Looking for a Green Shoot Within a Week

Stocks have not been up on back to back days since the market peaked one month ago. As I mentioned the other day, we have seen 6 independent days of widespread panic as you can see in the chart below. The very first sign of even a tradable rally will likely occur when we finally see stocks able to rally for two straight days. That opportunity should come next week at some point.

Once we see some sort of low forming there will be a lot of damage to repair. The way that happens is by entering a wide trading range that can sometimes be violent. Stocks should initially rally into the zone formed by the blue, horizontal lines which is roughly Dow 22,000 to 23,500. What we want to see is the historic level of volatility begin to abate.

How exactly do we measure volatility?

There are many ways, but looking below at the chart of the CBOE Volatility Index or VIX is a common one. I won’t go into the wonky details of the how the VIX is calculated. You can read about it online if you have the patience. The long and short of it is that volatility almost always goes through the roof during stock market declines. A VIX between 10 and 20 is fairly normal. This week, it hit 85. The VIX usually collapses quickly when downside momentum begins to slow down and that’s a good sign.

To give you a long-term view of the VIX over the many market declines we have seen this century, take a look at the chart below. You can see enormous spikes in volatility at the end 2018, early 2018, mid-2015, mid-2011, mid-2010 and of course, in the fall of 2008. It’s unheard of for the VIX to stay elevated for long periods of time because that type of downside momentum in stocks can’t last. It’s just hard to imagine while you are living through it.

I suspect that after the market gets through the middle of next week, we will see volatility begin to abate and stocks begin to find their footing. I don’t imagine that investors will be lining up to buy heading into a weekend. And Mondays have not been kind to the bulls over the past month. There may be one selling wave left. However, if you can close your eyes, swallow hard and wait until Wednesday, I think stocks may be closer to calming with a green shoot sprouting here or there.

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
If you have at least $250,000 of investable assets and would like to schedule a complimentary meeting, call, or video conference with me, please click on my calendar here email me at Paul@investfortomorrow.com or call the office directly at 203.389.3553.

Comments

  1. Burwell E. Pike Jr. says

    Hi Paul,

    First things first. I have been trading/investing since the 1973-74 bear market and I want to tell you that in that time, I have discovered that you have taken the place of my first, favorite, technical analyst, Mr. Robert Farrell formerly of Merrill Lynch, who I’m sure you have heard of in your investment career.

    As for your current analysis, I agree with you that we have one more shoe to drop before we can have a more sustained rally, which will last several weeks. Furthermore, I also believe that the rally will take the market into your “blue zone” as referenced above. However, I have my next daily top due to arrive on Tuesday +/- 2 days and therefore, I expect a multi-day decline to begin and the S&P 500 to decline into the end of March and not rally next week. More specifically, my next daily bottom for the S&P 500 is scheduled to arrive on 2 APR, which under a certain set of conditions in my work, MUST also herald in a weekly bottom with that daily bottom. That daily low will typically arrive either on-time or early within +/- 2 trading days since my trading cycle will then be right-translated and not left-translated.

    Good luck and thank you for all you do.

    Cheers,

    Burwell E. Pike Jr.

    • Paul Schatz, President, Heritage Capital says

      Thanks for your very kind words Burwell. Bob Farrell is among my all-time favorites.He was so smart and able to see through all the nonsense. I wish I was a quarter as talented as he was! I certainly miss reading him.

      Be well and PLEASE STAY SAFE!

      Paul

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