Month: January 2019

I’ve been discussing the likelihood of a retest quite a bit on the blog, on Twitter and in great depth with the Thrasher Analytics letter. Rather than focus on the news headlines or potential impact of economic data or Presidential tweets, I’ve been looking at historical market downturns and similarities they’ve had to our market today. I spoke today on TD Ameritrade Network that while still under the 200-day Moving Average we still have the risk of a retest or decline to create a higher low. Earlier this month I shared a chart from my Thrasher Analytics letter that showed the rise in percentage of S&P 500 stocks trading above their 20-day Moving Average and how we saw similar price action at the initial 2011 and 2015 lows.

Whenever I create a thesis for the market the next thing I want to do is determine when I’d be wrong. Looking at market history can help achieve this step, which is what I want to dive into in this post. Going back to 1960, after a 15+% decline while the market has remained below its 100-day and 200-day Moving Average, the risk of a retest or a lower high were high. But once we cleared these intermediate and long-term MAs then the risk diminished.

First we have the 2010 and 2011 declines. In ’10 we saw a lower high occur after the S&P 500 tested its 100-day MA (blue line) and in ’11 the retest was accomplished while price was under both MAs and a higher low was finally put in after a test of the 200-MA (green line). Once price was above both these indicators then the up trend was able to continue.

Then we have 2001 and 2008. Throughout these multi-year down trends we saw counter-trend rallies occur below the 200-day.

Next we have the quick move lower in 1998. An initial low was set and then a counter-trend rally up to the 200-day MA before the low was retested. The market then resumed its up trend and breaking back above the 100-day MA and 200-day MA.

What about Black Monday in 1987 and the down trend in 1990? Both of these saw a retest or lower low while under the 100- and 200-MA Once again, it took the market to break above both MA’s to get confidence to resume up trends.

In 1981 through 1982 the market trended lower, with multiple counter-trend rallies, with several testing the 200-day MA as resistance as the market made lower lows. In late ’82 the S&P 500 was able to break back above both MAs and an up trended ensued.

The same type of price action occurred in 1977. A mid-year counter-trend was ended at the 200-day MA as a few more lower lows were created until a final low in ’78 was put in.

The last example I’ll show was in the 1969 and 1973-1974. In ’73 we saw a few days back above the 200-day MA after the downtrend initially began but all future counter-trends were not able to even get enough strength to even test the 200-MA, treating the 100-MA as resistance until a low in ’74 was made.

In ’69 we once again had a down trend with price remaining below its 100-day and 200-day Moving Averages until we started seeing higher lows in 1970 that resulted in price moving back above its 100 and finally its 200-day MA.

Moving the focus back to today. The 200-day MA is roughly 3% above Friday’s close with the 100-day MA a few points closer. What should look familiar at this point is that the market seeing some counter-trend strength is normal within a down trend. But when these rallies occurred with price still under these MAs, the risk of a continued trend lower were still at heightened levels. So in my view, what do we need to see? We need the S&P to continue this strength with a solid breakout above the 200-day and 100-day Moving Averages and hold above these levels. Until that happens, I remain concerned of a back-filling of some of the gains the market’s enjoyed since the December low.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

There’s a saying that market tops are a process and bottoms are an event. This is meant to imply that tops are formed over drawn out periods of time, often several months, while the market will find a final low in a quick v-shaped pattern. While markets rarely mimic the exact pattern of prior moves, there are often characteristics that take shape at many turning points. Looking at prior market corrections, bear markets, down trends, or however you’d like to title them, we can see that bottoms are actually less of event/v-shaped as the saying implies and more out of a whimper of selling that’s often already been exhausted.

Below is a daily chart of the S&P 500 going back to 2011 with three unique pieces of information about the internals of the market. First we have the number of new 52-week lows made by the individual components of the S&P 500, next is the percentage of those components that are trading above their respective 50-day moving average, and finally the momentum of the S&P 500 itself.

While this is not an exhaustive study of market history, I’m looking at just the past three down moves to keep the chart easily visible and to make the point that we don’t always see exact replication of bottoms.

In 2011 we saw more of a ‘bang’ in new 52-week lows as the list expanded at the final September low, however more stocks had begun trading above their intermediate moving average and the momentum of the index was substantially off its low.

Again in 2015 we saw an improvement in the percentage of stocks above the 50-MA as well as fewer stocks making new lows when the index made its final low. Momentum had also improved, creating a bullish divergence of a higher low.

Finally, if we look at the start of 2018 we had fewer 52-week lows, more stocks above their 50-MA, and momentum tested its February low but did not break below it.

Now we could look at a whole host of breadth and momentum data, each likely telling a slightly different story. The tools I used in the chart above are not the focus of this post but to show that typically selling has dried up based on various metrics of market internals and trend strength by the time a final low is formed.

We can see a similar type pattern in google search trends for the term “bear market”. First, it’s interesting to observe the sentiment towards always expecting a down trend to turn into a bear market as the general public rushes to google the term when stocks move lower. However, also notice that the trend in searches for “bear market” decline going into the final low in price. These data points are monthly, so we don’t have a surgical-like view as would be most desirable. But during the GFC, search trend peaked in August ’08, in 2011 searches peaked two months before the low, and in 2016 it peaked the month before the low.

It seems people begin to lose interest in the potential for a “bear market” as the market bottoms. What causes this is beyond my area of expertise but I think part of it has to do with the data I showed in the chart above, with fewer stocks declining into the indexes bottom, things begin to feel “less bad” so the fear begins to diminish.

I last wrote about this topic on December 21st, showing another chart that often finds a low before the broad market. Currently the market is still digesting a broadening of deteriorating market breadth, being helped along by stories of Apple growth slowing down, trade wars, the gov’t shutdown, and whatever else begins the topic du jour in coming days. What I’m looking for as an active investment manager is for things to begin “less bad,” remember that the stock market truly is market of individual stocks, and what the majority of those stocks are doing will likely lead the broader indices. As I have been for the last year, I’ll be sharing more of my thoughts and analysis in my Thrasher Analytics letter.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.