It was a short week on Wall Street in more ways than one. The Dow joined NASDAQ in Bear territory (20% off their peaks) and the S&P 500 is perilously close to making it a trio. Crude oil, on the other hand, continues to break records driving the markets even lower as well as General Motors. The automaker hit historical lows as investors sold its stock fearing GM might not survive in the face of higher gas prices. As of Thursday, the S&P 500, after testing support at 1256, finished the day at 1262 on thin pre-holiday volume. It was not at all convincing.
I have adjusted my downside target slightly since the market internals are messy and chaotic something that often happens at market bottoms. Ultimately, the S&P 500 should decline to some point between 1257 and 1230. From there, it should rally but the question is whether it will be just another bounce or the real thing.
Several factors must be present for a convincing bottom. In the options markets we need the number of puts to calls purchased to increase substantially. The Volatility Index called the VIX must also move higher. The volume on the New York Stock Exchange will also have to move up over the six billion mark and the strongest sectors will have to decline. We call it “selling your winners.” This should all happen within an emotional environment of near panic and extreme pessimism. I know that’s not a pretty picture but it is a necessary condition for a bottom.
Right now and for most of the week the stock markets have been oversold and have been due for a bounce. This could happen at anytime but don’t mistake that for the real move upward. You can bet if financials lead then it is not a rally with legs. On the other hand once the market bottoms if the energy sector, natural resources and possibly information technology leads the advance then odds are it will be a more sustainable move higher. Meanwhile, traders have been building short positions while every attempt to rally has been met with a wave of selling so, in my opinion, the bottom is building.
From the volume of calls I received this week it is pretty clear to me that investors are nervous. Certainly the constant drumbeat of doom and gloom from the financial media doesn’t help the mood either. Let me try to put the present downturn in perspective. In my career, I have seen over 30 stock market corrections throughout the world. Many of them, especially those overseas, have been far, far worse. Yet, every one of those markets has come back stronger and higher than before. The same thing will occur this time. My philosophy is to buy snow blowers in the summer, straw hats in the winter and stocks during big sell offs. I plan to do that this time. In over 25 years I’ve not been disappointed yet. For now, my advice is to turn off the computer, skip the business section of the Sunday paper and instead enjoy this Fourth of July weekend.