Archive for February 13th, 2018:

Is the correction over, or is there more?

Written on February 13th, 2018 by Jamesno shouts

The long awaited market correction came with a vengeance the past two weeks, and now the question becomes is the coast all clear? Before we look at possible scenarios let’s discuss what finally triggered the rapid selloff. Lurking beneath the strong stock market rise in 2017 were slowly rising interest rates. With the strong economy, robust rising market and very low unemployment the recipe for inflation suddenly kicked in and rates began to break what many saw as a decade plus downtrend.  This sent a sudden shock through the market that maybe the Fed is behind the curve by keeping interest rates artificially low for to long.  Being late to correct this could mean inflation takes off and then the Fed must rapidly raise interest rates to counter that.  So the market had a momentary panic as this reality came to the surface and dropped over 10% in two weeks. Why did it all of a sudden appear in February?  Who knows, maybe the market participants suddenly became realists all at the same point.

So last week was pretty ugly in the markets, however an important “support” area held in the S&P 500, the 200 day moving average of prices.  What does that mean?  Market participants (traders, institutions, etc) all watch the price charts of the various indexes.  And certain levels are known as support levels where many traders will look to enter.  Hence when the S&P hit the 200 day Moving Average on Friday and held, we got a good bounce.  I personally put some client cash to work at this level as well.  Now the question becomes was that it?  Or is there more downside?  I can see two scenarios playing out in the coming one to two weeks.  The first and best case is that we saw the entire correction play out in two weeks and we now march back to all time highs.  See pic:

 

Could that scenario play out?  Of course and that is why you put some cash to work when the markets pull back to prior support levels.  HOWEVER, there is another scenario that could come into play if this bounce stalls out.  And this is the one you need to be prepared for as it could cause some major anxiety.  What I’m going to be watching for in the next few days / week will be the strength of this bounce.  If it stalls around the area highlighted below, there is a potential for one final move lower that is approximately the same point drop as we just experienced.  Potentially down to the 2450 level on the S&P.  That would clear the decks and put enough fear in the market that we could have a sustainable run through early Summer.  Is it possible?  Yes.  Is it probable?  The next few days will shed more light on that question.  Just know that anything can happen in the market.  Nothing is impossible.