Keeping a long-term perspective is always important, but it’s essential when markets are stormy and emotions are running high. A look at history shows that while markets react to news events in the short term, they have tended to reward patient investors over long periods of time. Indeed, global markets have shrugged off the impact of past viral outbreaks. While the past is not predictive of the future, it does offer valuable perspective. There is nothing exactly like the coronavirus. We don’t really know how this is going to play out. But you can compare it to SARS to help put things in perspective. What have we seen in the past that may help us look at current conditions more rationally?
Right now the NYSE Bullish Percent chart (NYSEBP), our main representative of the supply/demand picture and risk level for the stocks on the New York Stock Exchange (NYSE), is sitting at the 6% level, just 2% above where it sat at the bottom of the 2008 market crash, and just before the chart reversed up showing that demand was returning, giving us a tremendous buying opportunity into 2009. The chart is at its 1987 low of 6%. In the correction of 1974, the BPNYSE fell as low as 8%. In 2002, after the dot com and horrific September 2011 crash, the lowest the NYSEBP chart got was 24%, and in 1998, the NYSEBP only fell to 20%. These have all proven to be excellent buying opportunities upon a reversal up … which we know will occur. Additionally, the NYSE HILO chart, which represents the number of stocks hitting new highs vs. new lows, fell below the 10% level a week ago. The average length of time from moving below 10% to reversing back up is 21 days, and we saw the indicator reach these levels roughly seven days ago. This means we still have 14 more days to hit the “average” number before expecting a rapid turnaround and heading northward again. The market continues to search for a bottom, and now we see the levels on both charts as positive signs of a very near bottom. The Dow Jones (DJIA) and S&P 500 (SPX), and most other major indices, remain below -100% oversold levels on their 10-week trading bands. The DJIA is currently -136% oversold while the SPX is -126% oversold. The average stock is now -106% oversold on its ten-week trading band.
Historically speaking, looking out a year from now, the returns for the market tend to be strong following a period in which both the NYSE Bullish Percent (NYSEPB) and the NYSE High Low (NYSEHILO) are below 20% and 10%, respectively. That said, the short term returns have been choppy, so it could be dangerous to bottom fish without confirmation from the indicators. Until we receive these confirmations, I plan to continue raising cash where appropriate so that we are ready to reinvest. This chart shows the returns of the S&P 500 from 1 day after chart bottoms to 12 months afterwards.
When will we find the lows? Hindsight is the only way we are going to know the answer to that question. What we know at this point is that the indicators are at extremely low levels. Volatility is likely to remain very high here and that means the charts will move around to give buy signals once demand comes back into the market. We will remain patient, stick with the game plan, and look for entry points in strong relative strength names. As the indicators change, we will remain nimble and change with them and look to gain equity exposure when they suggest so.
Let me know if you have questions or concerns. I am excited for the possibilities to come.
