The Stock Market: All Clear Now?
The stock market's been rallying since it's recent dramatic downturn. We've been silent here since the first big drop because: a) such action occupied a chunk of time in order to assess what was really going on; b) based on our assessment, our firm decided to make some changes in our asset allocations; c) since the financial media inundated us with their drama, adding yet one more opinion or comment seemed more or less a waste of time and energy.
In case you were wise enough to ignore all, or at least most, of the media blather you may have missed the panic on Friday, February 9th (a week ago in fact). That's when stock prices plunged intraday to the lows for this move. Since I studiously avoided the typical media feeds (e.g., MSNBC), I missed the outright panic that gushed for a period on Friday - until the market dramatically turned around and jumped up into the green. For some, it saved the day. Having kept my mind on my work, rather than my screens, I missed most of the fun.
But let's not totally write off what happened over the last couple of weeks. Indeed, our firm deemed it necessary to send out a missive about the action, something we rarely do. Some found it helpful. We were essentially trying put the markets' gyrations into some sort of context. Here's what we wrote on February 3rd, the weekend after the initial tumble, before the big drop on February 9th:
The stock market has been in a bull market since 2009. In any bull market, normal corrections are common. They work off extremes and allow the market to grind higher. (Nothing goes up - or down for that matter - in a straight line.) The price action in January was an example of extreme action. The drop in stock prices this past week will help to work off the extreme action. While Friday’s drop was pretty dramatic - 665.75 points on the Dow, 59.85 points on the S&P, given the elevated price levels, we would expect price drops to reflect that elevated level. Still, raw points do have an understandable emotional impact.
To put some perspective on that, we look at the percentages: Dow -2.54%, S&P -2.12%, NASDAQ -1.96%. While clearly above average, such a percentage drop in a single session is not outrageous. Here’s a way to gain some perspective on this, based on the Dow (the average most quoted in the media): From it’s all-time high of 26,608.65 on January 26th, the Dow has lost 1,082.12 points, down around 4.1%. Any correction worth its salt “should” be between 5% - 10%. So this correction has so far not been all that severe by any measure.
Looking forward, we should see a bounce from these lows, likely next week. After that, it’s most likely we’ll find the averages turn down and give us the long-awaited “real” correction, which should take back all the stock market gains so far in 2018, and possibly even exceed these, if we get a full 10% correction.
As you can see, events unfolded somewhat as we described, although the speed and dimension of the drop happened a lot faster than anticipated. The basic pattern, though, seems to be holding. What that likely means is that we should expect another drop perhaps next week, with likely more choppy action for some period. The anticipated drop would be of the variety known as "testing the lows." That means that prices will drop down close to either the lows at the close on February 5th, or the intraday lows of February 9th. The likely scenario is that these lows will be "tested" and stocks will then climb higher. Maybe there's more up and down for some days or weeks after that. In the end, though, it's more likely that we see a continuation of the long-running bull market rather than a bear market. And that would make all the activity a correction in a bull market.
If that's all correct, then one thing we can learn from all this might be that corrections can be swift and violent, scaring the pants off a lot of people, causing some to sell in panic, which accounts for the dramatic action on February 9th. We might also learn that high-frequency traders employing algorithm-driven computer programs have exacerbated the degree of swiftness and violence of these sorts of moves.
What you do with this information is another story.
So, in all likelihood things aren't "all clear now"; but they'll be pretty clear pretty soon.
In case you were wise enough to ignore all, or at least most, of the media blather you may have missed the panic on Friday, February 9th (a week ago in fact). That's when stock prices plunged intraday to the lows for this move. Since I studiously avoided the typical media feeds (e.g., MSNBC), I missed the outright panic that gushed for a period on Friday - until the market dramatically turned around and jumped up into the green. For some, it saved the day. Having kept my mind on my work, rather than my screens, I missed most of the fun.
But let's not totally write off what happened over the last couple of weeks. Indeed, our firm deemed it necessary to send out a missive about the action, something we rarely do. Some found it helpful. We were essentially trying put the markets' gyrations into some sort of context. Here's what we wrote on February 3rd, the weekend after the initial tumble, before the big drop on February 9th:
The stock market has been in a bull market since 2009. In any bull market, normal corrections are common. They work off extremes and allow the market to grind higher. (Nothing goes up - or down for that matter - in a straight line.) The price action in January was an example of extreme action. The drop in stock prices this past week will help to work off the extreme action. While Friday’s drop was pretty dramatic - 665.75 points on the Dow, 59.85 points on the S&P, given the elevated price levels, we would expect price drops to reflect that elevated level. Still, raw points do have an understandable emotional impact.
To put some perspective on that, we look at the percentages: Dow -2.54%, S&P -2.12%, NASDAQ -1.96%. While clearly above average, such a percentage drop in a single session is not outrageous. Here’s a way to gain some perspective on this, based on the Dow (the average most quoted in the media): From it’s all-time high of 26,608.65 on January 26th, the Dow has lost 1,082.12 points, down around 4.1%. Any correction worth its salt “should” be between 5% - 10%. So this correction has so far not been all that severe by any measure.
Looking forward, we should see a bounce from these lows, likely next week. After that, it’s most likely we’ll find the averages turn down and give us the long-awaited “real” correction, which should take back all the stock market gains so far in 2018, and possibly even exceed these, if we get a full 10% correction.
As you can see, events unfolded somewhat as we described, although the speed and dimension of the drop happened a lot faster than anticipated. The basic pattern, though, seems to be holding. What that likely means is that we should expect another drop perhaps next week, with likely more choppy action for some period. The anticipated drop would be of the variety known as "testing the lows." That means that prices will drop down close to either the lows at the close on February 5th, or the intraday lows of February 9th. The likely scenario is that these lows will be "tested" and stocks will then climb higher. Maybe there's more up and down for some days or weeks after that. In the end, though, it's more likely that we see a continuation of the long-running bull market rather than a bear market. And that would make all the activity a correction in a bull market.
If that's all correct, then one thing we can learn from all this might be that corrections can be swift and violent, scaring the pants off a lot of people, causing some to sell in panic, which accounts for the dramatic action on February 9th. We might also learn that high-frequency traders employing algorithm-driven computer programs have exacerbated the degree of swiftness and violence of these sorts of moves.
What you do with this information is another story.
So, in all likelihood things aren't "all clear now"; but they'll be pretty clear pretty soon.
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