You Want Comfort? Get a Couch.
Complacency is not a good investment strategy. Neither is panicking, but don't just shrug off last week's action because the market ended flat.
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There are a few things that happened last week that are worth noting. The fact that the S&P was flat on the week has so many thinking they are so smart to not have panicked on Monday.
I think we can all agree that panicking never does anyone any good. But neither does complacency. And those shrugging off last week’s action are still complacent. We had an earthquake, and there will be aftershocks.
Just think of how many folks think 1987 was a walk in the park because the year ended with the S&P flat. Take a look at the chart of the S&P from the summer of 1987 until February 1988. There was an awful lot of sideways and scary action we lived with in the aftermath of the Crash. Market participants were on the edge of their seats throughout 1988, waiting for every economic data point like it would be ‘the tell.’ Everything is easy in hindsight; it’s living through it that’s not.
So here’s what was interesting to me last week. The Nasdaq came down and touched its 200-day moving average line. That’s the first trip down there in almost a year. In October, the last time we visited the 200-dma, sentiment was so bearish you could cut it with a knife. That is not the case today.
Just look at the Citi Panic/Euphoria Model, while it has definitely come off the boil (finally!) look where it was in October of last year. It’s not even out of the blue zone yet and the markets have been sliding for a month already.
Or look at the Hi-Lo Indicator for Nasdaq. A year ago it was already under .20 by late August and by late October it was single digits. Now we sit at .36 which is making a lot of progress toward an oversold condition, but Nasdaq has tumbled about fifteen percent vs. last year’s summer/fall decline of not even ten percent.
All of this just reinforces my view that after a short term oversold rally we will see the market come back down. That’s the time factor working on the intermediate term indicators.
As for the week ahead, you can see despite the rally the last two days, the Overbought/Oversold Oscillator has barely lifted. There will be a lot of economic data out this coming week so I don’t expect smooth sailing. I do however think that if we do get a pullback early in the week we would rally one more time in the second half of the week.
As my former colleague Jim Cramer used to say, the market is not a sofa, it is not a place to get comfortable.
