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Market Commentary: 3 Things to Look For in the Bottoming Process

Written by: Benjamin Bimson CIMA®, CMT® / CIO, BCJ Financial Group

All at BCJ hope that your Thanksgiving was full of wonderful time spent with family and friends focusing on all the things you and your loved ones are thankful for. I was thinking how interesting it is that on the day after we celebrate Thanksgiving, many Americans rush to begin their holiday gathering of various merchandise to cross off the wish lists of loved ones. I guess that is one of the American traditions. Celebrate being thankful and then rush to get more stuff.

Equally interesting is that despite reports from retailers like Kohls reporting record spending on Thanksgiving Day, the markets were unimpressed and sold off to just about the support level established by the end of the winter/spring correction.

The low before the market began recovery occurred on May 2, 2018 and continued to the high point last September. Prior to Friday’s market close (markets closed early due to the holidays), the low for the fall correction was 2,641.25 on the S&P 500. Since Friday closed below that point, it is increasingly possible that we will retest the lows of 2018. The good news is that the lows of 2018 is only roughly 2% below the Friday close on the S&P 500 at 2,581. February 8 and April 2 were the last two closes at that level. Here is a chart that shows where the market closing prices were for the past year along with the major support line at 2,881 (dark green line) and the major resistance line at the market high of 2,930 (red line).

 

Chart Source: BCJ Financial Group

 

I think it is important to understand that we are still quite a ways off from a true bear market. Reading the financial news or watching it on the television, it can be tempting to think “the end is nigh.” It is simply too early to do anything more than hypothesize about where we go from here.

Things to look for in a bottoming process:

  1. Look for the VIX to spike on selling. The VIX spiking over 28.5 often is a sign that investor sentiment is getting overly pessimistic. The VIX closed on Friday at 21.52.
  2. Look for massive investment (buying) once investors get overly pessimistic.
  3. Look for all risky investment assets to appreciate at a huge number of gainers/losers. This should continue for multiple days.

The above are normally healthy market correction bottoming indications. We can and have had numerous bottoms that did not include all, or even any, of the above. However, when that has been the case, the following recovery has not resulted in the same duration or strength as when the items above are observed. A good example is the relatively short duration between the early 2018 correction and the one we are currently experiencing.

The reasons and the solutions to the correction seem most correlated to the ongoing trade war with China and the Fed interest rate hikes. Unless these two risks begin to work out, we could very well end 2018 without a massive recovery and really no place to hide from the low investment returns. According to Ned Davis Research, this could be the first year since 1972 where there has not been a single asset class returning 5% or more (note that asset classes are different from individual stocks or sectors).1

We will continue monitoring the data in order to gain insight as to what we can learn from the individual data points and what they are telling us in aggregate. In the short and intermediate term, the data is really mixed. That can tend to occur both late in an economic cycle and in the middle of market corrections. Geopolitical risks further complicate the picture because there are few reliable methods to model geopolitical risks. Times like this take vigilance and resilient investors in order to avoid the pitfalls of becoming emotional about them.

This is the season to be thankful and to look forward to holidays with family and friends. Do not let the uncertainty of the markets dictate your joy because market volatility has no friend or family. It is cold hearted and cruel at times; more so when we focus too much on the near term. Long term, markets are a tool to grow, enhance and protect our livelihoods. Keeping a longer-term perspective helps keep us from letting the short term dictate our happiness. We are looking forward to bringing you some of our expectations for 2019 in the weeks to come.

 

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Sources:

1-U.S. Markets. Ned Davis Research. Amy Lubas, CFA and Chad Ellis. November 21, 2018 [11/23/18]

Securities offered through World Equity Group, Inc., member FINRA and SIPC, a Registered Investment Adviser.

Investment Advisory Services offered through BCJ Capital Management, a (SEC) Registered Investment Adviser.

BCJ Capital Management and DBA name are not owned or controlled by World Equity Group, Inc.

Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 18-209

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