foxex: Walking on Eggshells

Chart Advisor | Focus on the Price

Tuesday, March 17, 2020

1. Stocks don't hit curbs but do close higher

2. The length of this ordeal

3. How to catch the market bottom

Market Moves

Broad market indexes closed six percent higher than yesterday's close. Just two months ago that would have been a shocking statement, but not so much after recent days. While stocks attempted to find footing, gold prices rose, bond prices and oil prices fell, leaving investors with a feeling of uneasy balance that could transform the market trajectory and reduce both historic and implied volatility in days to come.

One point of note is that today's bounce came the day after Invesco's Nasdaq 100 ETF (QQQ) hit a $169.50 share price. (This was predicted in the March 12 edition of Chart Advisor. You're welcome.) A better question to ask involves whether that price is likely to hold. The answer: probably not. The market is simply too volatile to expect that prices will simply fly higher from here. So what could dampen the volatility? Good news for one thing.

Since most of the market's action and reaction nowadays is connected to the COVID-19 outbreak, it might be worth considering just how much longer the stress and panic over this pandemic is likely to persist. We might be able to get some idea by looking at the graph that the New York Times has been updating daily showing the count of new confirmed cases in each country. The chart below shows an interesting pattern in the number of new cases reported. Based on the trends in this data from Japan and South Korea, and even those from Italy and Iran, it appears that the number of new cases tends to peak and decline inside of 30 days or so.

Right now, even as everyone is preparing to hunker down with whatever supply of toilet paper they managed to collect, it seems difficult to imagine a world where people aren't worried about the novel Coronavirus and its effects. But if the trends in this data play out in the following countries, then it is possible that within a week the worst expansion of cases in Italy and Iran could be over, and the general threat of this disease could be gone in as little as three to four weeks. It is interesting to think what the impact on the markets could be.

The Length of this Ordeal

The data from the chart above, as fledgling as the numbers might be, suggests a time period that coincides with the option pricing on the CBOE Volatility Index (VIX), as shown in yesterday's Chart Advisor edition. The pricing at the close of yesterday's session suggested that there was a 50 percent chance that increased volatility could last another 40 days or so. That is about the amount of time it would take for those countries at the tail end of the impact wave to see the disease peak and begin to wrap up. If market participants are feeling especially opportunistic, it may not even take that long.

Once investors decide to get back in, stocks that have shown relative strength through this downward move may now begin to show the first signs of rebounding strongly. Apple (AAPL) may be among them, despite analysts' downgrades today. Consider the following chart that shows how AAPL shares have outperformed the State Street's S&P 500 index ETF (SPY) and iShares Russell 2000 index ETF (IWM). It's a good bet that the price action of AAPL will give clues when the market is getting ready to change.

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How to Catch the Market Bottom

Three things are likely to happen as the market seems to hit bottom and reverse its course. The chart below makes a historical comparison from the market bottom in 2009, and compares the price action between AAPL shares and SPY shares. There are three points to look at in this comparison. (Click on the chart to see a larger version).

First, the point at which price volatility has peaked (marked by the red arrow) serves as the starting point in this study. Though we certainly hope that this point was reached at yesterday's close, we can only know in hindsight. Once volatility begins to decrease, however, it will be easy to see if you have a study like a 10-day, 2X Keltner Channel applied to your charts (as shown here).

Second, once the volatility has been decreasing even as prices seem to drift lower (yellow arrow), this sets the stage for a change of trend. Third, watch for the S&P 500 to make a new low and AAPL shares to not do the same (green arrow). If the lowest swing low in AAPL's price action is higher than its previous low, and the similar point on SPY is actually a new low, then you'll know the process is complete, and a new upward trend is likely to follow.

In 2009 this process took about 100 days, but the decline was significantly longer than what has occurred so far. It is possible that this time around will be over much more quickly.

The Bottom Line

Stocks rebounded again without hitting their upside curbs, setting the stage for continued follow-through tomorrow. With the VIX remaining high (it closed above 75 today) indications are that investors remain very nervous and might resume selling at any moment. Watching shares of AAPL might help a careful investor know when the panic is truly over.