BANG! Looking for the Whimper – Market Insight for 10/24/18

The weakness that began to unfold in early October continues on is arguably intensifying as the month matures.  As noted in our update earlier this week investors increasingly seem acutely focused on the well discussed risks rather than what can or is still going right (seemingly old, boring news).  In recognition that our notes earlier this week (notes for week ended 10/19) and in the prior (Halloween Arrives Early) did a fairly comprehensive job of highlighting those key fundamentals and risks the market is weighing, the bottom line is that we believe as this pullback matures it is increasingly of technical nature.  Said differently, it is decoupling from fundamentals and being fueled off what is mostly technical behavior.  This includes program/computer/algorithmic trading; the type of trading that causes “babies to be thrown out with bathwater” (or all stocks trading similarly, despite unique business characteristics of each company).  Being that it increasingly appears a technical pullback, it seems appropriate to highlight some technical signposts of what to look for when trying to understand how much longer weakness may persist – a question likely on most everyone’s mind following a session like today.

Market technicians often refer to corrective phases as needing price, time, or a combination of both to wash out what was becoming complacent sentiment.  Note: we did not call it euphoric sentiment, and that is intentional because there remains nothing about investor mood this cycle that could be construed as euphoric; no, this remains a rather joyless bull market.  That said, things were a bit too good at the end of 3Q, and many were counting on an unchecked 4Q rally.  In early October the markets experienced a sharp pullback and what appeared to be capitulative selling pressure – observed by a sharp price decline accompanied by a surge in trading volume.  Technicians often refer to that event as a “bang!”.  Usually markets can manage to enjoy some brief recovery following a “bang”; but most often need to retest those lows.  Technicians look for such a retest (and often the retest actually establishes a new low), but like to see that occur on lower trading volume than the “bang”.  This 2nd retest on lower volume is what is referred to as a “whimper”; and it is usually the “whimper” that starts to set the foundation for a more tradeable low (entry point).  This was “bang and whimper” pattern was witnessed during the correction earlier this year in 1Q.  For those without new cash to add, it more plainly means that the market is likely to begin its true more lasting recovery back toward prior highs and ideally establish new higher highs in time.

October 10 certainly appeared to have the characteristics of a “bang”.  Here on October 24, the trading action is again almost equally nasty in terms of price and the prior low was undercut, but the volume looks to be reduced from the adjustments earlier this month.  Is this the “whimper”?  Time will tell; but the market is flashing signs of being oversold; those historically translated to mean better than average forward returns over the coming 3, 6, 12 months into the future.  We don’t profess to be short-term market technicians or base our investment of client assets on such – we favor a focus on underlying fundamentals rather than charts and patterns – but we are mindful that for as uncomfortable as such pullbacks can feel, history offers that it is generally a mistake to change one’s long-term approach due to short-term volatility.  We hope this note is helpful; please reach out if you’d like to discuss your investments as they relate to your financial goals more specifically.

Posted in Blog Post.