foxex: Remain Rational

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Remain Rational

2. Chart of the Day: Facebook on the Rebound, but Will It Last?

Markets Close

Dow
24,597.38 +0.29%

S&P
2,650.54 -0.02%

Nasdaq
7,070.33 -0.39%

VIX
20.65 -3.77%

INV Anxiety Index
99.06 Neutral

US 10-Yr Yield
2.911 +0.17%

(Bettmann / Getty Images)

Remain Rational

My father sent me this quote from John Maynard Keynes today: "Markets can stay irrational longer than you can stay solvent."

It's a good reminder that no one has a real edge when it comes to stock picking, timing the market, building the perfect portfolio, or protecting themselves in a bear market. There are a lot of smart investors and institutions out there that have built effective strategies, quantitative models, and time-tested methodologies that may outperform the market at times, but there is no silver bullet to always hit the bullseye. As Keynes might say, the "Animal Spirits" are too powerful and unpredictable. We need our own rules to fit our needs and the courage to stick to the strategies that work for us.

Markets have been following their typical pattern lately, and today was no exception: market open brings early gains that fade by the afternoon. It's easy to attribute this ebb and flow to the uncertainty around trade talks with China, but, then again, we could say that same thing every day until the tariff war is settled. We are in the 'in-between' stage of the quarterly cycle, where there are no corporate earnings or big economic releases to catalyze markets one way or the other. It's kind of like the dark side of the moon, but not as cool as Pink Floyd makes it sound.

Investors are downright pessimistic right now. We see it in our Anxiety Index as search volume around terms like 'correction' and 'bear market' continue to spike.

You can also see it in the AAII Investor Sentiment survey. The American Association of Individual Investors sends the same survey out every week, and you can smell the bearishness from miles away as pessimism hit a five-year high this week. Here is a snapshot from AAII's survey this week:

Why it Matters:

Institutions drive the markets, but individuals — retail investors like you and me — have our money inside institutions. We typically let a portfolio manager or ETF custodian make investment decisions for us via our 401ks or retirement plans, but we are still a big part of the market. We can express our fear or optimism by rebalancing, going to cash, or piling into stocks.

Extreme anxiety or extreme pessimism often occur near a market bottom. It's kind of like the expression, "It's always darkest just before the dawn." We haven't necessarily reached those levels yet, and we may not. As Keynes likes to say, it's impossible to know. We might get there and hang out for awhile in a slow grinding bear market that tries our very souls. Or we might bounce out of this funk and start dancing like a happy bull in Pamplona. Nobody can predict what will happen, so prepare yourself for every possible outcome.

What's Next:

There will be a lot more back and forth before the China trade talks are put to rest. My recommendation — try to ignore them until we get closer to the end of the 90-day truce. The Fed will raise interest rates next week. Count on it. Then we'll start to hear more about the 'Santa Claus Rally,' and whether or not we'll get one this year. We might, but then again, we might not. Investors may choose to book losses for tax purposes by the end of the year, which could put more pressure on the markets. The market forecasts for 2019 are all over the place and you should try to ignore those as well, unless there is a preponderance of pessimism or optimism in either direction. Usually that's a strong sign that things will swing the other way.

Markets are irrational, remember?

Chart of the Day: Facebook on the Rebound, but Will It Last?

The road has been rough for Facebook (FB) this year ever since the company reported earnings in late July that included a warning of slowing growth. But actually, Facebook's real troubles started earlier than that, when the company got caught up in a series of privacy and data scandals. The most notable of them is probably the Cambridge Analytica debacle, which resulted in CEO Mark Zuckerberg testifying before Congress.

Facebook stock recovered well from those scandals and went on to hit a new all-time high around $218 on July 25th. The next day, though, the bottom dropped out when the negative reaction to earnings guidance prompted a gap down and decline of nearly -20% to around $175. From there, FB has continued to trend down, with progressively lower lows and lower highs — the textbook definition of a bearish trend channel.

At its most recent low, Facebook stock plunged to around $126 in late November, for a massive total decline of around -42% from its July high. We stopped talking about a correction or a 'Death Cross' in FB a long time ago — the stock is now deep in a bear market.

Since that November low, FB has rebounded by more than 14% as of Thursday's close. From a technical perspective, though, this just places the stock at or around the top of a descending trend channel and still well below the falling 50-day moving average. Unless the stock has some catalyst to break out above this channel and moving average, the bias continues to be bearish and the path of least resistance is more likely to the downside.