Somewhere over the rainbow…"the dreams that you dream of, dreams really do come true…"
The gloom, the mist, the darkness, the thunder, the rain, the storm, the lightning. After the thunder rolls and the lighning strikes, the rainbow appears. Today that rainbow appeared, but you would never guess it from the final results. The S&P 500 finished down 10.59 points, the NASDAQ down 2 points, the Russell down 7 points, the VIX up a point or so and the super spike theory we predicted some weeks ago in the SKF came to fruition. So, where is the rainbow? Keep reading!
We had targeted 1,240 as a low on the S&P 500 today and that was the precise point from which the S&P 500 started to rally intraday. The NASDAQ also showed strength from near the 2,200 marker, which it hit back in January and March. Both times it rallied soon afterwards. One of our members queried why we are leaning bullish at this time when everything looks so bearish. Well, we like to stand aside at the beginning of a carnage. But as Buffett famously said (and we’ll paraphrase), if you are bullish on the markets, you want stocks to go lower!
This seems like a paradox but it is easily explained by compounding returns over time. Let’s say I see a stock trading at $20 per share and have $20,000 to deploy. (Neglecting smart risk management!)…let’s say I buy 1,000 shares. If the stock rises up to $30, I make $10,000. But what if I had been patient while the stock dropped to $15, what would the impact of buying with the stock just $5 lower have been? It turns out I could have made 100% on my investment with the stock rising to $30 instead of 50% as was the case when purchasing the stock for $20 per share. Buying after a 25% decline meant the difference between making 50% and making 100%! Now extrapolate that out further in time and you’ll see selloffs really are stock market gifts in disguise!
The sharp selloff in the Russell is also indicative of a triple bottom. We have been waiting, waiting and waiting for this moment to arrive. And now it is time to see if we do indeed hold these levels. The Russell rallied sharply off its support level and it wouldn’t be surprising to see it test that level one more time. Indeed that would be viewed very positively as far as we’re concerned.
What we don’t want to see is a breach of January and March support levels. Otherwise the region on the VIX chart below highlighted with a question mark is the region in which the VIX could spike! Our expectations are not for this to happen anytime soon, but we’ve been so patient in waiting to deploy our hefty cash reserves that prudence dictates we see the market reverse direction first. Even if only a technical bounce, we can still participate.
The super-spike expectation finally came true on the UltraShort Financials and volume was H-I-G-H, which is a really good thing! Now if oil starts to come down, the financials start to go up and the dollar strengthens a little, we might just be able to declare the bottom this week as previously predicted. Right now, we’re sticking with that call. A catalyst will be required for our projections to be proven correct. That catalyst may take the form of earnings season, which kicks off this week. As stated in our most recent Market Commentary, we expect that, if the markets were to bottom this week, the likelihood of them doing so was higher later in the week than earlier. As usual, there is no need to rush in with abandon. But for the first time in months, our trigger fingers are itchy. We have taken aim, the targets that were in sight have been reached. Now a little reversal will be the sign that we can finally point and shoot.
We’ll keep you posted when we start deploying those cash reserves.
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