I usually start these posts each Friday saying that 'I hope you've had a great week’. The market aside, I truly hope you have! But there is no denying that the pain from the current sell-off has been felt by everyone in equity markets. According to research put out by a Deutsche Bank analyst on Bloomberg this morning, it is in fact ‘the fastest stock market correction on record’, with the S&P 500 declining more than 3% in three of the last four sessions. Although stocks fell by more than 20% in a single day in October 1987, the difference this time is that the market was at an all-time high, whereas the peak before Black Monday was a couple of months earlier in August 1987.
Perhaps then the current episode should be labeled ‘the fastest drawdown on record’… either way, we must now look to the future and determine how best to position going forward. Our Checklist process helps us to do exactly this, and earlier this week was updated for the new month ahead. With a clear score for a range of global currencies, commodities and equity markets, it is far easier to have a view on the action and maintain perspective amidst the noise. We’ve also identified some great stock ideas in our Trading Club video analysis in recent weeks which may provide inspiration for your watchlist and potential bargains as sentiment reaches extremes and price overshoots (Trading Club members can access this wealth of research and expertise in on-demand here).
So what are the Checklists saying? Although there is no denying that there will be a negative impact down the road, our Business Cycle Checklist is currently positive and has even strengthened on last month...
Similarly, our Equity Market Checklist also remains positive with a score of +2...
So is this an overreaction?
Whilst the fundamentals support being long stocks, the reality is that the technical momentum looks overwhelming negative (you know what they say about trying to catch a falling knife). The S&P is currently oversold on the daily RSI, but anecdotally there was a great deal of selling at the close yesterday which is indicative of risk controls kicking in for the large institutional investors. There is also talk of Algo’s and CTA’s potentially being primed for further selling before they are ‘done’. And the market keeps going down on bad news (the opposite tends to occur towards a bottom). All said it could be some time before the reflexive selling is exhausted.
Still, I’m keeping an eye on the charts for a potential washout with a key Fibonacci retracement level around 2720 on the e-mini futures. That’s the level I would be prepared to ‘take the plunge’ at, given the positive fundamentals of our Checklists supported by the extreme fear pervading markets (of course, this is by no means intended as a recommendation or advice, and as always is intended for educational purposes only - you trade at your own risk).
Time will tell how this all plays out, but what’s clear is that things are becoming far more complicated in markets and it has never been more important to trade with a proven process. Recognizing this as professional investors, we provide our Checklists for a range of markets at the Trading Club and update them for our members on a monthly basis with video updates each week tracking the evolution in markets.
If you would like to join us for our full analysis including new insights each week or learn from the ground up with online tuition from Lex in our Million Dollar Traders online course, then reach out to us today and take your financial knowledge to the next level right away!
Have a great weekend,
James Helliwell | Chief Investment Strategist