Has the market really bottomed (2019)?

27 January 2019
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The market got off to a great start in January 2019 after the 1,000 point rise in DOW on 26 December 2018.  DOW gained approximately 3,000 points so far,   recovering more than 70% of the 4,000 point drop since 4 December 2008.   Some thought that the worse was almost over;  the market bottomed on 24 December 2018 and  was ready to resume its rally to scale new highs. But,  has the market really bottomed?

Lets examine the question using the following approaches

1.  Market Sentiment Survey
2.  Technical Analyse
3.  Fundamental Discussion
4.  Other Significant Events

1.  Market Sentiment Survey

There was regular survey done by E-Trade Financial on over 200 so called “rich respondents”,  each  managed at least $10,000 of online brokerage account.   According to the survey this month between 2 January and 10 January 2019,  the market sentiment was bearish.  This  bearishness rose 16 percentage points, to 54%.  It was at 3 year high.

However,  sentiment survey is just a survey like this !FFBear index prepared by stockcharts.com as shown in the following chart.  This particular chart is not 100% showing the correct direction the price movement.    This is particularly true if those in the survey or poll are not the 10% “rich investors” who controlled more than 86% of the US market.  Even if the poll is taken from the  “10% rich investors”,  we might also not be able to get the correct picture.  

   

2  Technical Analysis

Data based on market buying and selling  are more reliable than market survey and polling results.   These data are history records of how investors “put their money in their mouths”.   They are not likely to lie especially over longer period of time and time frames.   One of  such data we can use to tell if the market has really bottomed is “SPXHiLo” Index

What is SPXHiLo Index?

It is one of the indexes also found in stockcharts.com. The SPXHiLo Index is a 10-day moving average of a % ratio taken by dividing the 52-week highs with the sum of 52-week highs plus 52-week lows.   When market is good,  this index will rise; on the contrary,  it will fall.   If the market trend is weak,  this index will make lower lows;  or else,  it will make higher lows.

The daily data of SPXHilo is difficult to understand as it rises and falls too quickly.  The data would be more useful and reliable if we are to smoothen it down using moving averages.  The following example makes use of the 50 and 200 moving averages.

Examples?

The following chart is showing how SPXHiLo behaved in the period between February 14 and October 16 vs S&P500.  One can see that during the period between Oct 15 and Feb 16,  the 50 MA made 2 equal lows of around 40%.  This is much lower than the low on Nov 14 @ about 73% although S&P500 was at about the same level as the lows at Oct 15 & Feb 16.  This lower low trending shows that S&P500 was very weak then.  Thereafter,  the 50 MA picked  up & crossed over the 200 MA to make new highs,  signalling that S&P500 had recovered.  It became fully recovered when it made higher lows.  Also notice that when SPX broke above the double top formation,   the 50 MA was still at its low, faraway from 200 MA .  This indicates that the rally was a "Head Fake Rally".  It re-visited to test the low around mid-February.

The following chart is another similar example.  This time,  SPX broke above the double top formation at around Apr 2008 but the 50 MA was quite far down below the 200 MA.  This also indicates the rally @ Apr 2008 was also a  "Head Fake Rally".   

Judging from the very sharp v-shape fall of the 50 MA,  it is believed that many investors were caught holding the stocks then.  They would have to wait until  after March 2009 before they could sell them at a lost.   There was also a "Head Fake Rally" on around Oct 2002 but it occurred when DOW was forming a double bottom.

Now let’s analyse the latest SPXHiLo chart as shown below.   This chart shows that to date,  the 50 MA is far away from the 200MA and is still in sliding down position.  This indicates the present rally is likely to be another “Head Fake Rally” just like the "Head Fake Rally" in 2008 & 2015.  Even if the 50MA can cross the 200MA,  it is likely for DOW to test the lower lows again.

 

3.  Fundamental Discussions

For the market to recover completely and continue to rally,  there must be some resolutions for the following issues that caused the present market crash.    These issues are:

1.  US Federal Reserve’s interest rate hikes and shrinking of balance sheets;

2.  The Trillion dollar debts that has threatened to damage the Global economy;

3.  The slowing down of Global growth everywhere with housing and retail sale in bad shapes;

4.  The slumping of oil prices and the transportation industries all over the World;

5.  The Trade War between US and China.

Understand that these are thorny issues that cannot get completely resolved.  Even some could be resolved,  they could take many years.  The “mountains’ of debts might not get  eradicated unless there is a war or bankruptcy proceedings to “wipe” the debts out completely. 

Other Significant Events

Other significant events and happenings that can easily derail the present rally include the following:

1.  Record Hedge Fund Liquidation 

Last year,  the US Hedge Fund industry set new record in liquidation.     Hedge Fund Research reported that  344 Hedge Funds closed their doors during 3rd Quarter 2018.  This is about 30% more than the record of 267 set in 4th Quarter of 2006.   On an annualized basis, the 2018 figure of  920 Hedge Fund liquidations is about 9% more than the 2005 record of 848.   It is therefore unlikely that the market has completely recovered from the recent stock market fall and declared that the market has bottomed on 24 December 2018,  

2.  Record Margin Debt Recalls 

The last market crash in December 2018 has triggered the explosive decline in Margin Loans.  There must be margin calls then resulting the margin loan market to lose another USD$38 billions in December 2018,  threatening to break the record set in 2008.

 3.  Countries in Negative Growth List

10 countries joined the list to become "countries with negative growth" in the month of Sept 2018.  Among them,  5 of them already in technical recession. They include Italy and Agentina, 

What to Do Next?
 

The market is presently in the hand of a few “riches” that controlled more than 85% of the market.  They are playing the games among  themselves and call the “shots” when they like it.  As a retail investor,  we could be “coiled” around by them if we were to play against them even though we knew their movements and can bet what would be their next move using chart and technical analysis; but,   these are tools that may be completely useless against market manipulations.  

Fortunately,  it was always said that market manipulations affect mostly the day traders and short term players.  Staying as a long term investor and not to jump into any conclusion about market recovery is the best move so far under the present environment.

Disclaimer:  This article is for information and  educational purposes.   Readers are advised to  conduct their own research and study to make their  own investment decisions.