Professor’s Comments March 17, 2020

Posted by OMS  at March 17th, 2020

The markets continued to crash yesterday. The Dow had its worst one-day point drop ever, losing 2,997 points to close at 20,189.   The NASDAQ and SPX were down 970 and 325 points, respectively. Volume on the NYSE was moderate, coming in at 108 percent of its 10-day average.  There were zero new highs and a massive 2002 new lows.

Yesterday’s decline was impulsive, so it was likely part or all of Wave 3 down.  As long as the Dow stays above the 20,000 level, it’s likely that the first scenario I discussed in last weekend’s WSR is occurring.  Under this scenario, the Dow should begin to bounce today and then begin a series of up-down-up-down moves to form a Wave 4 triangle.  Then once all five waves of the triangle are complete, the Dow should re-test yesterday’s lows, probably completing somewhere between the 19,000-20,000 level.  Students should understand that this will NOT be the end of the Bear Market. Likely, it will only be the beginning.

The reason I say this is because at this point, several patterns could play out.  And while all these patterns have lower prices, it is not clear yet how they will develop, especially in terms of time.  I have one pattern that could last 4-5 years.  I find this interesting because most of the TV commentators I heard yesterday were talking about a V-shaped recovery once the coronavirus ends.  Hmmm?  I don’t see that happening.  The only take away I had from yesterday’s blood bath was that most people on TV I listened to yesterday have little knowledge of market history OR have any idea about how to read a chart. The two most recent Bear Markets we’ve seen during the past 20 years lasted over 2 years. This one will likely be a lot worse. So far, it’s only been under development for a little over a month.

As of yesterday, the Dow has lost about 32 percent of its value.  People are hunkering down in their homes, watching TV or Netflix, not shopping or going out to eat in restaurants or attending sporting events. People are worried. This is causing a major slow-down in the economy.  Consumer spending represents about 70 percent of the economy, so when consumers are self-sheltering in their homes, they’re not spending.  And while the coronavirus will end at some point, the effects of this lost revenue will likely be felt for years.  You can’t take over $10 Trillion from the stock market (so far) and expect things to return to normal anytime soon.

Think about it. Think about all the seniors who have lost a good portion of their portfolio because their financial advisors pushed them into dividend paying stocks because interest rates were so low. They thought the great Bull would last forever. It NEVER does. Now, many of these ‘dividend’ paying stocks have lost 75-80 percent of their value. And now the dividend that looked so attractive, is in danger of being reduced or eliminated. Ask yourself…are these investors likely going to come back into the market once the virus ends? I don’t think so. I believe its far more likely they will be sellers into any rally,…. if they get the chance. The people I talk with want out! Once again, they have been burned by the people they put their trust in. So IF this segment of the population, the seniors, who have most of the money in America, don’t come back, where is the money going to come from to drive stock prices higher? Investor confidence is a big part of what helps move stock prices. It’s what caused the Bull Market from 2009 to last so long. But now that investors see what can happen when the Bear raises its ugly head, I believe that many of those same people will be shy about getting back in. Like I said, this Bear could be with us for awhile.

The Sector Ratio fell to 1-23 Negative after yesterday’s decline. The only positive sector was Computers with an RS rating of zero.    Energy, Leisure, Autos, Banks, and Financials led a List of Weak Sectors with RS EXTREMELY weak RS ratings.  Almost 90 percent of the ratings were negative with double digits.   

The Model Portfolio remains heavily invested in cash.  It’s in the protection mode. Except for a few shares of UCO, which I believe has a lot of upside potential, it’s not holding any stocks now.  IF the Dow begins to bounce, I will look to scalp trade the legs of the triangle using the techniques I’ve discussed in previous Comments recently.  However, I believe the safer bet will be to fade any rally, especially if the Dow moves closer to the 23,000+ level or remain on the sidelines.  I won’t be holding any positions overnight.

Don’t panic! There is a time to be aggressive with stocks and a time to protect yourself. The time to invest is NOT now. That time will come, but right now there is way too much risk and uncertainty in the market. Students should recognize that what is happening now is NORMAL. It’s what happens in a Bear Market. And like everything else, this too will pass. Protect yourself now so when the time comes to get back into the market, you will be able to take advantage of the many opportunities I see coming. But right now, being cautious and conservative is a much more appropriate course of action.

Gold is the one exception.  Last weekend I posted a chart of gold (GLD), which appears to be completing wave 2 of its Wave 5 up.  At this point, it’s still not clear if the recent decline in gold is the completion of wave 2 down or if it’s only sub-wave ‘a’ of an a-b-c move for wave 2.  GLD is extremely oversold now without a trend in place, so, it should bounce. If the bounce is only wave ‘a’ of the sequence, gold (the metal) could rally back to the 1,500 level before falling to 1,350 before wave 2 completes.  This is the reason I’m waiting for the market timing signal in gold to turn positive before taking a position in the Model.

That’s what I’m doing,

h

The Model Portfolio is being shown for educational purposed only.  The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio.  Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.

Market Signals for

03-17-2020

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The Hockey Stick Pattern
The Creation of Waves and Trends
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