Monday, December 15, 2014

Finding A Bottom...

It appears that equity markets have finally succumbed to the ongoing selling in the oil/energy markets.  Prior to last week, the major stock indexes had been holding up quite nicely in the face of the energy meltdown but no longer.  The S&P 500 is down more than 4% since last Monday and the Russell 2000 is back into negative territory for the year. There are only 11 trading days left in the year but for some reason we don't think they'll pass by quietly.

As we looked at our data and indicators over the weekend and today, we took a quick tally of various Pros and Cons currently working for and against the market.

Pros (Market will rebound and finish out the year strong):
  • Potential V-shaped bottom:  This has been the common theme over the last 2.5 years. Anytime the market has weakened and undergone a "significant" pullback it has put in a sharp V-bottom and quickly recovered to new highs. 
  • Seasonality on bulls side:  We've entered the thick of "Santa Rally" season and this will only get stronger as the year closes out.
  • Logical support around 50-day MA on S&P, Nasdaq, Russell 2000:  Each of these indexes are around or approaching this significant level of support.
  • We've started to observe some really dependable oversold indicators:
    • The 4, 13, and 52-week New Highs/New Lows Ratios are at oversold levels.
    • The NYSE McClellan Oscillator has officially moved into oversold territory after today.
    • The % of stocks on the NYSE above their 200-day is now at oversold levels. Since 2012 this indicator has only gone below the 40% level 3 other times (6/12, 11/12, 10/14).  All 3 ended up being very solid buying opportunities. 
Cons (Market continues to weaken into year-end)
  • Bear market in energy: No explanation needed.
  • Expansion of Breadth to downside  - We're seeing an expansion of new 20-day lows across the market. 
  • The potential impact of tax-loss selling into year-end.  
  • Momentum names are starting to break down with the red hot bio-techs (IBB) starting to wilt. 
The holiday season has us wanting to lean optimistic.  We say keep an eye out for the first signs of divergence in breadth and price.  We'll be looking for fewer individual stocks making new lows and then a reversal to the upside in the indexes.  That could be the market putting in the next bottom.

-Ryan Worch

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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