foxex: Bear Correction

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, May 11, 2020

1. Stocks move higher as indexes show mixed results

2. This rebound favors risk

3. Buy and hold results favor big tech

Market Moves

Monday's pre-market session for stock index futures featured significant selling as investors appeared to be worried about a second wave of COVID-19 outbreaks. But whether it was less-informed investors or the Fed who took charge, the early selling reversed course as the markets opened. The indexes closed with mixed results as the S&P 500 index (SPX) was nearly unchanged, while the Dow Jones Industrial Average (DJI) closed a half-percent lower and the Nasdaq 100 index (NDX) closed nearly one percent higher on the day.

Despite such variation among the indexes, the idea that investors should be buying up more stocks right now is an interesting one. Historically, any market that has moved the indexes as far and as fast as the recent pandemic-spurred movement was considered a bear market. This poses a classification problem here because the time-span, velocity and completeness of the rebound so far is unlike any of the 14 bear markets on record since World War II. The speed of this rebound makes this market action seem more similar to the 26 market corrections that have occurred during the same time span.

As the graph below demonstrates (courtesy CNBC.com), most corrections are rather short lived. On the other hand, bear markets tend to require more than a year for the indexes to recover from their lows. Further there is not a bear market or correction on record which has rebounded as far and fast as this one that has subsequently gone on to make a new low within the next year. So there is the distinct possibility that this period will either be considered the fastest bear market of all, or the deepest correction on record.

SPONSORED BY STATE STREET SPDR ETFs

Build Your Core with SPDR^® Low-Cost ETFs

With today's low return expectations, building a low-cost core may be more important than ever. Matthew Bartolini, CFA, explains core construction and key implementation strategies.

SIGN UP >

This Rebound Favors Risk

The idea that the current market moves should lead all indexes back to new highs before the end of the year may seem like crazy talk to many analysts, but certainly it falls into the now familiar category of "we've never seen that before." One bit of evidence that such moves will likely occur can be found in the chart below.

This chart compares the performance of five indexes since the March 23rd low point including the Russell Microcap index (RUMIC), the Nasdax 100 index (NDX), the Russell 2000 index (RUT), the S&P 500 index (SPX) and the Dow Jones Industrial Average (DJI). Experienced chart watchers recognize that when investors favor a riskier index it is generally a bullish indicator for future market action. It implies people want to risk their money and let their bets ride, so to speak, rather than protect their capital. This indication of bullish investor sentiment seems strangely persistent considering the times. So persistent, in fact, that the price action has caused some to wonder if this activity is being heavily influenced by the decisions and activity of the Federal Reserve.

Traders Take Profit on Glu Mobile Stock After Analyst Downgrade

Marriott Posts a Profit Despite Worldwide Lockdown

Top Spiking Technical Analysis Articles This Week

Buy and Hold Results Favor Big Tech

The final chart demonstrates that the dynamics of buying and holding stocks throughout the recent correction shows slightly different outcomes compared to the performance just since market lows. Stocks of big tech companies are outperforming even the impressive showing of both the Russell Microcap index and the Valueline Composite Index (VALUA) since the recent market lows. Year to date, the stocks that have risen higher and fallen lower than the broad market indexes include both Microsoft (MSFT) and FAANG stocks as tracked by Microsectors' Large-cap Equity index ETF (FNGS).

The Bottom Line

Stocks continue to rally with a better showing than many other assets this year. The most recent move from the low point of March favors risky stocks. However, the performance since the beginning of 2020 seems to favor larger tech stocks. Either way, this is a market of bullish investor sentiment.