First off, Mike Santoli at CNBC gets full, 100% credit for the title of this article, but it was just too good not to “borrow.” Thanks, Mike! 😉
Secondly, WOW… there is just so much to talk about this week. I’m normally long-winded as it is, so this article is going to be extremely difficult for me… that is, to get across the main points without going completely overboard.
So today, I’m going to have to ask you to stay with me from beginning-to-end. For some of you, it might make sense to read this over twice. But before I start typing away here, please know that I welcome emails or phone calls from ANY of you, client or not. Please don’t feel bad reaching out with questions. Alright, here goes…
What happened? Aside from continued (old, boring) Coronavirus news, Saudi Arabia got into a little argument with Russia last night about oil production and let’s just say it didn’t go so well. As a result, Saudi Arabia is puttin’ the hurt to Russia by an increase in oil production, which (think supply & demand here), drove oil prices down more than -30% last night, and this news subsequently seeped over into the stock market.
Then, in overnight trading (i.e. – the futures market), “circuit breakers” went off. Markets managed to chill out after they re-opened and as I write this, while the S&P500 is trading at the lows of the day, I’m not seeing the kind of widespread panic that we saw overnight or just after the market opened this morning.
For those who don’t know, “circuit breakers” were instituted back in 1987 after Black Monday in an attempt to prevent such a huge, one-day collapse in stock prices from ever occurring again. Today was a good test and they did their trick, and did it well.
That being said, I’ve got both good news and not-so-great news.
First, the good news…
Interest Rates: This is the interest rate on the 10-year Treasury, below, which is also one of the most highly correlated instruments you can use to determine the prevailing mortgage rates available. If you’ve been thinking about refinancing your mortgage, now might just be a brilliant time to do so. Don’t try to be a hero and “wait to see if it gets lower” here… If you need an introduction to a good, trustworthy mortgage advisor, call or email me and I’ll make the introduction for you.
Signs of Bottoming: Speaking of interest rates, the good analysts over at Macro Charts posted this chart on Twitter, which shows times in the past when 30-year bonds have rallied in ways that the have this past six weeks There have only been three times like it in history for bond futures (1982, 1987, and 2009), after which stocks rallied +27%, +19%, and +47% thereafter.
More good news: Can anyone tell me what happens to bond prices when interest rates fall? Yep… they go up. Normally, I like to wait for a trend to end, top-off, and then fall first (indicating that it’s in a clear downtrend) before I sell an investment. However, considering how violently fast interest rates fell this past six weeks – and thus, as fast as bond prices climbed, I sold almost all the bond investments we owned in our portfolio models this morning.
Now it’s time for the not-so-good news…
The Stock Market: The S&P500 is now lower than it was more than two years ago. Also notice how it’s broken through a “floor” of potential support at around $2,900 – a place where it’s been rejected at different points throughout the past 26 months. Obviously not the best news, but here’s the silver lining: The blue arrow in the upper-pane shows you how the market is experiencing lower-lows, but in the lower-pane, notice how we can see higher-lows in momentum. This is called “positive momentum divergence,” and is a hint, or piece of positive evidence that suggests the market might be bottoming here.
History Lesson #1 (2016): The stock market has a tendency to experience corrections about once-per-year on average, with an average drop of roughly -14%. However, when these drops occur, they usually last around four months, and the “bottoming process” usually takes the shape of the letter “W.” I was going to share the rare exception, which is what we call a “V-Bottom” (like the one we experienced in 2018-19), but this scenario is likely off the table at this juncture.
So below is the double-bottom, “W” pattern that took place back in 2016, which was actually the 2nd correction in a 12-month period (in 2015, the market also experienced a correction as well). My metaphorical “tornado sirens” went off for the 2nd time as I sold all the stocks in our portfolio models in anticipation of a bigger, more catastrophic crash… but a “tornado” never arrived and the sirens went silent.
History Lesson #2 (2011): Today, all the buzz in the news is about the Coronavirus and now an “Oil War” between Saudi Arabia and Russia. Back in 2011, Standard & Poors decided to downgrade the AAA credit quality of U.S. Treasuries to AA+, which caused the market to fall -19.9% in short order. We got out of the market that year as well, but only ended up getting back in at higher prices as again, the market did not crash. Notice the “W” bottom between July and November of 2011, below.
History Lesson #3 (2010): This was a much milder correction and while my “tornado sirens” did go off, the time spent out of the stock market was minimal. But still, you can see a clear “W” bottom in the chart below, before heading to new, all-time highs.
History Lesson #4 (The 2007-09 Market Crash): Here’s what we’re looking for over the course of the next few weeks. It could be more, it could be less, but what we’re trying to avoid is what turned into a -57% crash in the S&P500 as more than half the country’s wealth was vaporized over the course of 18 months. Notice how the market tries to bottom, but that “W” can’t seem to find any legs on the right side of the chart pattern. As the market breaks down a 3rd time, below the first two bottoms (in early-2008), it was time to leave the party before things got crazy.
In closing, how the market behaves this next four days is going to be crucial, but it’s not QUITE time to put the entire defense on the field just yet. If it can find some footing and head higher, today’s close could signal the bottom of this correction and we could see much higher prices, come Election Day. However, if things don’t markedly improve this week, or if the rest of the week gets worse, then the tornado sirens could start sounding and it would be time to grab our kids and head to the basement.
Don’t forget to watch the video I recorded this morning from my basement, which you can watch by clicking HERE.
Till next time…
Categories: Adam Koos, CFP®, CMT®, Market Commentary