Monday, February 15, 2016

Approaching A Tradable Bottom?

As we prepare to kick off the holiday shortened trading week, one observation we're keeping squarely on our radar is shared below.  The charts below examine four different periods over the last 30 years and compare the price action of the S&P 500 with one of our favorite indicators.  What seems clear from the data is that we're either getting close to a tradable rally OR the market is on the verge of taking a nastier dive.  

The charts look at the following periods: current market, 2007-2008, 1998-2000, 1987-1990.  The price of the S&P 500 is shown in the top pane of each chart and the corresponding bottom panes show the percentage the index is above/below its 200-day moving average at the time.

A few things can be noted from these studies: 1) We've seen many instances over the past 30 years where once this indicator drops down to the -10% area it has represented an extreme and a place where the market has bounced.  2) There have also been periods where the -10% marker has served as little support when the market hit true moments of stress (2008, 1999-2000, etc).  There we saw both the index and this indicator drop to much lower levels and stay depressed for months.  3) Whatever the path that's taken, this indicator has a history of ultimately being fairly useful once it shows a positive divergence from price.  Once we see that "all clear" signal it may be a sign that the market has made its final lows in this pullback/correction/what-have-you... 

Current Market

2008 Bear

1998 and 2000 Bear

87 Crash and 1990 Bear

Even with Friday's powerful rally, stocks still finished in the red last week.  After trading below January's low of 1,812 on Thursday, the S&P rallied on Thursday afternoon and Friday to finish the week down less than 1%.

That being said, the index continues to suffer on a year to date basis as it's still off almost 9% from 2015's close.

In another sign of the market's current "risk-off" attitude, Utilities and Staples remain the clear sector leaders so far in 2016.

Futures look to be signaling a very green open for the market tomorrow.  We'll see if such a scenario has staying power this time.

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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