No Pain, No Gain for the Stock Market

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Stock Market Chaos Can Generate Opportunities

The major stock market volatility over the past week and a bit may be new to some of you, but for me, it wasn’t such a big deal, given that the run-up in January and 2017 was not reasonable. I have also experienced the stock market havoc during the technology implosion in early 2000 and the subprime financial meltdown in 2008.

Now that’s not to say the past week wasn’t easy to stomach, but for those with a longer term to the stock market and investments, market chaos like this breeds buying opportunities. However, it will likely sting more before getting better.

Think about the Great Recession in 2008. If you bought shares back then when no one was buying, you would have done well and would understand that stock markets simply do not head straight up, like what we saw in January, without some reckoning.

The fear is that the selling capitulation that has engulfed stock markets worldwide could and will likely continue until such time that buyers resurface and decide a bottom was there. The fact is, the stock market is extremely technically oversold at this time.

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The Dow and S&P 500 have recorded their worst week since October 2008 during the subprime crisis.

The extreme selling capitulation is obvious, with the Dow losing 1,175 points on February 5 after plummeting nearly 1,600 points intraday. The index bounced 567 points on February 6, but then plummeted 1,032 points on Thursday.

On Friday, the Dow was again everywhere on the chart, swinging nearly 900 points during the session as the traders and computers battle.

Dow Index Chart

Chart courtesy of StockCharts.com

The table shows the Dow over the past six days:

Date High Low VIX
2-Feb-18 26,061.79 25,490.66 17.86
5-Feb-18 25,520.53 23,923.88 38.80
6-Feb-18 24,946.23 23,778.74 50.30
7-Feb-18 25,293.96 24,785.44 31.64
8-Feb-18 24,903.68 23,849.23 36.17
9-Feb-18 24,209.50 23,360.29 41.06

The extreme intraday volatility will likely soon run its course. It’s just a question of when.

The VIX peaked at 50 on February 6 before declining to the 30 range for Wednesday and Thursday, but surged back to 41 on Friday.

Stock Market Volatility Index

Chart courtesy of StockCharts.com

Until the VIX can settle down to below 20, the intraday volatility will continue to be a threat.

The Dow, NASDAQ, S&P 500, and Russell 2000 are all below their respective 50-day moving averages and threatening to test the 200-day moving average.

My concern is that a breach of the 200-day moving average could drive the selling capitulation and algorithm sell programs, driving the indices to a bigger correction than the nine percent to 10% currently on the books.

2018 NASDAQ DOW SP 500 RUSSELL 2000
Current 6,777.00 23,860.00 2,581.00 1,463.00
50-day MA 7,074.73 25,095.19 2,718.79 1549
200-day MA 6,557.08 22,793.50 2,539.18 1462
Feb -8.56% -8.76% -8.60% -7.11%
Return 2018 -1.83% -3.48% -3.46% -4.72%
From High -9.71% -10.36% -10.16% -9.44%
Target 7700 27000 3000 1750
Vs. Target 13.62% 13.16% 16.23% 19.62%

Analyst’s Take

I expect the selling capitulation to settle down, but we could first see lower moves for the stock market.

The ability to pick a bottom is impossible, so you need to be careful. You could accumulate on further weakness if you are thinking long-term and/or you can also sell some put option premium to generate income while setting up a lower entry price.