Economics

Thursday Panic Breeds Great Opportunity For The Patient

fastestcorrection

Correction Becomes True Panic

There are quite a few amazing stats on this recent selloff. However, recognize that by the time the impact of the coronavirus is shown in economic data, stocks will likely be done selling off. Traders are always on the leading edge of the facts even though it seems like emotional panic selling. 

Long term investors can benefit from buying bargains even if it’s possible those purchases lead to short term losses. We can’t predict the future impact the virus will have. But it’s usually a good idea to buy great businesses at reasonable prices. That’s what you should do now. Create a list of companies that have solid businesses that you would buy at lower prices.

Let’s now look at the insanity of this decline. Obviously, stocks fall over 10% all the time. We can expect about 1 correction per year. This one is different because of its speed. The market hasn’t caught a bid. I think it will soon though. 

As you can see from the chart below, it has taken 6 days from the peak to decline 10%. That’s the quickest decline off the peak since 1928. This chart doesn’t include the December 1928 decline off the peak which was quicker. This is like February 2018 except faster. 

We didn’t have the VIX blowup and recession fears. Instead we had an overvalued market and fears of the coronavirus. S&P 500’s PE multiple hit 19 which was the highest since 2002. We needed to see a correction.  

This has been the S&P 500’s worst weekly decline since 2008. On a percentage basis, the VIX is up 129% this week which would be the highest weekly increase ever, dating back to 1990. There are 25,504 rolling 5 day returns for the Dow Jones since 1915. This was the 47th worst. 

Worse periods were the Great Depression, WWII, 1987, the tech bubble, and the 2008 financial crisis. Again, corrections are normal. Average intra year peak to trough decline is 13.4%. Current decline is 12%. Those other declines weren’t as quick though. With such a fast decline, it seems like we aren’t at a bottom. However, I’d recommend buying long term positions here.

We’re Due For Solid Intermediate Term Performance

S&P 500 is down 10.7% in the past 5 days. In the past 20 years this has only occurred during the Yuan devaluation in 2015, the Eurozone crisis in 2011, the great financial crisis in 2008 & 2009, and the tech bubble burst in 2000, 2001, and 2002. S&P 500 has been down at least 3% midday for the 3rd time in 4 days. That has only occurred 3 times when the market was 50 days out from setting a new record. Other two were Black Tuesday in 1929 and Black Monday in 1987.

The chart below shows the percentage of stocks above their 50 day moving average. Only 7% of stocks are currently above their 50 day moving average which puts this market below 98% of historical data since December 2001. Obviously, the limit is 0%. 

If stocks fall on Friday, this could be the worst selloff of this expansion. When this reading is in the bottom 2nd percentile, stocks rally 15.2% in the following 9 months on average which is over double the 7.3% gain in all other circumstances.

McClellan Oscillator shows similar results to the previous chart. Current reading is -127 which makes this market the 4th most oversold since 1998. The table below shows the other oversold instances. If you look at the top 10 most oversold levels, every time the market rallied in the following month. Worst rally was 2.4% and the best was 13%. I’m confident stocks will be higher in the next month.

Review Of Thursday’s Panic

S&P 500 was down 4.42% on Thursday. It’s no longer overvalued. It’s not cheap, but it’s certainly reasonable to expect decent gains in the next year with EPS growth rebounding after the weakness related to the coronavirus ends. Russell 2000 fell 3.54% and the Nasdaq fell 4.61%. VIX was up 11.6 points to 39.16. Personally, I’m strongly confident that the VIX will fall in the next 2 weeks. It won’t stay this high for much longer.

Only 4 stocks are up stocks in the S&P 500 are up this week. They are Regeneron Pharma which is up 7.1%, Gilead Sciences which is up 4.2%, Clorox which is up 2.5%, and CME Group which is up 0.7%. Tesla stock is down 25.99% since the 19th. My prediction that the stock would have a 30% correction was spot on. That doesn’t make this stock a buy though. It was a bubble; it won’t re-inflate. 

Every single sector fell again. Worst sector was real estate as it fell 5.59%. Public Storage stock fell 7.41%. 2nd worst sector was energy as it fell 5.47%. Exxon stock fell 6.02% as it now has a 6.99% dividend.

CNN fear and greed index fell 8 points to 13. AAII investor sentiment survey showed the percentage of bulls fell 10.1 points to 20.4% which is 7.6% below average. Percentage of bears rose 10.5 points to 39.1% which is 8.6% above average.

Biden About To Gain Momentum

The Democratic primary has taken a sharp turn as Biden has stolen the momentum from Bernie and Bloomberg. A Monmouth poll that was ranked as an A+ poll by 538 showed Biden up by 20% over Sanders in South Carolina which will give him momentum in the South. This explains why the odds of ‘no one’ winning the majority of delegates rose to 50%. 

Sanders has a 62% of winning the plurality and Biden has a 31% chance. Clearly, traders don’t think Sanders will get the nod if he wins the most delegates because PredictIt shows he has a 50% chance of winning which is down from his peak of 65% last week. Biden has a 30% chance of winning which is up from his trough of 7% on February 11th

The post Thursday Panic Breeds Great Opportunity For The Patient appeared first on Theo Trade.

Source: First Rebuttal

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