With continued uncertainty in global markets, today two legends in the business sent King World News powerful pieces covering everything from the worries in global markets to a surprise in China and comparisons to 2011.
“Jeff, given yesterday’s stock market action do you think we have put in a double bottom in the S&P 500?” — A New York based portfolio manager
The above quote and the following note is Jeffrey Saut today: “That’s certainly a good question given Wednesday’s Win, but I still think it is too soon to tell. He then asked about the “undercut lows” I have mentioned that were the sequences that bottomed the equity markets in 1978, 1979 and 2011. To reiterate, the S&P 500 (SPX/1920.03) slid into a “capitulation low” followed by numerous failed rally attempts. Then, before the final bottom occurred, the SPX came back down to the capitulation low and broke marginally below it with what a technical analyst would term an “undercut low.” To show the portfolio manager said sequence, I whipped up the attendant charts (page 2) showing the “capitulation low,” the subsequent back-and-forth action, punctuated by the “undercut low.”
The entire sequence tends to encompass 6 to 8 weeks. “Interesting,” he said, “But can you remind me of the news backdrop during the 2011 bottoming sequence? Was the news as bad as it is now?” A quick look at my notes showed that: 1) days before the U.S. defaults on some of its debt payments, the White House and party leaders agree to raise the debt ceiling; 2) S&P downgrades the U.S. debt rating stating the budget deal doesn’t do enough to address the long-term picture of the country’s finances; 3) the Occupy Wall Street protest begins in Zuccotti Park and spreads across the country; 4) Egypt’s Mubarak resigns as President ushering in the Arab Spring; and 5) the Japanese yen surges to a record high against the U.S. dollar.
“So yeah, George, the news backdrop was pretty bad in the fall of 2011, which precipitated the ~20% decline from the 7-7-11 intraday high (1356.48) to the 10-4-11 intraday low (1074.77).” Interestingly, despite all the movement and volatility during 2011, the S&P 500 returned only 2.07% for the year. If that sounds familiar, it should because despite this year’s volatility the S&P is only off 6.74%. As for if we are going to get an undercut low or a double bottom, I will say it again, “It is just too soon to know.” I will say that yesterday provided the potential for a double bottom in the SPX.
As Investopedia writes: The double bottom is formed when a downtrend sets a new low in the price movement. This downward move will find support, which prevents the security from moving lower. Upon finding support, the security will rally to a new high, which forms the security’s resistance point. The next stage of this pattern is another sell-off that takes the security down to the previous low. These two support tests form the two bottoms in the chart pattern.But again, the security finds support and heads back up. The pattern is confirmed when the price moves above the resistance the security faced on the prior move up. Remember that the security needs to break through the resistance line to signal a reversal in the downward trend and should be done on higher volume.
The Dow Theory Sell Signal
This sequence is shown in the idealized chart formation on page one. While short-term traders can take heart in yesterday’s explosion and trade the upside using Tuesday’s lows as a stop-loss point, investors should likely wait until the double-bottoming pattern clears the top-side of the middle part of the “W” that was achieved on 9-17-15 at ~2021 before committing new capital. From a technical standpoint, that would complete the double-bottoming formation. Yet even then, I would be very careful as to where to commit capital because there is MASSIVE overhead resistance (read: supply) in the 2030 to 2100 level on the S&P 500, and because there was a Dow Theory “sell signal” on August 25th that is not going to be reversed quickly.
In this environment securities selection is important, which is why you need a good financial advisor. In past missives, I have featured a number of mutual funds and stocks that I have purchased over the past 5 weeks on the hope that we are in a bottoming phase. While we are hopeful a double-bottom has been achieved, the weight of the evidence is still out.”
This is from Art Cashin’s note today: “Overnight And Overseas – China markets are closed for Golden Week but Chinese PMI came in better than feared and that allowed Australia’s market to rally about 2% as did Japan.
In Europe, markets shot higher on the opening but gave back a chunk of the gains by midday. U.S. futures are higher but well off the overnight highs.
Among other assets, the yield on the ten year is a touch higher, while crude is smartly better, which should help equities overall. Gold and the Euro are lower. Most commodities look a touch softer.
European refugee problem is becoming more difficult and expensive. Merkel looks to toughen asylum laws. It may make page one next week.
Consensus – They look to open better, helped, as noted, by crude. Next pocket of resistance in the S&P should be 1928/1932. Welcome to the fourth quarter. Nonetheless, stay wary, alert and very, very nimble.” ***ALSO JUST RELEASED: Frightened Investors Withdrew A Staggering And Near Record $63 Billion Out Of Mutual Funds In The Past 3 Months CLICK HERE.
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