That Bull Looks Sick!
Well, the ‘January Effect’ certainly isn’t working this January so far. In the first 21 days of 2022 SPY is down 8% which equals the biggest drop since 2000, during the GFC of 2009 and not a happy comparison. More recently, I can remember thinking that January 2016 was exceptionally painful, and it only dropped around 5% then.
The question now is what do we do now? Are things going to get better or worse? Of course, no-one knows but we can look at the charts and see what is going on to be able to make an informed guess.
To put things in perspective lets go right back to the COVID bear and see what has happened since then. You can see that we’ve been in a steady bull market, with minor dips. This is the largest by far, at 8%. Technically, we are not at our ‘Get Out’ signal (10/200 death cross) but SPY is actually trading below the 200 day SMA which is a very unsettling development.
You would be forgiven for panicking and dumping all your positions, but let’s look at all the signals and see what we can work out. Firstly, SPY is not in a bear market – that’s a drop of 20%. We are not yet in correction territory either – that is a drop of 10%. Secondly, looking at the MACD:
The histogram is approaching -4 which is not a good sign, and its continuing decrease shows that the bears are still in control. No signs of a bull rescue just yet.
If we look at the RSI – Relative Strength Index – on the same timescale, we see that SPY has dropped into oversold territory, which means that it is trading well below its typical value (like we didn’t already know!) and has the potential for a bounce.
How much potential? Well, lets looks at when it was last in oversold territory, which was during the COVID bear in 2020.
You can see that it got even lower than the current level, right down to 20, but worryingly the low of the oversold was at the end of February, and SPY dropped a lot after that, until 23rd March, even when the RSI had gone back into ‘normal’ territory. As we know, indicators are just that – indicators, not foolproof ways of knowing what is happening.
One indicator I always keep an eye on is the volume of trades. Here is the volume graph since the start of 2020. You can see the huge volumes around the COVID bear, and the current volume is the highest since June 2020. Does that mean capitulation? (when traders have given up waiting for an upturn, have dumped everything and finally the bears are exhausted). Maybe. Maybe not. As for everything in the market we can only tell for sure after the fact.
And for the last graph – the VIX (volatility index) which, surprisingly, is not that high. Here is the last 2 years of the VIX:
So, what is the takeaway from all that? Technically we are not at our get-out signal. If the current trajectory is continued then the death cross will happen around 445 – 450 and we seem to be closing in on it fast.
The choices are:
- Stick with the objective measure and wait for the death cross to confirm the end of the bull market; or
- Jump the gun and assume that SPY is going to go down further.
The choice is yours – you have all the data on past performance in the appendices in the ITM Bear book. Personally, I am still in all my SPY trades – but, of course, beating myself up that I didn’t close some of my ‘play trades’ (OTM options) when my SMUG Index was high. I always know when it is, because I tend to update my wealth spreadsheet more than once a day, which is a sure sign of smugness. I should have listened to it. (Tuition fee duly paid, lesson learned.) So, I feel your pain, but remember that the market first reached this level in July last year so we have ‘only’ lost 6 months of gains. But I know that it still hurts.
QQQ – The NASDAQ ETF
I know from the many emails that I receive that a lot of you also use ITM on the Nasdaq ETF, QQQ, and have made exceptionally good returns over the past 18 months. Well, the news there is rather more dismal. As you can see from the chart below, the 10/200 death cross is approaching even faster, and it is possible that it will be there in a couple of days. Stay vigilant, and ready to get out as soon as it is confirmed (i.e., it has actually crossed and there is white space between the 10 and 200 SMAs).
Just a reminder – this is not a bear market yet, we are not even close to one, so no bear trades should be started.
The Next Two Weeks . .
. . will be interesting. By the next Blog Post we’ll probably know whether or not the bull market is over or not. Trading is fun until the market goes against you (like now) and then it can be frustrating and nerve wracking. I know, I’ve been there many times in the past.
If you are following the ITM strategy you will have lost a lot of gains over the last 2 weeks, and will be feeling pretty bruised. But keep things in perspective, look at the long term picture and know that you are protected from any major fall out.
One of the things I am noticing is how uniformly pessimistic the financial press is, which has, in the past, signalled that we are near the bottom. Let’s hope so anyway. Lets look at some words from 2 well-known investors:
Well, right now everyone is fearful. Bulls are few and far between. And also:
This time is not different. We’ve been here before – not exactly the same, things are never exactly the same, but things aren’t completely new either. Looking at what has happened in the past gives us a basis for predicting the future. Whatever happens, people are still people, with their emotions, their dreams and their fears, and they still behave the same way. That is our constant and that is what we have to watch.