So, it happened. We got the sell. At the time of writing the market is down over 7% since February 10, and creeping in on correction territory, which is classified as a 10% drop from all-time highs.
The Coronavirus is receiving the blame for the market movement and is certainly adding to the volatility. However, what I want you to remember is that this market was continuing to rise higher, for what I saw as no particular reason. It got differentiated from its fundamentals, which you can see from my buy sell chart. Reminder that the Buy/Sell graph that I send you is simply shows a 3-year time span from the market starting point to what I think is fair value for the overall stock market. There is a line above it which is 5% above my perceived fair value and a line below, that is 5% below.
I classify the market as trading out of fundamentals when it trades above or below the 10% zone, and when it’s not trading on fundamentals it trades on technicals (or charts).
Technical analysis as you may recall from previous articles, is a trading discipline that uses trends gathered from trading activity such as price movement and volume. You may hear them in such terms as 200 day moving averages or Relative Strength Indexes. Don’t worry about the jargon, just think of it as a line on a chart. I tell you this because when the markets are not trading in the short term on earnings, it goes through what we call “price discovery”.
Price discovery is a term used to describe where supply and demand meets. It has nothing to do with the company itself, or future sales or profit. It’s simply looking for a price that is tangible. Looking at the chart of the S&P 500, the blue line is the 50-day moving average, often thought of as a first level of support. The orange line is the 200 moving average, which is often referred to as the second support level. If you look you can see that over the past year, we saw the market hit the 200-day moving average 3 times and we are now looking to test that again currently.
So, in the short term if you’re looking to see where this could go from here, the next support level on the S&P 500 is around 3052, which is another 2% lower than where we are at the time of writing. If we go through that figure, then our next support level is around 10% lower than that.
Lastly about this current pull back is that even after this recent move, we are still slightly above my price for fair current value. So, I will tell you that this move was not unanticipated.
If you have read anything that I’ve written over the years, then you’ll know that I hold the view that it’s time to go earn your money when the market is down. It’s time to go bargain hunting. Although I’m starting to see capitulation in the Energy sector, it’s not broad enough to pique my interest yet. Just know that we have an appetite…but we’re not salivating yet.
In summary, although it sucks watching your account balance go down, we need to ride the waves. No one can tell you what the market is going to do in the next day, week, month, or year. It’s a crapshoot in the short term, predictable in the long term. We are right at where I think we should be from a valuation standpoint, and if we do drop down further from here, my view is that it will give us opportunities to add great companies at better prices.
With that said here’s the buy/sell. If you have any questions or concerns, feel free to give me a call.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mick Graham and not necessarily those of Raymond James.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results.