26,000 level. This level is where wave 4 up should top. If the timing indicators are still negative at 26,000, I’ll be looking to fade the rally. If the indicators turn positive, I will start buying. Follow the indicators….and BTW, WASH YOUR HANDS! That’s what the Marines did in Afghanistan back in the late 80’s when I was in the Pentagon. We saw the Russians lose about 80 percent of the 50,000 soldiers they had in country due to disease, not bullets or missiles. We told our Marines to wash their hands a minimum of three times a day to keep well. I don’t think we lost any as a result of disease.
So, don’t panic. WASH YOUR HANDS and stay healthy!
Have a great weekend.
That’s what I’m doing.
Also, BTW, I did a Q&A session with Paige Kelton of Action News Jacksonville last night. I did two interviews: one that appeared during the 5-6 PM hour and a follow-up Facebook session with Paige. The Facebook session was recorded an appears on Action News Jax Facebook page. The call-in Q&A session was interesting for me, as it has possibilities that we can turn this into something on a regular basis. Let me know if you think a session like this would be useful to you. May we can work something out. We could turn it into a Class About Nothing :>)
Market Signals for
|DOW||NEG||24 Feb 2020|
|NASDAQ||NEG||24 Feb 2020|
|GOLD||NEU||28 Feb 2020|
|U.S. DOLLAR||NEU||28 Feb 2020|
|BONDS||POS||07 Feb 2020|
|CRUDE OIL||NEG||24 Feb 2020|
As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.
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