Below, we run quickly through TPA’s comments and the market action during the bloodletting in March. Then TPA explains that clients should expect next.
TPA began to warn clients about trouble ahead in the beginning of March. In early March, TPA saw warning signs in historic intraday volatility that it linked to ETFs and indexing, which TPA has been analyzing and reporting on since 2016. These massive investing trends had created a market structure of co-movement and extreme volatility as huge waves of assets all tried to move in the same direction at once.
World Snapshot 3/2/20 (S&P500 @ 2954) - “THE NUMBER OF LARGE QUICK INTRADAY MARKET MOVES OMINOUSLY ACCELERATES…A look at DJIA intraday chart 1 below shows the huge index changes that occurred in less than an hour on Friday: -665, +705, -526, +537, -550, and +644. The benchmark S&P500 had declined 12.76% in just 7 days as the news about the Coronavirus worsened. Still, the rapid rallies and declines on Friday raises the question of whether there are other market forces at work other than just investors selling stocks…”
World Snapshot 3/11/20 (S&P500 @ 2882) – “HAVE ETFS CREATED AN UNSTABLE MARKET? There are implications that ETFs have reduced liquidity, added to volatility and, possibly, exacerbated declines. The volatility of the past 3 weeks should force people to examine closely how this huge industry is affecting the stock market. TPA began discussing the possible problems with the rapidly growing ETF market back in 2016. ….TPA has found 3 metrics that point to potential problems in the market that stem from the overwhelming presence of ETFs: 1. ETF stock illiquidity, 2. ETF average bid-ask spreads widen[ing] 3. The difference between the ETF’s price and the intraday NAV… “
On Wednesday 3/12 at 10:00AM, TPA sent out its first note warning about the S&P 500 level 2500:
“Looks like long term support (11 YEAR) at 2500. This is the uptrend line from the 3/9/09 close. That does not mean it is a place to buy. It is a place to watch and see what happens. If we break through 2500, the next support is the 12/24/18 low of 2351, but that would not be as constructive as holding 2500.”
In Mid-March, TPA had seen enough. The S&P500 had confirmed the break of its 11-year uptrend line. The longest bull market had come to a close. There would be intermediate term rallies, but the friendly bull market that had bailed investors out after each and every decline, could be counted on no more.
World Snapshot 3/17/20 (S&P500 @ 2386) “THE LONG TERM TREND IS OVER – A NEW PARADIGM One thing that is certain is that the 11-year uptrend line, which has supported the S&P500 through much turmoil and the longest bull market in history, is no longer intact.”
On 3/19, with stocks more oversold by some metrics than they were during the 2008 decline, TPA told clients that, although many pundits were looking at the Christmas Eve 2018 low of 2531 as support, the best long term support level was in the range of S&P500 2110 to 2180. This was a strong support level where the risk/return tradeoff made the most sense.
World Snapshot 3/19/20 (S&P500 @ 2409) “WHERE DOES THE RETURN-RISK TRADEOFF BECOME ATTRACTIVE? The S&P500 is down 29% since 2/19/20 and the broader Russell 3000 is down 31% since 2/19/20. TPA has been telling clients that the long term trend has changed, but the declines are so staggering that it is close to the time to look for a level at which things may stabilize for the medium term. TPA would advise clients that it sees the return/risk tradeoff getting more favorable in the 2110 to 2180 range (see the chart below). S&P 500 2180 is down 9% from Wednesday’s close and down 35% from the 2/19/20 close; just 20 days ago. “
In fact, the 2110-2180 range was long term support. The low on 3/23 (my birthday) was 2191.86 a mere 50 BPs above the range after a 35% decline in 23 days (first chart below). A closer look shows that the futures on 3/23 preopen did trade into the 2110-2180 range; hitting a low of 2175 (second chart below).
NOW WHAT?
The S&P500 has now rallied 19% off of its low close of 2237.40 on 3/23 and 21% from its intraday low of 2191.86 on 3/23. The benchmark is now within sight of its 50% retracement. By definition, a 50% retracement of the S&P500 would be a rally that retraced 50% (+574) of the net loss (-1148) from 2/19 to 3/23. The chart below shows that the 50% retracement level is approximately S&P500 2811 (the low of 2237 + 574 = 2811). S&P500 2811 is over 6% above Monday’s close.
The second chart shows that there is also technical resistance from the break of August – October 2019 support at just above the S&P2811 level. After such a big move, there may be a pullback at any time, but at the S&P500 2800 – 2830 level, the risk/return tradeoff becomes bad for the market.
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