Here’s what you need to know about the current state of the market. (October 24, 2018)
VIX--X T2108 VIX--X T2108 SP-500
Just a quick video here. I would just totally avoid this market ABSOLUTELY; and listen to me, I’m giving you pearls and they are expensive pearls, don’t short. Stocks are going lower, everything looks horrible and it is literally too late to short; I am going to tell you why. There is that old adage, when the VIX is high it’s time to buy. When the VIX is low lookout below.
This isn’t super high here. And the reason it’s not super high is because this selling, there wasn’t a lot of panic. It wasn’t just like everything was getting dumped out and there were no bids. It was actually kind of orderly, it was just persistent it was really persistent. Anytime there was any bid that showed up somebody said, “Oh, there you go.” That is just the way the market is right now and so I think with that said though, we don’t have a capitulation yet but we do have kind of some technical reasons to at least not look for more downside right now.
I don’t like to guess because it has never made me any money so I am not going to do that. Let’s just look at a couple key indicators. First of all, with respect to the VIX ( INDEXCBOE: VIX ), when it gets up above 30.00, certainly up to 40.00 or so, that’s when I think you can back up the truck. Right now I think you just want to watch a little closer and here’s why: If we look at this T2108 indicator, it’s a Worden indicator for the percentage of stocks above their 40-day moving average. You can see that this is down at a low. It is kind of like the inverse of the VIX ( INDEXCBOE: VIX ), right?
So here is what it really means though: The percentage of stocks that are BELOW their 40-day moving average, the last two months of trading, the percentage of stocks is almost 90 percent. That means persistent oversold; that’s not just one or two days, that’s really, really nasty. But if you look at this on a line chart the blue line here is the S&P ( INDEXSP: .INX ). The black line, again, is the percentage of stocks above their 40-day moving average. The last time we were down at this level was here on the 8th, on February 8th. That was THE day that the S&P ( INDEXSP: .INX ) bottomed. The level here was 12.46, that was the low, that was the intraperiod low there as well. So we are actually below that. But again, it’s a little bit more orderly right now.
With that said though, I would still look for the same type of thing. It doesn’t matter how crappy the economy is, how bad things are, how negative people are. Think of stocks as rubber bands, at some point when they move so far in one direction or the other they just get really, really stretched; to where even if the future is so dim that everybody is walking around like a blind man. There is no reason to do anything other than sell, sell, sell. At some point all the eager beavers are done selling. All the weak hands are out. People have just puked up everything they could possibly sell and then at that point there is literally no more supply. And then, of course, when the opening bell rings, hey, stocks got to trade and so anybody who wants to buy has to reach up and grab higher prices. That is just the nature of things.
You have to understand that before you are going to be successful trading. Otherwise, you are going to be looking at fundamentals, which don’t matter half as much as you think they do. Actually, they matter probably about an eighth as much as you think they do. So you look at fundamentals and say, “I don’t understand why the stock is going down.” Or you look at the earnings report and the earnings were great and you don’t understand why the stock is going down. Or earnings were crappy and you don’t understand why the stock is going up. What you have to do, literally, is just think of this stuff as a rubber band. And when the rubber band gets stretched too tight it is going to snap back. And so that is what you have got to look for in the next day or two. My bet is, just because of the way things are, my bet is we are going to rally tomorrow. That is just my sense of things.
There are a couple reasons for that, none of which have anything to do with Tesla ( NASDAQ: TSLA ). It is just that Microsoft ( NASDAQ: MSFT ) reported earnings, they’re really strong. They beat the Streets estimates and that stock is moving up. And that, really kind of in itself is enough to make people think maybe we got too negative. Also, on the downside you have got AMD ( NASDAQ: AMD ), the semiconductors have just been getting absolutely smashed. They reported a crappy number and so they are down. Well, by the time the opening bell rings my bet is that is going to be kind of done. So what I am really telling you is this, and I am not picking a bottom per se, I am just telling you that the rubber band is really, really stretched so look for some kind of a snapback.
Also, keep something in mind, we’ll look at the SPX( INDEXSP: .INX ), keep something in mind, tops tend to be more processes, they take a while. Every once in a while you get this thing but this was a big parabolic move. Anybody except a brand new guy that was trading could see that this was coming. This type of thing where we have had kind of an orderly advance throughout the year you see this little topping process, it’s not an event. But bottoms are truly events. They are like “Vs”, maybe a series of “Vs” but they are absolute “Vs”. So you have got to look at these bottoms as “Vs”, this would be a definite trading low. And then look at tops as “Ms”. Maybe several of them stacked in a row.
The bottom line is this, again, just to be clear, don’t be shorting anything tomorrow. Everybody is always the most negative right at the bottom. Again, I don’t think this is that. I don’t think this is the bottom but I do think this is the bottom for this week. That is what I am seeing in this T2108 indicator as well as some of these other things. Just don’t go crazy on me. Don’t be doing anything goofy. You have been sitting on the sidelines for a while, hopefully. Don’t undo that patience with one or two really dumb things.
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