Morning Comment: Keeping Your Head While Others are Losing Theirs



We definitely saw signs of capitulation yesterday…more than we saw on Tuesday. Not only was breadth similarly horrible (32 to 1 negative on the S&P 500 and 10 to 1 negative on the NYSE Composite Index), but we finally got the huge jump in volume to well over 5bn shares. As we said Wednesday morning, it usually takes a jump in the composite volume to over 5bn shares to signal that a “wash-out” move is taking place.

However, the sixty four thousand dollar question is…when does the “capitulation/wash-out” move end? It doesn’t look like it ended at the last night’s close. The S&P 500 futures are trading 23 points lower this morning as we write. However, from the 4:00 close for the cash market…until the 4:15 close for futures, those S&P 500 futures sold-off ANOTHER 20 points. Therefore, the futures are really telling us that the S&P cash index is going to open 43 point in negative territory. We do need to point out that the futures are all over the place this morning, so these numbers can (and almost certainly will) change between now and the opening. However, we just want to make sure everybody knows that one thing won’t change: No matter where the futures are trading between now and 9:30, you’ll have to subtract 20 points from that number to give you an idea of where the S&P will really open this morning.

It looked like the “wash-out” move took place midday yesterday…when the S&P jumped a whopping 90 points…but as we all know, the market rolled-back over and took back all of those 90 points…and then some. Given the signs of capitulation we got yesterday, the “capitulation/wash-out” move could complete itself this morning. However, if it doesn’t, things could get incredibly ugly over the weekend. We’re old enough to remember the 1987 crash. Back then, a severe decline in the previous week scared investors…especially individual investors…in a significant way. They went home for the weekend…went their kid’s sports games and to their neighborhood cocktail parties…talked about the markets…and scared the hell out of each other! So by Sunday night, many of them had decided to call 1-800-Mutal-Fund and redeemed their shares….which began a cycle of “forced selling” that took the market down by another 20% in one day. Therefore, if today is another ugly one, the bottom could fall-out of the market next week.

We do not think that will happen. In fact, when we left the office last evening, we were thinking that one more sharp decline in the morning (this morning) could/should be just what we need to completely wash-out the market. However, given the impact of algorithmic trading in today’s market…which is very much based on momentum…an early morning decline could turn into a rout. The one thing that makes us think that this won’t happen is that crashes do not take place right after the market makes an all-time high. The stock market touched at record high just over a week ago, so the odds are low that a crash will take place next week. (Besides, “crashes” are very, very rare.) Of course, there are exceptions to every rule…and given that the recent 12% correction is the fastest “correction” (10% decline or more) since before WWII…a further outsized decline from here is not out of the question.

That said, the stock market is obviously even more oversold than it was two days ago. The RSI chart on the S&P 500 has fallen all the way down to 20.14…which is very close to the level it reached at the late 2018 low (when it reached 19.20). We’d also note that the DSI data shows that bullishness on the S&P has fallen into the single digits. Bullishness fell to just 9% last night. We have seen numbers in the mid-single digits before, but any reading that falls into the single digits is certainly extreme. It shows that there are A LOT of people on one side of the boat (the sell side of the boat)…and thus there are not a lot of people left to sell. This means that we should see a short-term bounce soon. The problem is that just because the market should see a short-term bounce soon…that doesn’t mean that it will happen today…or that it won’t begin from a much lower level. (Chart attached below.)

Either way, those who followed the suggestions we made when the coronavirus first became an issue…and raised some cash…should be well positioned to take advantage of this decline. It’s all but impossible to pick the exact bottom. However, after this 12% decline, investors can begin to tip their toes back in the market. They can start to nibble on their favorite names (or new names that they have been hoping to buy once they declined a bit)….and then buy more if/when the market falls further. That way, even if those investors do not buy everything they want before the stock market bounces back in quick/sharp fashion…they won’t mind paying some higher prices for a part of their new positions in those favorite names…because their average prices will still be very nice indeed.

It’s all about keeping your head when others are losing theirs…and those who have some cash on the sidelines to spend should have an easier time keeping their heads over the next week or so.





Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Feb 28, 2020 — 8:02 AM
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