Granted, it was a historical 20 minutes or so. Never in my thirty years of investing around the globe had I experienced quite the downdraft the markets incurred on Thursday. But to dismiss that drop as a computer glitch or someone pressing the “B” for billion instead of “M” for million button on his keypad, well, that’s just BS and I don’t mean Bill Schmick.
The intraday low on the S&P 500 Index during that hour registered 1065, which is a hair breath below its 200 day moving average (DMA). It is interesting that this entire panic-induced, mindless computer selling suddenly stopped on a dime at that point and the averages reversed. It doesn’t add up. Why is that important? It is because the 200 DMA is the line in the sand for a continuation of this rally. A collective someone knew and took advantage of that fact. In hindsight, it is what we call a “test” of the market and so far the index has passed that test.
“That’s good, right?” asked a shaken client from Canaan today, who called after watching the news on television.
“Well, yes and no,” I admitted.
You see, most often when a test like that occurs on heavy volume like Thursday’s, we should expect a ‘re-test” of that low just to be sure it will hold. That implies we have more downside to go. At that 1065 level, the S&P would have corrected about 12% from its yearly high, which is well within the realm of probability. The fact that European markets closed on their lows on Friday, despite Germany’s Parliament giving a yes vote to paying their part of the Greek bailout, indicates the coast is still clouded and far from clear.
“There’s no solution on the horizon,” maintains Robert Tepper, the President of AEB Corporation, a broker based in Great Barrington.
My good buddy, Rob, is Dutch, born and bred, and has forgotton more than most people know about Europe. He returned yesterday from a trip to the Euro Zone.
“Greece has been cooking their books since the EU was started,” he contends, “and those nations who haven’t, aren’t happy about bailing out this AIG of Europe.”
He agrees that there is mass hysteria in the markets, that the issues are serious and that the community of European nations is taking far too long to solve it. That said, we both agree that there is no alternative but to solve it. Please read my two recent columns on Greece for my solution.
A few weeks ago, I forecasted as much as a 10% pullback in the markets somewhere between S&P 1,200-1,235. When it didn’t happen immediately, I started doubting the wisdom of that call, thinking the markets were simply going to blow past that level and keep going. In hindsight, I should have stuck to my guns. Right now we are down 8.2% from the high of 1,217. I figure this correction bottoms out somewhere between down 10% to down 12%.
What worries me most is what will happen in the aftermath of this crisis. Usually, this kind of volatility, including this week’s history-making sell-off, signals a change in the market’s dynamics. Bailing out Greece is only the beginning of a work out period that will take time and money to fix. Remember, Greece is just the tip of the iceberg, with other nations—Portugal, Ireland, Spain, Italy—in need of economic help and possibly debt restructuring. It could well take several months, even the rest of the year, to resolve these problems.
Will that process stifle the exuberance of our own market? Will caution prevail and clip the wings of our rally, which is well over a year old? If so, that does not necessarily mean the markets will continue to decline. The continuing good economic news could provide a floor for our market. Instead, we may just mark time for a couple months or possibly for the rest of the year at around these levels. It is too early to tell, although if markets do flatten out instead of continuing to forge higher, it is not the end of the world. In fact, I’ve been expecting just such a scenario to occur sometime this year. If it does, I will certainly have a formula for how to play that kind of market so keep tuned.