OK. Maybe we should ask… “is a bounce near?”
Let’s be clear about something, the fundamentals of the economy are awful, and they are being reflected in the stock market as it falls deeper into its worst start to a year in decades. Having said that, countertrend “bounces” are common during bear markets (see more below). So, turn = bounce in this post.
Last week we stated, “As bad as today’s action is, tomorrow mornings release of May’s consumer price index will be a major market mover.” Wow! was that ever an understatement! Friday was awful and Monday was a mess.
Related to that, we have a bone to pick. Monday’s action was made more severe by a “leak” by the Fed to the Wall Street Journal about the possibility of them doing a 0.75% hike on Wednesday (today, which they did) versus the widely accepted 0.50% view. Had that “leak” not happened, today would have likely experienced the big drop that Monday did. It is irritating to us that anyone in our government would be making a “leak” of any highly important information, but that seems to be the norm under this Administration. Men and women of integrity do no such thing.
Last week we stated the stock market was at a flash point, and it then immediately tanked about 10%. (Did we leak something? LOL) Not on your life! It was just good analysis- listening to the math of the market.
This week we are suggesting that investors need to be watching for a surprise bounce during the rest of June.
Why is that you ask? Several reasons really.
But before we discuss them, let me state that if the stock market unravels tomorrow, then the bounce idea will die quickly. Often in the past few years the stock market has done the opposite on the day after a Fed announcement then it did on the day of the news. Today was up. So, if tomorrow falls hard and on big volume, then the bounce probabilities go almost to zero.
All right then. What do we see that suggests a bounce may be imminent?
First, the end of the quarter is nearing, and Wall Street loves its fees. Unfortunately for them (and not to mention, their investors), their assets under management have taken a huge hit. Let’s see if there’s a push to rally the market going into the month end, just in time for the Q2 fee assessment.
Second, the S&P 500 and the Nasdaq indexes fell to new price lows on Friday and Monday. Yet, the number of stocks on those indexes that were hitting new 52-week lows then was less than the number of new lows during the prior index bottom attempt (May 12th & 20th), which was at a higher index price level. That is a possible “positive non-confirmation,” unless stocks plunge lower tomorrow or Friday and set a higher number of new 52-week lows.
Third, internally we follow several key indicators that gauge the markets health and monitor the footprints of money. Two of them, the NYSE TRIN, and the Put/Call ratio, gave extreme readings on Friday & Monday that often suggest a short-term bottom may happen within 1 to 5 days. This is not an absolute, as conditions can get worse for a while and cause additional extreme readings to pile up. (The Covid crash in March 2020 is an example.)
Fourth, the main indexes (the S&P 500 and Nasdaq) are stretched very far below their respective 50-day moving averages (mav’s). The SP500 was (-10.3%) and the Nasdaq (-12.6%) as of Tuesday’s close. (Note: They are -8.7% and -9.9% as of today.) Historically, the indexes trade back towards those key mav’s after falling so far away from them. Again, it CAN get worse, before it must get better. Please also note that the 50-day mav is heading downward rapidly, so even sideways action for a few days can close that gap significantly.
Fifth, we have observed that the VIX (fear index) did not hit a new high even as the stock market plunged to lower lows. Perhaps the “Big Fish” don’t feel they need to hedge much at this moment. Ask yourself why that might be.
There are other things too, but those are the main ones for now.
Our Current Market Outlook remains “Market in a Correction” with a red light. The “Core Four” (see top of page) now shows 1 green, 1 yellow and 2 red lights. It is entirely possible that if a rally starts asap, our signal could be upgraded to yellow within just a couple of days. Keep in mind though, the longer-term major trend is still very much down. It is very possible that a third nasty wave of selling could hit the market by the fall of this year. We will remain flexible and open-minded to any and all possibilities as the year progresses.
Please take a close look at this graph of the Nasdaq from 2000-03. It shows how the stock market can have many large rallies in the context of a major, multi-year, bear market phase. (Note: The Fed was initially raising rates then too.)
Chart is courtesy of Investor’s Business Daily’s MarketSmith subscription.
Also in last weeks post, we wrote this regarding possible outcomes from the CPI figures, “And third, investors hate the CPI announcement and stocks head dramatically lower like an elevator with a snapped cable. Very unpleasant.” Thank you Lord for the discernment.
Game plan: Seek the Lord for His wisdom and guidance. Update your watch list to include areas that have resisted last week’s downturn. Continue to be on guard, especially tomorrow, for days with large price drops on explosive volume (aka. Distribution Days).
Have a Triumphant day! ®
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. Not to be used as legal or tax advice.
©2022 Triumphant Portfolio Management, LLC.