October 12, 2012
Stock Market Crash Course: Buy the Bottom
Written By Chloe Lutts Jensen
In today’s Stock Market Crash Course, the experts agree on one thing: this correction’s bottom will be a great time to buy. But how long will the correction last? Gregory Spear, John Gray, Clif Droke and Dan Sullivan all take a look at their indicators to give us an idea. Click below to watch the video.
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Chloe Lutts, Editor of Dick Davis Investment Digest and Dick Davis Dividend Digest
Chloe Lutts is the editor of Dick Davis Investment Digest and Dick Davis Dividend Digest, and the third generation of the Lutts family to join the family business. For each Digest, Chloe reads hundreds of investment newsletters to select the strongest ideas for her readers. Prior to joining the Dick Davis Digests, Chloe was a financial reporter for Debtwire, a division of the Financial Times, covering fixed income, and before that, she reported on global debt markets for Institutional Investor. She also has previous experience at Cabot, writing about growing momentum stocks for Cabot Top Ten Trader and high-potential small companies for Cabot Small-Cap Confidential. She holds a B.A. in International Relations from Brown University, and also studied in Beijing and Paris.
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[Transcript]
The market has obviously weakened quite a bit this week, but it’s not totally obvious what that weakness means or how serious it is. So today we’ll hear from a few different experts on what indicators they’re watching to gauge the market’s next move.
First up is Gregory Spear, The Spear Report, Tuesday night:
“I look at the size of a price move like yesterday, Tuesday, and then the volume, and see what that can tell me about sentiment and direction. Yesterday’s move in the S&P was pretty large, but the volume in SPY, an excellent sentiment tracker, was only about the same as most of last week’s daily rally volume. To get this big a price move down on average volume requires that buyers be pretty much absent altogether. That sounds bearish, but actually, it means that responsibility for the price move may be attributed more to a temporary drying up of buying than to an increase in selling momentum, and this in turn means that it should not take a great deal of buying to reverse the direction. …
“The second technical development is the new swing high that was created Friday, but which couldn’t really be identified until yesterday. As you can see on the chart below, this occurred at exactly the level of the highest close in September. In my experience, a failure to achieve a higher high that involves a failure at exactly the prior high is not particularly bearish. The market is likely to try again fairly soon.
“On the bearish side of the technicals are the four gaps in the SPY chart that are waiting at considerably lower prices and calling like the Siren’s song. Despite these, I am sticking with my own call for a higher high before we attack the gaps. With a prediction like this, it is important to identify when exactly this would have to be considered ‘wrong,’ so that we can make a change in our bet that is based on a trend definition trigger and not on emotion. For this purpose, a daily close below the recent swing low of 142.95 for SPY or 1430.53 in the S&P would mean that a downtrend was established and our target would then be the first open gap below that level. At that point, any rally up to the level of the last swing high would then be a selling opportunity.”
As you can see, the S&P tested but held that 1430 level Wednesday, the day after Mr. Spear wrote this, so so far, so good.
Also pretty optimistic until the market indicates otherwise is Clif Droke, Momentum Strategies Report, Wednesday evening:
“Investors are worried and are using any excuse to sell right now. If you’re watching the headlines alone you might be tempted to conclude that stocks have entered another bear market. And while it’s true that this week is a ‘cyclical vacuum’ week as I explained in Monday’s report
— That’s when there are no cycle peaks or bottoms in a week and neither buyers nor sellers are in control, creating volatility — he says despite that,
“this is the time to start watching for positive technical divergences.
“In technical parlance, positive divergences occur when the market is heading lower and certain indicators are moving higher. The bullish action of key technical indicators which diverge against the general market downtrend can be a ‘heads up’ warning of an imminent trend reversal for the broad market.”
He then goes on to give examples of some positive divergences that could arise, which I don’t have time to recount in detail here, but they include a bottom in the semiconductor ETF, SMH, or a rally in the Bank Index, BKX.
On the other side of the coin are the technical analysts at Investor’s Intelligence, who wrote Thursday morning:
- Stocks slumped again Wed and the further declines on slightly higher volume point to at least an interruption for the overall market uptrend. … This is not the time for general new buying. That will have to wait for further indicator declines and general short term oversold conditions. Yesterday saw only the very early stages of that.
They also gave some guidance on what to watch, noting that:
- If earnings broadly fail to meet even lowered estimates the markets should fall further. That is the likely upcoming scenario. It will relieve the recent excesses and stimulus generated index highs.
However, they conclude that such a downturn would be followed by:
- solid new buying chances later this month.
So even though they’re expecting more short-term downside, that would actually be a plus for the medium-to-long-term outlook.
A similar case was made on Tuesday by Dan Sullivan, The Chartist:
“We expect the market to end the year higher from these levels, but with earnings, the election and threat of the ‘fiscal cliff’ it is going to be a bumpy ride.
With our models in positive territory we continue to advise a 100% invested position.”
