WASHINGTON, January 10, 2016 – We admit to being more than a bit shell shocked at last week’s vicious market action. Over many years, this particular time period is one that’s regarded as having “seasonal favorability,” meaning that stocks tend to have an upward bias. “Seasonal unfavorability” tends to occur after Tax Day (generally April 15) but this time of the new year generally treats investors rather nicely.
However, pretty much any investor holding positions in the stock market this week was bleeding from the eyeballs at Friday’s closing bell, as stocks pretty much across the board were viciously savaged, leading to market declines reminiscent of the bloodbath that unfolded in early 2009 at the peak of the Great Recession selling panic.
In fact, last week’s action was absolutely the worst hit the market has taken since it began to reverse its huge, Great Recession declines in late March, 2009, something that spooked rookie and veteran traders and investors alike. It was simply not a good week by any stretch, particularly given the extended misery everyone experienced during the holiday period with no discernable Santa Claus Rally in sight, even though some bulls tried to fire it up once or twice.
We place limits on our losses, here as part of our investing philosophy. As a result, we were forced to sell out of a number of positions last week for losses pretty much across the board. We always regret doing this. But you have to be disciplined when you’re stuck in a waterfall decline that shows every intention of persisting. “Hoping” is simply not an investment strategy, and we’ve seen too much of this attitude leading to failure for decades now. If you can’t learn, you can’t play.
But the larger question this week for all investors is, “How long should I hang on?” A secondary question might be “Is it so bad that now is the time to buy?”
The answer to the first question is: Have you placed a percentage limit on the losses you’re prepared to take? If so, and if you have met or exceeded those limits, it’s probably time to sell out the offending investments any time you can catch a dead-cat bounce. There’s always time to come back for better bargains later. Sometimes your best investment is cash.
Older investors—like this one—have to be mindful that vicious markets like this one can deplete capital quite quickly. Younger investors can afford more risk tolerance and can reasonably consider holding on right now. But the problem here is this: all support levels are breaking down right now and we’re traveling on uncharted investment seas. Final decision, though, is up to you.
The answer to our second questions unfortunately is equally imprecise. It certainly looks bad enough out there that 2016’s tsunami decline could mark a buyable bottom. Problem is that when you catch a bad wave like this, things are very likely to get even worse before they get better. Fortunately, this week should offer us something of a “tell.”
According to the highly reliable McClellan Oscillator, a technical indicator that tells us whether markets are oversold or overbought, we officially hit oversold status Friday. “Oversold” simply means that the selling is now officially overdone, which generally means that some kind of rally, whether temporary or lasting, is nearly at hand. The question here, though, is, when? Monday, later, or what?
An oversold market can get more oversold before it gets better, so Monday isn’t a lead pipe cinch for some kind of rally. However, this week, sometime, somewhere, a rally is almost bound to happen. What we don’t know, however, is if the general equation for the last seven years will still hold true, namely, will investors “buy on the dips?”
Last week was certainly one hell of a dip. But the unknowable item is this one: Was last week’s negative action enough to change the common wisdom from “buy on the dips” to “sell on the rallies.” If we can catch a rally that sustains itself for several days, there may be at least some short-term hope for many investors.
But if we hit a pattern where morning rallies sell off in the afternoon (as on Friday), or if a rally one day means another, bigger decline the next day, then it’s probably time to sell what’s left, go cash, and head for the sidelines.
At any rate, these are the signs to watch for.
In addition, a number of indicators and reports will be out this week, and it’s best to keep an eye out for the following ones:
- Wednesday: The Fed Beige Book report. Information the Fed is entertaining at their meetings..
- Thursday: Initial Jobless Claims. This illustrates whether employment—short term—is heading up or down. Since we’re now in the after-Christmas period, it wouldn’t be surprising or even disconcerting to see this number pop up a bit as seasonal layoffs, particularly in retail, are a tradition.
- Friday: The Michigan Consumer Sentiment Indicator. A pretty reliable report on how consumers are feeling. You want them to feel good.
- Other reports: Retail Sales, with the December report giving us an indication of how good or bad Santa was for stores and consumers in terms of spending. Crude oil, meaning, are inventories trending up (bad) or down (good), in the sense that a tightening in supply might mean per barrel prices are finally beginning to stabilize.
We’ll have more information as the week progresses. Some time after 10 p.m this evening (EST) we’ll update this report with a reading on Monday morning trading futures. These numbers generally provide a reasonable indication as to how the market will open for trading the following morning. Another negative three-digit number would be very bad indeed.
UPDATING: As of midnight, January 11, Dow futures are off 52 points after drawing nearly even late Sunday evening. Reason given by the punditocracy: China’s markets failed to hold Monday morning, closing down once again and indicating Chinese markets (and the yuan) will likely continue to plunge. Monday’s opening bell may not yet be a disaster, but it doesn’t look positive at the moment.