Critical Point for the S&P500
TL:DR: If there is going to be a reversal, it needs to be this week. If not, expect further downside.
Last post we said that it might be volatile because we have the duel tension of large variables pointing to a recession, but at the same time being very oversold. So longer term downward forces, but short term support forces.
We said in the last post:
"those who are playing for an intermediate bounce, would go long now (and better on certain stocks that are very oversold and are at great valuation, and have the financial flexibility, or optionality to reward shareholders directly), and they can cut their losses if there is a definite close under SPX 3590, which is only 2% lower from where we are now. In that sense, you are risking 2%, but your potential reward, should the markets cycle higher, is likely 8%+. That's a 4:1 ratio."
Here is the exact chart I annotated in the last post.
I didn't say that the market would behave exactly like this, but the main idea is that we were ripe for a bounce, and depending on the fundamentals, would likely resume downside unless some game changer appears to convince the market of a soft landing.
Did the markets do exactly that, but much faster than expected?
We had a quick bounce from the recent lows of 3580 to 3800, which was a 6% bounce before we selling resumed and we are now at 3583.
So we got a decent bounce (6%), just not as good as 8% before drifting to the downside.
So, if you managed to capture some of that 6%, count yourself lucky for "stealing" some chips back from the bear market.
One lesson to take from this is risk management and strategic places to take your trade.
Those that took the trade at the lows only risk small losses if the support is broken, but the upside could have been a short term to intermediate term cycle.
The amount of news out there can be overwhelming. Which piece of news truly moves the market? You will be surprised to hear that research has been done to see if political and economic news significantly moves the market and that it turns out that these types of news does not predict the market.
Hence, that's why it is good to be able to switch hats from a fundamental investor to a market trader at times where decision making on "fundamentals" which are quickly evolving is difficult.
Looking at the weekly chart above, we are directly at a very long-term support line (red line).
This is the natural place for a bounce to happen.
Some major moving averages are like magnets. They repel and attract prices.
When the price had finally touched a moving average for the first time, repulsion is the most common experience.
If we get a real bounce from here on some game changing news, the price will get attracted back, closer to the blue line.
However, if the price finds enough weakness to convincingly break below the red line, then it likely has much more downside to go and will take a relatively longer time to "find a bottom".
So we are at a critical point now.
So we are temporarily below 3590.
If we don't recover from this level this week in a signficant way, I am inclined to assume further downside.
Beware and understand the possibilities going forward.
One good news is, that I think certain equities are already quite cheap. If the market truly breaks below the red line and capitulates, it will be a great, great opportunity to load up on companies that are cash flow rich and has a business model and financial health to survive a recession.
I am already preparing a list of these, I hope you will too.
In other words, I am saying that if that red line breaks, we are likely closer to the end of the downside than the beginning, so don't be paralyzed in the crisis and bad news. Once you've brushed off the regret of what you could have or should have done, prepare yourself and look for opportunities.
If you do research, you will find that on the long term, investing in growth stocks do not give you the best returns. Value stocks that have low earnings growth (at least 5% a year) has been the best return for investors on the long term.
We do a class to teach people what to look out for to find the best candidates in a recession bottom scenario that regular investors can easily understand. Valuation like P/B as well as relative strength analysis helps in that stock picking at the bottom process, but this is sort of already well-known. We have others that are not as well-known that increases the odds of success quite significantly.
Email if interested.
Do take care of yourself!