Stock Market Recovery on Tuesday Brings Much Needed Relief
There have been a number of things that have tried to put an end to our now three -month long bull market, but so far, the buying pressure has been up to the task.
Tuesday’s trading wasn’t all that terribly exciting in itself, but in the face of the recent sell-off blamed on an inversion of bond yields that are associated with an upcoming recession, we could indeed say that gaining at least some of this back provides some welcome relief to the bulls.
Just when it looked like things were looking up for the prospects of making up even more of the ground that was lost during the bear move of the last 3 months of 2019, where the S&P moved past the former high of this move that was set on March 1, last Friday’s selloff threw another obstacle in our way, and one that some investors found particularly scary.
Even though the prognostications that were thrown at us by way of this inversion require this drop to be at least 10 days, and even then, at best this predicts a recession and accompanying market downturn a year or more out, this at least had the potential to create enough selling momentum to put an end to this run and perhaps send us down toward where we were last December, or worse.
Stock markets are much more than the two-dimensional view that we get when we look at the prices we are trading at, as this only represents a small percentage of those who own stocks or those who are immediately looking to acquire them.
This is actually a three-dimensional model, with a lot of potential trades lying both beneath and above current prices. Some of these orders are actually on the books, but the overwhelming majority of this potential is not, and we could say that it is contingent.
We Need to Consider the People Who Didn’t Trade That Day
This contingency is just as real though, for example, how many people would sell if we did move down 10% or 20% or whatever the threshold an investor has set for themselves to get out. During bull markets, this threshold can be pretty wide, where a pullback of a certain magnitude, say 10%, isn’t seen by that many as a reason to sell.
When we’ve had a bull market for so long and it is indeed showing signs of tiring, this lowers this threshold generally and more investors line up closer to the current price due to their tolerance levels being reduced by the current outlook and recent performance.
This does happen to a certain extent in reverse with bear markets, not so much with individual investors as with institutional ones, who are more willing and adept to buy bottoms or prices close to it. When bear markets are actually looking like they are coming to an end, institutional investors will, at the very least, reduce their willingness to raise their stakes, and this leaves a tell-tale trail on the markets which manifests itself in the market not bouncing to the upside so much.
Risk of missing out on further moves, that investors experience when they sell too early, does need to be accounted for properly, but they say it hurts more to lose real money than potential money, and this is true as well. If we hang on past the point where the reversal happens, this risk also translates into the real kind, the kind that shows up on your account statements and balance sheets.
It is well-known that markets move down faster than they go up generally, and it makes perfect sense that they would. This actually requires us to set our exit thresholds tighter during downward reversals, and investors generally do that. They often even look to bail before it is really time to do so, using a rationale such as we’ve made a lot of money already and it may not pay to be too greedy at this time.
This does add to the mass nearer the surface, and how we respond to pullbacks allows us to measure whether we’ve struck a point where the weight of the market will drive it lower, where the willingness of the market to buy dips becomes overcome by the amount of selling waiting at these new prices.
It is easier to take profits than take a loss, that’s for sure, and this is what many investors look to do when things turn against them or even might. We know that 2019 will be far from a boom year economically, and the only real question seems to be how low will we go before this current trend downward with economic growth finally ends.
How We React to Pullbacks Can Be Very Informative
There doesn’t seem to be that much reason to bail now, with things basically trading in a range lately. Maybe this three-month move is over, but we’re not really going very far in the other direction yet, and we should always wait for some sort of real confirmation of our fears before we act upon them.
A serious enough fear of a recession has the potential to change this all by itself though, as if we get enough momentum to the downside going, and reach enough potential selling orders that now lay beneath the surface, the weight of this could indeed take us below water again.
It’s not hard to imagine how this could happen. Let’s say that Monday and Tuesday saw a similar sell-off as Friday did. This would put us back below where things reversed on March 12, and invoke more of this underground willing to sell, which could potentially wipe out the current rally and then some.
This week’s response to last Friday’s news is therefore particularly important, where we get to see whether or not the market brushes this off or whether we let it take us down further. The good news is that, at least in the first two trading days, we are seeing confirmation that people are still seeing value in this environment at these prices and are still buying the dips pretty well.
A modest lost for individual investors can be an opportunity for the bigger ones, who enter their positions on pullbacks a lot to help cut down on the upward pressure of their buying. This also serves to bolster the market, as it does drive prices up, but starts at a lower number and yields a lower average cost per share, which is what these guys are after.
When we get divergences such as we’re seeing lately, we oscillate between people taking their profits and getting out and bigger players jumping on to get a bargain. As long as these big players, who put a lot more thought into their decisions than smaller investors tend to, are still on the bullish side, things can’t be all that bad.
Perhaps the most important thing we can be looking at now isn’t all this fundamental data but how the market responds to our selling off on not so great news. When this happens, we can drop further or we can bounce back, and how we bounce back shows the underlying market sentiment and its current level of resilience like nothing else.
We have to speculate about a lot of things when we invest, so we can’t get away from this totally, but the less we use speculation and the more we rely on facts the better, and investment decisions always involve both.
We can speculate on whether or not this move has gotten too tired, or the economy has, or whatever other data we wish to look at, but seeing this be converted to something concrete such as how well we rebound from pullbacks turns speculation into a very usable fact.
There is a lot of back and forth with stock prices and investing in them, much like a tennis match, with the ball being hit back and forth between the bulls and the bears. The fact that we’ve held our serve thus far in this move doesn’t mean that this will continue indefinitely though, and if we lose games when it is both our serve and theirs, that’s when it’s really time to worry.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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