Don’t Trade Until You Read This..

Wall Street has apparently lost its collective mind. Last week, the coronavirus had people citing the book of Revelation. The end is Near! Near! Near!…

Euphoria reigns as the new week begins with the Dow Jones Industrial Average lifting off like a satellite rocketing into orbit, gaining more than 1,200 points. (Elon Musk and SpaceX take note on how a launch is supposed to look.)

Have investors escaped the masked man with a chainsaw by reaching the foggy edge of the forest? Or will the villain emerge from the shadows with a startling suddenness. BOO!

Well, much like a teenage, horror movie, we sort of know how the plot goes: edge of your seat, relief, BANG, immediate peril with some blood, blondes and bellowing (couldn’t think of another word for scream that starts with B for the alliteration!)

Slasher movies end with a battered hero and a ‘sort of’ to be continued, for parts 2, 3, 4 ,5 etc. How many Freddy Krueger, Jason, and Chuckie movies are there? Not enough, I guess.

We can’t say for certain how the market is going to play out in the days and weeks ahead, but we do know a big part of the story. Friday’s action drew a fat red line that we do not want to cross. As long as investors don’t close the Dow, S&P 500 and NASDAQ below their Friday’s lows, then we are safely out of the woods.

Friday’s low points:

  • Dow 30 – 24,681.01
  • S&P 500 – 2,855.84
  • NASDAQ – 8,264.16

Write those numbers down on a sticky, the notes app on your phone, with lipstick on the mirror, just someplace you won’t forget them. Although, we won’t forget and will remind you if/when they come into play again. Should the safety net of Friday’s bottom fail to hold, we don’t even want to think about it, but it would be “look out below.”

As for the recovery side of the tale, we see two likely scenarios based on experience.

Scene One: Stocks recover in a V shape, meaning they rise nearly as fast as they fall. This is the most common expectation based on what we’ve seen and read online from the so-called gurus.

Scene Two: Confidence isn’t fully restored; sellers regain control of the narrative and red fills your computer screens. Prices fluctuate, but steadily decline – or possibly cliff dive again – until they enter the neighborhood of Friday’s lows.

Prices touch bottom – there is some wiggle room above and below the fat red lines – and rebound, making the bottom firmer. From there, prices work their way higher one step at a time, eventually recovering most, if not all, of last week’s losses.

Scene Three: Commence crashing, smash through Friday’s lows and bombs away again, as outlined above.

We confess, we don’t know which of our three storylines the market is likely to take in the days and weeks ahead. Our models will tell us when its safer to be more aggressive and add some new $$$ to the market or head for the hills and initiate positions that could benefit from lower prices.

Last week’s action moved our readings out of the bullish column (two sells and a neutral). Under normal circumstances, we’d be taking money off the table, defensive actions and establishing some short positions with inverse exchange traded funds.

Yeah, but the last week or so of trading has been anything but normal.

The first two rebound days lean towards the V. If so, we’ll be right back where we were, most likely within a week or two. If not, the first spell of selling could start before the week is over with the bottom being tested shortly.

Because of the uncertainty, we suggest taking a “wait and see” approach. The answer will come into focus sooner than later. Once we are confident in which of the three paths Wall Street is likely to take, we’ll let you know and focus on ideas that could work based on more than 30-years of financial markets experience.

May all your trades be profitable.

UPDATE: We completed our analysis prior to the Federal Reserve Board taking the step of cutting interest rates by half a percentage point. Fed Chair Jerome H. Powell pointed to risks in the outlook of the US economy and decided to act to reassure investors and shore up sentiment.

The Fed’s action does not change our outlook for stock prices in the near term. It simply shifts the story from scene one to scene two, at least for the moment. It does however add another layer to the plot and sets up a race between Tuesday’s intraday highs and Friday’s lows.

If Wall Street can close above Tuesday’s highs, then it’s a pretty good bet bulls win the race and stocks head higher in the aftermath. On the other hand, if Friday’s lows fail to hold up, bears are in control and prices should fall some more.

So you know, Tuesday’s highs.

  • Dow 30 – 27,084.59
  • S&P 500 – 3,136.72
  • NASDAQ – 9,070.32

Stay Tuned…

Rich Meyers