January 25, 2016

Markets may have made an important bottom last week

From my perch, Wednesday's selling seemed indiscriminate, likely impacted by risk-parity strategies and gamma-hedging clowns rebalancing their portfolios on the way down.

Some 43% of New York Stock Exchange issues reached new 52-week lows at midday Wednesday. That's only the third time that's happened since the October/November 2008 market meltdown, and just the fourth time since the October 1987 crash. 

In fact, there have been only 21 events of this kind since 1966. Here are the median subsequent returns the affected stocks saw afterward:

-    One week later: A 3.4% gain (up 16 times out of 21, down five times)

-   One month later: A 3.7% rise (up 17 times, down four times)

-    Three months later: A gain of 6.7% (higher 14 times, lower seven)

-    Six months later: An 11.6% advance (up 13 times, down seven times)

-    One year later: A 19.7% gain (higher 15 times, lower five times)

Oil is also trading some 5% higher today (oil prices might have bottomed).

I've been aggressively accumulating the SPDR S&P 500 ETF (SPY) since midday Wednesday for as low as $181.30, reducing my individual short exposure. Since then, the S&P 500 has risen by nearly 80 handles!

I'm in an uncustomarily bullish stance now. It's my view that Wednesday's selloff could have marked an important market bottom, with a reasonably high probability that the midday red ink represented a capitulation low.

Regarding energy prices, I also noted yesterday that the CBOE Crude Oil Volatility Index "is back to the high it made when it bottomed for a rally last August. As oil prices go, so does our market -- but with crude down around $26 a barrel, the brunt of energy prices' decline is probably behind us. And as has been the case over history when stocks fixate on one independent variable, the correlation eventually begins to lose its influence."

I take comfort in the fact that there's so much resistance to the notion of a bottom.........
Of course, I'm aware of the fundamental economic and other risks that we face -- I've been chronicling them for the past year. But many individual securities might have already materially discounted those risks.

My conclusion: To reiterate, I believe the market might have made an important market bottom during the "noon swoon" on Wednesday.



Position: Long SPY 


via www.thestreet.com/story/13430024/3/this-time-is-different-from-2008-was-that-a-bottom-best-of-kass.html

ShareThis