2020 began on a positive note.
By mid-February, the Dow Jones Industrial Average had climbed 1,030 points to hit an all-time high of 29,569, while the TSX Composite Index gained 908 points to a lofty 17,971.
It was hard to discern anything negative - unless one scrutinized the statistics.
In New York, 67 per cent of listed stocks were trading above their 200-day moving averages (200dMAs). Meanwhile, the Chicago Board Options Exchange’s Volatility Index (VIX) remained below 20.
Yet, despite a 10-to-1 ratio of advancing versus declining stocks (those that closed higher or lower for the day), key indexes were no longer moving higher. To the jaundiced eye of a technical analyst, this was a classic case of a “market top."
But did anyone listen? No.
Everyone (well almost everyone) was too busy cheering the indexes on - would the DJI reach 30,000, the SPX 3,400 or the TSX 18,000?
Rather than being concerned about markets topping out, investors worried more about “FOMO,” the Fear of Missing Out! Who cares about a virus in China that sounds like a beer?
The decline started on Feb. 24, which saw the DJI tumble 1,080 points and the TSX shed 381. Day after day, the carnage continued: The DJI fell to 29,000, then 28,000, 27, 25, 23, 21, 19,000!
FOMOs quickly gave way to the plaintive wail “Will it ever end?”
Both the 50-day and 200-day moving averages abruptly turned down, and kept falling. Near the end, over 450 stocks were reaching new 52-week lows every day. Only 4.5 per cent of stocks in New York were trading above their 200dMAs - a level that had not been seen since 1987, or 2009 or late 2018! The VIX, meantime, shot up to 85, its highest level since October 2008. During most trading sessions, only about 8 per cent of stocks advanced on the day, and there was a 1-to-13 ratio of upside-versus-downside volume. A classic case of a “selling climax."
The sell-off mercifully ended on March 23, with the DJI at 18,214 and the TSX at 11,173. Charts initially developed a “tail” (‘A’ on the accompanying graphic), characteristically the sign of a true reversal in the offing. The rally that followed - the first part of a base-building pattern driven by bargain hunters and FOMOs - created a ‘V’-shaped pattern that has lifted the indexes towards their 1/2 recovery levels, 2,800 for the SPX and 14,560 for the TSX.
Still, this base-building phase, essential after a drastic decline, may well see indexes retest recent market bottoms once or twice, thereby taking the shape of either a lower-case ‘n’ or ‘m’ on the charts - the left leg having already been established by that initial V move.
Where to next? The SPX and the TSX could climb somewhat higher (to their 2/3rd recovery level), but sooner or later will have to revert towards their lows to trace the next leg of that ‘n’ or ‘m’ pattern I envision. If virus-related news improves, there need be only one more leg down (‘n’) and the base-building pattern could be completed by mid-June. However, should the impact of the virus linger, markets will need more time and the pattern will doubtless acquire another leg down, meaning the ‘m’ base is unlikely to be completed until October.
In any case, whether it turns out be the ‘n’ or ‘m’ pattern that prevails in coming weeks and months, we will not see a true reversal and the beginning of the next up-leg until the 50dMAs and the 200dMAs intersect to create a so-called “golden cross,” where the 50dMA crosses above the 200dMA.
This will all take time. Stay tuned.
Ron Meisels/The Globe and Mail
Ron Meisels is president of Phases & Cycles Inc., a firm that specializes in the technical analysis of North American stocks and financial markets and a weekly contributor to the Globe and Mail. He can be reached at ronmeisels@phases-cycles.com.
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Ron Meisels