by By Simon Kazinsky
on 16:06 May 21, 2020
We are still at the beginning of a bear market.
I have to admit that I did not consider a flash to the recovery in the stock market of this magnitude would be on the menu after the meal justifies the shock began in February. While unexpected, it reinforces my view of how important stop losses are. It is difficult to imagine how, not the reduction of positions as the market moves suddenly against you can lead to the success of an investment strategy in the long term. I guess, however, is that the perma bulls feel allowed if they have not been wiped out in the process, they have managed to recover most of their loses. This could be their demise, if a second wave of sales kicks in, which, bytheway, this is my central scenario.
The assessments are always ridiculously expensive now that the S&P is only about 10% less compared to its top and, at the same level as in October last year. On average, the companies listed in the index trading above their 21 and multiple (EACH). If the dividends are in the course of revision or cancellation (with a value of more than 20, it is almost guaranteed to lead to a better health level in the space of a few years and, considering that we are in the 11th year of the current expansion, the correction is to the time waited and waited.
But when it is, the new leg down will start?
I am looking at the previous declines in 2000 and 2008 to find the clues.
Such as the SP500 monthly chart of 7-month moving averages (peaks) has been tested at least once during the last two major corrections, the bursting of the bubble in dot-com and 2007 financial broke. Due to the strength of the current rally, we can not exclude that the tests at the beginning of this cycle, is off the table. The good news is that, if this is the case, then we are just a couple of hundred points of the mark, and since the month of June will give us a new energy and a moving average is already down, the gap will become more narrow in a week.
But, of course, we can’t reach the level that we need to be vigilant when the current rise is over. For this, we look at the daily chart and find the 35-day moving average (close) has been supported in the previous long-term uptrend, and also to provide support to mid-May.
So, my strategy has been to maintain a short position at this level will be increased if we reached the to 3050 3100 area or if we can move below 2850, of course, the revision of these values as time goes on, and the moving averages that move.