Another interesting week with unmatched volatility both ways, up and down. The intra-week range of the S&P500 was around 10.5%, that’s equivalent to a half year’s return back in the quiet periods like 2017. For those of us that are still waiting on the sidelines with our cash piling up, we should be celebrating this volatility. Periods of heightened volatility don’t happen often, so when we invest our cash towards the end of this volatile period, the probability of a smooth climb up is in our favor.
Market Sentiment Remains Neutral
This week’s AAII Bull/Bear spread came in at -16.7%, a slightly bearish outlook but still not negative enough to indicate that the fear has peaked. If you recall my previous post, last week’s reading was just below -20%. Once we get multiple readings below -20%, then that would be a clear sign that the market is ready to reverse directions and head higher. Until then, I recommend continuing to sit on your cash and wait this one out.
How much longer until we find a bottom?
While we can’t definitively call where the bottom will be, we can time our investments so that the risk/reward is heavily skewed in our favor. When we’re faced with a crisis, whether viral (COVID-19) or financial (2008 Housing Crisis), it usually takes a long time for the core issue to be resolved and for investors to gain confidence to buy back into the market. Many investors are panic selling because it seems like the market keeps on dropping without an end. However, if you take a longer look at the market, you’ll realize that it has only been in this crisis for 5 weeks. To give you some perspective, take a look at the 2018 market crash due to increased interest rates and trade war concerns, that crash look around 13 weeks before the market momentum reversed. Same thing happened in 2017-2018 and 2015-2016. When looking at deeper recession, the 2008 financial crisis lasted 73 weeks, and the 2000 economic recession lasted 132 weeks. By using these past examples as a very rough guideline, the current market selloff should still be in the early to mid stages, and further selling that occurs over the next few weeks shouldn’t scare you. In fact, it’s giving you a once in a decade buying opportunity.
Another way we can make an educated guess at where the bottoming range could be is through the use of technical analysis. For over 10 years, we’ve been in this secular bull trend that started after the housing crisis in 2008. If you notice on the chart below, over the last 10 years we have had many market corrections that reversed directions right on the 200-week moving average trendline. We have recently broken that trendline with strong volumes and by a large margin, which indicates to me that the secular bull trend of the past decade has officially ended and we could be going into a period where uncertainties remain high and market prices remain depressed.
From the bottom of the 2008 recession, to the recent peak in 2020, the S&P500 gained roughly 404%. If you practice Fibonacci technicals, then you’ve probably heard of the 50% retracement level. If you haven’t heard of it, it’s a widely used technical analysis tool that uses the Fibonacci numbers as a guide to find possible support and resistance zones within the stock market. According to the theory, after a long bull run, a retracement is likely to find support at a level that is around 50% of the gains (trough to peak). In the current retracement, we’ve dropped around 30% so far from the peak, so that means we could potentially drop another 20% or so before bottoming. If you graph this out on a chart of the S&P500, you’ll see that another 20% drop will get us to the support region created by the consolidation period in 2015-2016. I am personally planning to deploy more of my cash if it falls another 5-15% into this support zone.
My Portfolio Performance Update
In case you were wondering, please see below for my portfolio performance over the past 6 months and also the individual holdings currently. Note that I have a large position in the ETF MINT, which is a money market ETF that I use as a cash substitute.
Upcoming New Projects
I will be starting to produce a weekly podcast where I discuss similar topics in investing and current market events. Updates on when the first episode airs will be posted on this blog so make sure you check back often!