I know it’s difficult, but if you are an investor watching the market drop with a horrible feeling of dread and a sense of Déjà vu, then maybe you should turn that frown upside down and see this for what it is; an inevitable correction that affords an opportunity to buy some stocks that will, in the long term, look cheap. Are there problems in some emerging markets? Sure there are. Are we seeing a slight slowing of growth in the US, even after allowing for the big freeze? Sure we are. Was the last earnings season somewhat disappointing? Sure it was.
All of these things are true, but individually, or even collectively, do they indicate fundamental problems that will derail the recovery? I don’t think so.
Let’s take them one at a time. Even without a sarcasm font I’m sure you will get my meaning when I say that I am shocked, shocked I tell you to see questionable economic management and resultant volatility in emerging markets! If the Chinese manufacturing numbers are your worry then look at it this way.
China’s transition from agriculture to industry was rapid, so should we be surprised that they are now seemingly beginning the transition to a more service oriented economy, resulting in less focus on manufacturing? As for growth in the US, when we allow for the weather disruption the recent numbers seems to be nothing out of the ordinary. Quarterly GDP is notoriously fickle and until we see evidence of sustained negative growth I’ll hold off on talk of a collapse.
Earnings season was a disappointment to many, but only when measured against expectations of continued exponential growth. Companies are generally still making more money than before and expect profit growth to continue. Once again, this is hardly the stuff of a recession.
Long term, then, it appears that nothing much has changed. We are still grinding our way through a difficult, bumpy recovery. The problem that many of us face, however, is that even if we accept that, it is difficult to pull the trigger and buy in a falling market. One more day like yesterday can leave us feeling pretty foolish. There are, though, some technical reasons to believe that now is as good a time as any to snap up some cheap stock. My hordes of adoring fans who hang on to every word I write (I still can’t find the sarcasm font) will be somewhat baffled.
Am I not the guy who writes disparagingly of “lines and squiggles on charts”? Do I not frequently say that, despite my forex background, I’m not a lover of detailed technical analysis? Well, yes, but when several signals coincide it is a fairly good bet that people will be paying attention, and it is the actions of people who notice signals that makes technical analysis work.
This is especially true when the same conclusion can be drawn from looking at charts over multiple time periods.
If you were to look at a 1 Year chart for the S&P 500, then connect the bottom of the dips with a line, it would look like this.
Now you don’t have to have a math degree from MIT to see that the current level could well be an area of support.
Part of my dislike for a lot of technical analysis is that it is possible to paint a very different picture with the same data if considered over a different time period. In this case, however, applying a different analysis to a 6 month chart leads one to the same conclusion; that we are in an area of support.
Yesterday’s close of 1481.79 represents a 50% retracement of the move up from August’s lows to the end of year highs. There is no magic to this number, but those looking at a 6 month chart will also see a point of support on that basis too, at least in the short term. Where it comes from is irrelevant; it only matters that buyers are encouraged by their own analyses.
The technical signals above don’t tell us anything about the long term direction of the market.
For that, we must use a more fundamental analysis and simple logic. If you agree that what we are witnessing right now is more of a correction than a collapse, then using the opportunity to deploy any cash that you have on the sidelines makes perfect sense. What these signals do tell us is that now is probably as good a time as any to do that.