Another crazy session

We had another pretty crazy session on Wall St on Tuesday. I know there’s a lot of fear and uncertainty out there so I wanted to provide you with a quick market update on how I’m seeing things.

Did you get to watch the market update video I published on the weekend? If not, take a peek at it here, as I will be updating my comments on that video here.

What’s happened since last week?

Last night markets sold off heavily after the open. The selloff was led by the NASDAQ, which fell almost 3% by the middle of the session.

At their worst, the S&P fell 2% and the Dow lost -550 points or 2.2%.

However, in the afternoon all three indices rallied with each index closing down only slightly.

These swings can be unsettling. Since 2008, whenever the market falls, everybody starts to wonder whether this is “the big one”. Whether this is going to be the start of a 20%, 30%, 40%+ decline.

We are still carrying the emotional scars of 2008-09 and our fear is not helped by the persistent bearishness of many market pundits and mainstream media.

Market Update – Technical Picture

Market Update S&P 500 has pulled back to support
SPY has retraced back to the 61.8% Fibonacci support level

Remember in my video on the weekend I said I expect the S&P 500 to form a “W bottom”? Well, here it is folks…potentially at least!

SPY (the S&P 500 ETF) pulled back last night to touch the 61.8% Fib level from the 2018 lows…a level which (coincidentally??) coincided with historical support. Ignore these Fib levels at your peril, folks.

My expectation now is that the low for this pullback is “in” and we move higher from here. Of course, we are only ever dealing with probabilities so I will be flexible in my view if the unfolding evidence requires me to be so.

“But Simon, the S&P 500 has closed below it’s 200 day moving average!!”

Yes, I have heard this more than once today!

What can I say? It happens! Remember, the 200-day MA is a “line in the sand”. It is not a surgical instrument. Only if we get successive closes below a downward-sloping 200DMA will I become more convinced of a change in trend.

Corrections are Normal

I want to revisit a blog I wrote on 25 October 2017 – How to Trade at All Time Highs.

In that blog, I wrote:

“The frustrating thing about bull markets though is that they like to take as few people along for the ride as possible.

Looking at the latter stages of the NASDAQ bull market from 1999-2000 may be instructive here. During the 15-month period from the start of 1999 to the peak in March 2000, the NASDAQ Composite experienced 6 corrections of at least 10%.”

Shaded areas highlight pullbacks of 10% or more in the NASDAQ, 1999-2000
Shaded areas highlight pullbacks of 10% or more in the NASDAQ, 1999-2000

The point being, two-way movement in the market is normal. Pullbacks are normal. Corrections should be expected, particularly in the latter stages of a bull market.

But none of this diminishes the potential for significant gains in the months ahead.

If the emails I receive and the conversations I have with people in the market are any indication, emotions range from cautious to downright scared. This is corroborated by sentiment data.

Smart Money vs “Dumb” Money

According to Sentimentrader:

Smart money moves in…Hedgers in the major equity index futures contracts covered nearly $19 billion of their short position, one of the largest one-week changes ever.

Dumb money moves out…Equity funds saw an outflow of more than $17 billion in the past week alone, one of the largest we’ve seen in years. Such large one-week flows led to excellent returns for stocks. The different between these two sets of flows was nearly the largest in a decade, all prior ones leading to a rally for the S&P 500.

I’m not trying to catch every swing

As clients of mine and regular readers know by now, I always have some short positions on, even in a bull market. The short positions gain in value when markets pull back and help smooth my equity curve out a bit. I essentially view them as a free hedge.

But I am not trying to pick the onset of each correction with the intention of loading up on short positions.

As I believe the big trend is still up, I am looking at pullbacks like this one as an opportunity to re-load on long positions.

don't try to chase every market swing

I hope this helps. Until next time, good trading!