Days Like Yesterday Are Dangerous
Many traders needed a day like yesterday. Granted, maybe my talking to a few dozen folks doesn't exactly represent a quorum, but the sentiment was almost unanimous.
Trading has been tough the last few weeks for many. Buy and hold positions have tested faith and an investor's trade thesis. Swing trading has been a day-to-day chopfest, while intraday trading has been much of the same. Yesterday, however, was a strong trend all afternoon, rewarding anyone willing to just hop in and ride the wave. And you didn't have to buy just the S&P 500. Energy was destroyed early in the morning and made for a big bounce play. It didn't matter if you went individual names or ETFs. The same could be said of the precious metal miners.
But days like yesterday are dangerous.
One good day can repair your P&L statement, but it will not atone for trading sins. A day like yesterday won't matter for very long if you don't correct mistakes you were making prior to the quick pop and recovery. These moves don't remind me of the "V" bounces over the past few years. They remind me of the dangerous times in the markets over the past 15 years.
Energy is still a concern. Looking back to 2011 and the "V" bounces in energy, it is important to note the time consideration with each drop. While the "V" bounces have felt quick in nature, they haven't always been that way. It's only logical to think, the larger the drop, the longer the time to recovery. The Energy Select Sector SPDR (XLE) seems to support that thesis.
In 2011, there was a drop of 26% from top to bottom, which took two years to recovery. By recovery, I mean if you bought at the top, you couldn't sell for breakeven until two years from your initial purchase. In 2012, there was a lower top, which then fell 18%. This move, encapsulated in the 2011-2013 drop and recovery, required only seven months for recovery. Again, we saw another bounce, followed by a big drop contained in the 2011-2013 time frame. This drop was slightly less than 10% with only 4.5 months to get back out what you put in.
Currently, XLE is down 12.4% on a closing basis from the 2014 top. The question is: Have we found bottom? If you believe so, and are buying now, the expectation would be about 2.6 months until we are back to $100, or half the total 5.3-month move. Should we drop another 5%, then one would expect it to take about 3.5 months, once we were down a total of 18%, to get back to $100. I find these numbers to be wildly optimistic, but simply going on past history, that's what is indicated.
One word of caution, try not to think about that 26% drop, because even from this point, it would be a painful ride down and still quite a bit of time until recovery.
At the time of publication, Collins had no positions in any of the securities mentioned.