Special Bulletin: March 15, 2024

 Beware the “Violent-3”

Market participants, traders especially, are aware of the term “shakeout.” There’s a particular form of shakeout that we are focusing on today and at TPM we call it the “violent-3.” 

As its name implies, a “violent-3” (or V-3) is a sharp, violent move down in the stock market. In a large majority of cases, it lasts 3 trading days and often pushes the major indexes down to (or slightly under) their 50-day moving averages (mav’s). Usually, the V-3 happens after the market has been advancing smartly for some time and after the major indexes 21-day mav’s have already been tested (and held) a couple of times during the uptrend. 

Typically, a V-3 is in reaction to a news event that scares “the crowd” temporarily. Under the surface, many tightly priced trailing-stop orders lay dormant. When a negative news event hits, the initial stops are triggered. Then selling begets selling as additional further away stops get triggered and then more sell orders pour in from traders not using stops trying to quickly lock-in their profits, and a dog-pile ensues. In a flash (and usually at key technical support levels) the short-term selling is over as calmer heads (institutional traders) step in and halt the decline, thereby having “shaken out” the gnats (annoying individual investors) and in the process increased their own position sizes at lower prices. And then the advance often starts over again.

The S&P 500 stands at about 3.3% above its 50-day mav as of 10:30am today, March 15th. That’s not too far away. Bear in mind that a shakeout to the 50-day mav in the major indexes would even be seen as healthy by many market participants.

Successful investors have trained their minds for certain outcomes and have learned to master their emotions during “news” events. How about you? What expectations do you have? Are you prepared for a quick drop? What is your plan in the middle of it?

To have expectations is important. But to be able to recognize when reasonable expectations are broken is even more important and is vital for preserving and growing capital. Do you see yourself ever saying, “When conditions change, I change. What do you do, sir?” This is an important point to make if support at the 50-day mav’s ultimately didn’t hold and prices knifed further through them.

Will today’s weak opening lead to a shaper sell-off and become day 2 of a V-3? I don’t know, but we will see. Maybe no V-3 develops this week, but one will eventually, and probably sooner than later. Will you be prepared emotionally to respond prudently? In the stock market (in all of life, really), the phrase “Plan your work and work your plan” applies.

Our Current Market Outlook remains “Uptrend Under Pressure” with a yellow light. Our “Core Four” (see top of page) currently has 2 green, 1 yellow and 1 red light with a VIX that is back over its 50-day mav. FYI: The advance/decline lines are unimpressive, and curiously new 52-week lows on the NYSE are beginning to creep up.

The trend remains up (but with caution) as the major indexes are still trading above their 21-day mav’s. Be careful at this juncture. The only way the market can go higher from here is if it goes higher. Without new, immediate highs, expect a period of sideways consolidation… if not worse.

Finally, this weekend as you think about and may even celebrate St. Patrick’s Day, consider reading this article about the true meaning of the day and the love and forgiveness displayed for people by St. Patrick as a reflection of his love for Christ.

https://www.ligonier.org/learn/articles/who-was-saint-patrick-and-should-christians-celebrate-st-patricks-day

Christ with me,
Christ before me,
Christ behind me,
Christ in me,
Christ beneath me,
Christ above me,
Christ on my right,
Christ on my left,
Christ when I lie down,
Christ when I sit down,
Christ when I arise,
Christ in the heart of every man who thinks of me,
Christ in the mouth of everyone who speaks of me,
Christ in every eye that sees me,
Christ in every ear that hears me.     St. Patrick, 385-461 A.D.

Game plan: Bulls: Be prudent. Revisit your time frame and risk tolerance to “not give it all back.” Bears: Are you beginning to wipe the sand from your eyes? The trendlines of the major indexes remain properly stacked and over their 21-day mav’s, but a quick trip to their 50-day mav’s is not unexpected. Please pray for the peace of Jerusalem (Psalm 122:6-7). May they prosper who love her.

Note: You can learn more about The Triumphant Core Four risk management system by clicking here.

Have a Triumphant day! ®