A Punch in the Gut

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If you are going to compete you are going to get knocked around from time to time. It is not what happens to us that determines our results, how we respond to situations is the most important thing. So, instead of panicking after a sharp pullback let’s try to put things in the proper perspective. I have suggested selling stocks as they break down below their respective support levels for the past several weeks. I have sold some stocks that have reached their own private bear markets here in May. I felt it would be better to sell names that simply are not performing. I will use this accumulated cash to add to names that I feel will be winners in the next market cycle.

The technical picture for the market is currently ___________. You can place your favorite negative phrase in the blank. In March 84% of the names in the S&P 500 were in sound shape technically. That total was off 26% from the peak when I wrote last week. Last week the bears took us to the woodshed. The percentage of technically favorable names fell a further 19% last week to a current dismal 39%. Dry your eyes and quit your whining. Chaos creates opportunity. With the selling over the past few weeks I am now better positioned to see things more clearly and take advantage of opportunities that present themselves over the coming weeks. Things are even worse in the secondary markets: 36% of small cap stocks are in sound shape technically. 

Leading Economic Indicators also took a hit last week. The decline in stocks, globally, last week was the biggest culprit. Policy actually improved last week as the Fed gave signs that they would be ready to again step in and inject cash. Consumer sentiment is fine while investor sentiment is at shockingly low levels. Typically, doom in the hearts of investors signals a reversal in the markets.

The 200 day moving averages are in play for the major indexes. I simply cannot stress enough how much I hate to speak of, write about or even think of 200 day moving averages. If you are talking about individual names or averages, concern of the 200 day is a sign of pain. If we can bottom out here over the next week or so and the major indexes hold above their respective 200 day moving averages then a rally is likely. Based on the strength of the sell off, 1350 on the S&P 500 will prove to be a tough barrier of resistance. 

As long as smaller European economies are the focal point the market is going to be tough sledding. At some point peripheral Europe will again move into the shadows and we can make some money in the market. 

I will continue to scour for names that offer an attractive combination of fundamental and technical strength. These are the sort of names that when bought properly after tumultuous times can often become your next winners.

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About Thomas J Smith CFA