It soared into the sky; and then, all of a sudden, it burst into bright little lights that fell to earth.
It was a euphoric start to the market - the market rallied 283 points, and faded into the close, finishing slightly lower on Tuesday.
This was the most challenging session of 2018. At one point, the Dow was down almost 400 points from its intraday high.
Breadth
- NYSE: 944 advancers - 1,996 decliners
- NASDAQ: 941 advancers - 2,047 decliners
Bears Growl
Right out the gate, bears made their move with talk of a “blow off” top as major indices shattered intraday records, including the swiftest 1,000-point move in Dow Jones history. What’s mind-boggling is that it took just seven days to reach that milestone, considering that the last record was 24 days.
There have been signs this kind of session was going to happen soon with a series of sessions powered by panic buying. With that being said, the Dow is still up more than 4.0% for the year; more importantly, the underlying fundamentals are still in place.
Near-term markets can move for an assortment of reasons beyond the fundamentals. We must take account of two other factors when we assess the market: technical factors and behavioral analysis.
Technical Factors
The market, having lurched straight up, is a million miles above the two key moving averages; I employ the 50-day and 200-day moving averages on an exponential basis. For the Dow, those numbers are currently 24,399 and 22,320.
Other key numbers include:
- 25,633: the low from last Friday. If it hadn’t held, this would have been an ‘outside day’ with a higher high and lower low than the prior session, which is usually a bearish sign
- 24,824: the Dow broke out at the beginning of the year and took off like a rocket
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Behavioral Analysis
For years, the stock market rally was deemed the “most hated” in history. In fact, the rally was the most ignored in history. The level of indifference, measured by fund flows and sentiment, hovered at record levels for long periods of time.
However, it finally happened in late November and individual investors felt a sense of euphoria. According to the American Association of Individual Investors (AALL), optimism spiked to a seven-year high (in the week, ending January 3); even after pulling back 10%, the bullishness level 10% points above the historical average.
Smart Money?
Interestingly, institutional investor confidence declined in December and peaked in July; according to State Street Bank, it reflects a lowering of equity holdings.
Unconventional Wisdom
Conventional wisdom holds that we should always zig when individual investors are zagging, but I think they have been wiser than the professionals that continue to underperform. I also think that the old Wall Street axiom about the dumb individual investor is now seen as a canard.
More and more individual investors are self-directed, disciplined, and they have knowledge of market history.
This doesn’t mean they’re never going to blink or panic. Right now, buying the dip and worrying about missing turns is a greater source of fear than losing money. As money pours in from the sidelines, there will be more anxiety and less conviction. For now, I think it’s the pros that need to find a way to make up ground.
As bond yields work higher, I continue to see rotation into equity and more panic-buying among the smartest dudes in the room.
On that note, there were a lot of brokerage upgrades on Tuesday; ‘hold’ and ‘neutral’ ratings underscore how far behind the Street has been with this rally, and I don’t think they can shake out weaker hands.
Return of Volatility?
Yesterday, the so-called CBOE Volatility Index (VIX) popped more than 14%, but it remains near the five-year low. There could be wilder gyrations, but I don’t think we’ll get a lot of 400 trading ranges.
With that being said, guessing ‘tops’ based on charts and measures of emotions are difficult.
You might pick a near-term top, but keep in mind there are millions of people that have missed this rally (going back to March 2009). People who were initially proud they weren’t ‘long’ during the most serious part of the sell-off have since lamented, and they have opted to wait for the next leg down.
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