It’s Still Summer – Where Do We Stand? Is It Time To Buy The Dip? “Time To Light The Candle?”
Ok, I’m getting old. How do I know that? 1. I catch myself watching the weather channel way too much and 2. during certain times in the market, I think back and remember iconic TV commercials from earlier times in my career. One of my all-time favorite commercials was this one released by TD Ameritrade in 1999. It’s a must watch mostly for its horrible timing near the peak of the internet bubble, but also for the generational exchange between a younger technology savvy Stewart and his older business associate. In it, Stewart coaches Mr. B into buying a stock, electronically, online, without a broker, without a phone call, for a fixed commission.
What’s Mr. B buy, 100 shares of Kmart. Yes Kmart! Stewart utters the classic line. “let’s light this candle”. Sounds a lot like the Reddit boards nowadays! In uttering those 4 words, “let’s light this candle”, Stewart is referencing a stock charting technique used by traders to determine possible price movement based on past patterns. https://vimeo.com/39711469. Stewart is emotionally cheering Mr. B on trying to get him to run and gun a stock.
I am Chris Perras with Oak Harvest Financial in Houston and welcome to our weekly stock talk podcast, keeping you connected to your money. Before we get into this week’s topic, discussing the 3rd quarter, “It’ still summer, where do we stand now? Is it time for FOMO? Time for fear of missing out and, as Stewart said 25 years ago, “time to light this candle”? or is it time to be measured and “buy the dips?” Please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content.
No one, including myself can say so with absolute certainty, that yes, the lows are in for the year. That June 14-16 was it. However, we first presented our positive case for this on July 1st, with our video release, “Opportunity knocks early”. The data has been saying that “yes” those are the odds that it was “The Bottom”. The correction and bear market of 2022 are likely in the rear-view mirror.
However, after a 2-month, 700 S&P500 point, 17% rally into mid-August, the market then pulled back? 4.5% over only 7 trading days into August 24th. This is in line in both time and price to what we had expected. As we previously discussed, “failure” below the 200-day moving average on its first attempt is quite normal in both bear market rallies and bull market pivots. Declines of 3-5% over only 3 to 12 trading days are quite common.
It seems like most strategists on TV haven’t changed their tune even with the 17% rally back toward 4300. Even though few of them called for a significant 1st half selloff in 2022 back in late 2021, it seems most are wedded to their newly adjusted downward dire projections. I guess the trend is your friend for most of these strategists out making calls for new lows. Bears will be bears. However, are they views justified in data and history or more likely emotionally biased?
Before investors who like to tactically position their portfolios jump on this bear train, 8 or 9 months after it left the station, one should ask themselves, does history bare their continued negative biases out for the rest of 2022 and the first half of 2023. Here’s some data from Goldman Sachs that runs contrary to that negative outlook.
According to their research, US equity returns as measured by the S&P500 have been historically asymmetric following a 50% recovery in bear markets. This 50% recovery threshold was crossed earlier in August. Goldmans team discovered that in the 12 months following such retracements, the S&P 500 experienced significantly larger upside than downside. Losing periods averaged a modest -5% which is in line with the recent dip. This is also in line with short term losses when markets pulled back after bumping up against the 200-day moving average. The average upside moves over the next 12 months, post a +50% retracement, clocked in at +19%.
An additional +19% move would triangulate to new all-time highs in the market of over 5150 in mid-2023. In-line with what our investment teams current outlook for the first half of 2023 is. While the end of every bear market is different, the momentum and breadth of the rally since June 16th does suggest equities may sustain their rally later in 2022 into 2023.
Here is some more detail from Carson Group and Ryan Detrick. When the S&P500 has regained half its bear market losses, stocks have never made new lows the next year. Of course, this is no guarantee and this streak will eventually be broken. But the odds are low that 2022 is the year for that to happen and the market to go below its mid-June lows.
However, even if one believes in this positive outcome for stocks over the coming year, is it time to get FOMO? Should you “fear missing out” and chase momentum stocks or is it best to be in the BTD, “Buy the Dip” crowd. Here’s where my good friend a monthly chart of the S&P500 going back 35 years puts this decision into perspective. Here’s where zooming out, which is almost never done on TV because it doesn’t sell short term emotions, is beneficial to an investor not a short term trader. We’ve shown this one many times this year.
Recall that very few times over the last 50 years has this chart formation monthly, played out negatively over the next 12 to 18 months. The Dotcom bubble in 2000 was one and the Great financial Crises in 2018 was the second. In those two instances, the markets bounced off their 50-month moving average, rallied back above their 20 month moving averages, and subsequently fell lower in an extended multiyear bear market downturn. No, I am not a trained chartist. But looking at this chart, a picture is worth a thousand words. What specifically our we looking at to confirm we have exited a cyclical bear market and have returned to extend the secular bull? We are looking for 2 more green Candle months to form in August and September over the 20-month moving average. The closing price on the cash S&P500 for July was 4130. The 20-month MVA is about 4110. 2 or 3 additional green monthly candles, which are monthly closes above 4130, in what the bears deem as “bad seasonal” months September and October would likely chart wise, seal this crowd in a bear cave for the 4th quarter of 2022 through mid-2023.
On the other side, it would also trap those who raised to much cash in late second quarter on the way down, into a great deal of FOMO into year end and the first half of 2023 should the doomsday economic collapse expounded by bears not transpire.
For now, as we have previously discussed, we expect the “buy the Dip” institutional crowd to re-enter the market on moves down of only 3-5%. Our data says it’s more likely that FUD, fear, uncertainty, and doubt, begins to clear throughout the remainder of 2022 and FOMO begins to return in the 1h2023.
One of our favorite indicators, the cost of forward hedging, or insuring, big portfolios, months into the future, has rarely exhibited this chart formation. After “up and too the right”, rising for over a year. Forward volatility looks to have peaked back on June 14th and has now broken its longer-term uptrend. This doesn’t mean that volatility will collapse shortly back to the good old days of sub-10 in 2017. But historically, it has been the environment that quick jumps in volatility have caused short term and generally shallow selloffs in stocks. Selloffs that are quick and sharp and are usually bought by big institutions.
This is opposite the tactical setup for the first half of 2022 volatility was saying to “sell the rips” tactically. This one is a formation that says, “buy the dips” should return and be rewarded.
Finally, we must remember, that if you believe in behavioral finance, seasonality, and market cycles. we are close to entering the most bullish time frame of a Presidential cycle. We first started discussing this dynamic way back in the 3rd quarter of 2021. I’m sure we will be addressing it again in the coming months as we get closer to the Mid-terms in November, however, here is the historic quarterly data once again from the research firm CFRA. We’ve highlighted the important quarters in yellow for you. Historically, come the 4th quarter we enter the most positive 15 months in a 4-year Presidential cycle.
Wrapping things up, no it is not time to “light the candle” for stocks as Stuart did right near the internet bubble peak in 1999. However, yes, there are many indicators saying that “buy the dips” should be returning and could last well into the first half of 2023.
If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor. Our team does have insurance-based tools that do not have the volatility of public markets. However, we remind you, that these investments may also have lower long-term expected returns.
At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at ######## and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.