We may have, but keep in mind that bottoms are a process and not an event. A huge amount of technical damage has taken place over the past few weeks and even a .75 rate cut doesn't promise to cause a V-shaped bottom to emerge.
Banking, real estate, textiles, and retail all look to have a near term bottom in place. But, volatility is likely going to continue to be massive and finding a reasonable entry point in these sectors is going to be rough.
Asia is recovering nicely today; especially China. Europe, however, is tentative as they wait to see how the US markets open today. Apple reported after hours and was gapping down last evening.
What we want everyone to keep in mind here is that this market is a falling knife. A dead cat bounce is sure to emerge from somewhere near the current price level; especially now that the Fed has offered a huge surprise rate cut and rumors have it that another .50 cut is still on its way. But a falling knife is a falling knife. It looks like the knife may have stuck in the ground yesterday, but it certainly hasn’t stopped quivering yet.
The Big Picture
It's important to take a step back and check out the big picture in order to understand where we are now at and where we may be headed next. We don't know about everyone else, but we have had a very difficult time trading this market recently. Trading is all about weighing the probabilities and probabilities are typically measured against past norms. This market has been anything but normal over the past 3 months, as we will demonstrate below. The fact that this is not a normal market environment forces traders to recalibrate their analysis to the much more violent conditions the market now finds itself under.
On to the Charts
Let's be clear. As of the past few weeks, the market is now in a confirmed downtrend with a confirmed top in place. Bounces will occur that allow for long side trades – and some of these bounces will be good ones – but the long term trend is now down and investors need to keep this in mind and consider protecting their long term portfolios.
We want to compare this current market top to the top that took place in 2000.
As you can see, above, the 2000 S&P 500 top took place over the course of an entire year. Then, when prices started to roll over they did so in an orderly fashion, simply bleeding lower.
The 2000 market top allowed institutional money time to unload their positions and get short. Retail simply held and hoped as the market dripped lower, wearing them out.
The Current Top
The current market top looks different to us. Over the past 6 months the S&P carved out a head and shoulders pattern. This indicated that distribution was taking place. But, what is different here is the way the market broke down. Rather than bleeding lower offering shorts plenty of time to add to their positions and keeping retailers holding and hoping, the market plunged.
This indicates to us that stocks have become like a hot potato here. Institutions seem to be bailing along with retail. At some point – probably some point near here – the market is going to bounce and likely bounce well. But, keep in mind that this bounce is going to be a selling opportunity. This market top began violently and it is likely to end just as violently as it began. The end looks to be a long ways off to us.
Good for Traders, Bad for Investors
This is bad news for investors but good news for traders. It will take some recalibration to get back in tune with the music of the market here, but this type of volatility leaves open wide areas of inefficiency for traders to exploit. Investors should, on the other hand, consider themselves warned.
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