feeling for a bottom

feeling for the bottom

panic in the air

During bad markets like the present, company fundamentals tend to go out the window as predictors of short-term stock market performance.  What takes their place is varying shades of fear and reading charts.

As for fear, I’ve found in watching my own usually-optimistic behavior, that no matter how far down the market has fallen it isn’t approaching a bottom until I start to get scared–that maybe my innate cheeriness has finally ruined my career and the family finances.  For what it’s worth, I started getting these (irrational) feelings for the first time on Wednesday.  It could be that my last-minute rush to get my thesis project finished and submitted to SVA contributed a feeling of panic.  If not, my Wednesday experience is good news.


My version of William Pitt is to say that charts (not patriotism) are the last refuge of scoundrels.  Nevertheless, when rationality flies out the door, charts are what’s left.

In the US, despite the chatter of TV actors, the important index is not the Dow but the S&P 500.  The important things to look for, in my view, are past bottoms and places where the index has been flattish for an extended period of time.  That’s not a lot to go on but that’s most of what there is.

In this case, the relevant figures I see are 2400, which was the bottom for the mysterious market drop at the end of 2018 and 2100, where the S&P spent much of 2015-16.

Two idiosyncracies of the US market:

–the index often breaks below a big support level–scaring the wits out of traders who see themselves sliding into a yawning abyss, in my view–before reversing itself.  The break below signals the bottom

–almost always the index recovers for several weeks before returning to, and bouncing up from, the initial bottom.  This didn’t happen in 2018, though.

the economy

My guess is that the worst of the coronavirus will be behind the US by June.  If that’s correct, then at some time in May (?) the stock market will begin to discount better times.

The biggest economic negative has come from the White House, where the incompetence of Mr. Trump was on full display, raising echoes of the disaster he created in Puerto Rico earlier in his term.  Not far behind is the recent revelation that Republican senators dumped their stock portfolios after coronavirus briefings, while still toeing the party line that there was nothing to worry about.  (My view is that Trump has done an enormous amount of long-term economic damage to the US in his presidency so far–hurting most deeply those who have trusted and supported him–but that we have yet to see the negative consequences.)  Somehow, Washington appears to have started to function again, however.

On the other hand, state and local officials have negated some of Trump’s “hoax” campaign by acting quickly and decisively.

From a purely stock market view, it seems to me that investors have switched out of panic mode and are beginning to sift through the rubble to sort winners from losers.  If I’m correct, it’s important for us as investors to pay attention to what the market is saying now–and ask ourselves how well this matches with our sense of what is happening.





dealing with market volatility

Beginning rant:  finance academics equate volatility with risk.  This has some intuitive plausibility.  Volatility is also easy to measure and you don’t have to know much about actual financial markets.  Using volatility as the principal measure of risk leads to odd conclusions, however.

For example: Portfolio A is either +/- 1% each week but is up by 8% each year; Portfolio B almost never changes and is up by 3% every twelve months.

Portfolio A will double in nine years; Portfolio B takes 24 years to double–by which time Portfolio A will be almost 4x the value of B.

People untrained in academic finance would opt for A.  Academics argue (with straight faces) that the results of A should be discounted because that portfolio fluctuates in value so much more than B.  Some of them might say that A is worse than B because of greater volatility, even though that would be cold comfort to an investor aiming to send a child to college or to retire (the two principal reasons for long-term savings).

more interesting stuff

–on the most basic level, if I’m saving to buy a car this year or for a vacation, that money should be in a bank account or money market fund, not in the stock market.  Same thing with next year’s tuition money

–the stock market is the intersection of the objective financial characteristics of publicly-traded companies with the hopes and fears of investors.  Most often, prices change because of human emotion rather than altered profit prospects.   What’s happening in markets now is unusual in two ways:  an external event, COVID-19, is causing unexpected and hard-to-predict declines in profit prospects for many publicly-traded companies; and the bizarrely incompetent response of the administration to the public health threat–little action + suppression of information (btw, vintage Trump, as we witnessed in Atlantic City)–is raising deep fears about the guy driving the bus we’re all on

–most professionals I’ve known try to avoid trading during down markets, realizing that what’s emotionally satisfying today will likely appear to be incredibly stupid in a few months.  For almost everyone, sticking with the plan is the right thing to do

–personally, I’ve found down markets to be excellent times for upgrading a portfolio.  That’s because clunkers that have badly lagged during an up phase tend to outperform when the market’s going down–this is a variation on “you can’t fall off the floor.”  Strong previous performers, on the other hand, tend to do relatively poorly (see my next point).  So it makes sense to switch.  Note:  this is much harder to do in practice than it seems.

–when all else fails, i.e., after the market has been going down for a while, even professionals revert to the charts–something no one wants to admit to.  Two things I look for:

support and resistance:  meaning prices at which lots of people have previously bought and sold.  Disney (DIS), for example, went sideways for a number of years at around $110 before spiking on news of its new streaming service.  Arguably people who sold DIS over that time would be willing to buy it back at around that level.  Strong previous performers have farther to fall to reach these levels

selling climax:  meaning a point where investors succumb to fear and dump out stocks without regard to price just to stop losing money.  Sometimes the same kind of thing happens when speculators on margin are unable to meet margin calls and are sold out.  In either case, the sign is a sharp drop on high volume.  I see a little bit of that going on today


more on Monday


discounting and the stock market cycle

stock market influences



discounting:  fear vs. greed


Putting this relationship in its simplest form:




(extreme) examples



Where are we now in the fear/greed cycle?

More tomorrow.

Jim Paulsen: lower lows, but not by much


His main points:







what comes after a double bottom?

A double bottom marks a significant reversal in market direction.   There are two possibilities:

–after a bear market, meaning a nine-month to year+-long market decline caused by a recession.  (This is not the situation we’re in now.)  The market typically bottoms six months or so in advance of what government statistics will eventually say was the low point for the economy.  It does so partly on valuation, partly because the first anecdotal signs that the worst is over are beginning to be seen.

The market then begins its typical sawtooth pattern of upward movement, forming what technicians call a channel.  This is an upward sloping corridor whose ceiling is formed by progressive market highs and whose floor is similarly formed by progressive lows.  Initially, the slope can be quite steep.  Day to day, the market makes progress by bouncing along between floor and ceiling.

–after a correction, meaning a decline of, say, 5% to 10% in market value that occurs over several weeks and which, in effect, adjust market values back from stretched to the upside to levels where potential buyers see the potential for reasonable gains over a twelve month period.  (This is our current situation, in my view.)

Generally speaking, the same upward channel forms.  But the slope may be very shallow.  In fact, until new, positive, economic information emerges, there may not be much of a slope at all, so that stocks move more sideways than up.  Nevertheless, in the case that the channel is almost completely horizontal, periodic successful testing of the bottom established at the end of the correction reinforces the idea that downside risk is limited.