TGIF – Recalibration

The correction continues. Losses came swiftly and violently to start the month of February. The rebound off the lows had the same pace and the gains have been soothing. Volatility is back, bigtime. The Market went straight down at first, and then it went straight up again. This tends to be normal Market behavior within a corrective phase. We don’t think the correction is over yet. The S&P is now up 6 consecutive days, with a 4% weekly gain. That’s the best week since November of 2016. It regained nearly 70% of the losses during that time. It certainly provided relief from the pain from the sell-off, and has many believing the correction was quick and it’s over. We’re not so sure.

The oversold bounce seems to be running out of steam, and a re-test of the lows is likely. It’s been our base case scenario. It would be healthy. Rarely is it a one and done situation. Strong bottoms need to prove themselves. They need to be tested. The tests aren’t fun. Most tests aren’t. They’re stressful. They’re nerve racking. But if you’re prepared, you generally do well. We will be tested. We always are. That’s part of what we do.

Market sentiment has been as volatile as the Stock Market. It went from near all-time highs for Bullishness in January to a near decade low the first week of February, as stocks fell. But Bullish sentiment has risen with this week’s rally, and it is back above the average, a sign that fear has evaporated and more complacency has set back in. That tends to lead to more declines, one of many reasons we believe the correction is incomplete. The breadth of this week’s rally was underwhelming and volume was on the low side. The Advanced/Decline ratio was just 2-to-1 this week. A sustainable oversold rally sees something closer to 5 advancing stocks to every decliner. On the surface, it looked and felt really good. Under the surface, there is more work to be done. This week’s price action was not sufficient in our minds to tell us the correction is done. The Market is still recalibrating earnings and economic growth with inflationary pressures and higher interest rates. Time it takes. Volatility it brings.

We believe the lows from a week ago will be tested. That level is 2,532 on the S&P 500. That translates to roughly 23,300 on the DOW. We are however prepared for new lows. That could very well happen, and it would still be Bullish to completely shakeout the excesses and re-set expectations and valuation levels. Things were very extended in January after the record rally. The fact that a correction never transpired last year makes for a deeper dive this year. It’s all part of the process. It’s not fun. It’s very healthy. It’s Market medicine.

We are putting our buy list together, with expectations of lower levels and the great buying opportunities in the Spring. For now, we continue to act in defense mode. We expect more choppy price action, with the downward bias in place. Buy the dip and sell the rip in Trader Talk. We are increasing our hedges and are focused on protecting your hard-earned nest egg. We’re on it.

Have a nice weekend. The Market will be closed on Monday in observance of President’s Day. Our office will be too. We will be back, dark and early on Tuesday.


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