Wednesday ended the best January for the stock market since 2013! Unfortunately, a much different picture was emerging by Friday. At the close on Wednesday the S&P500 (C fund) was off its high, but still up 5.6% for the month. By the close on Friday, over 2% of that gain had evaporated.
For the week, the C fund was down 3.85%, the S fund was down 3.62%, and the I fund was off 3.59%. This was the worst weekly price drop since January 2016. So what does all this mean?
First of all, the sky is not falling! It’s the first time we’ve seen any significant price decrease in 2 years so, people are understandably on edge. What we need now is some perspective. By any measure, this market has been over heated for some time. The question was not if, but when, a correction would begin. The question now is, how deep is this correction likely to go? While no one has a crystal ball, there are some concepts and technical analysis tools that can put this into perspective.
The idea of Reversion To The Mean is important to keep in mind while managing expectations for the next several months. The chart below is a great example of this concept. This weekly chart of the C fund shows just how far out of wack the price chart has come in the past few months. At the high in January, the C fund was 15% above its 50WMA (its Mean)! Even after this week’s sell off, the C fund still has a long way to go in reverting to its Mean… On a weekly basis, we should be prepared for continued downside as the price chart reverts back to its 50WMA.
The short term perspective is a bit different. The 6 month daily chart of the C fund below show 2 trend lines, and a Fibonacci overlay, since the last short term low in August 2017. We hit our first area of potential support at the first trend line on Friday. Because Friday was such a strong down day and took us right to this trend line, we could see support here this coming week. If the first trend line is violated, the next area of support is the longer term trend line that intersects the first Fibonacci line at about 2700. This is the most likely area of major support that we will see in the coming weeks. We will be watching the technical indicators closely for confirmation of support.
In the long term, the sky is NOT falling. All 3 of the 5 year monthly charts below show that the long term up trend is still very much in tack. The technical indicators will drive decisions here. When the black MACD line crosses down thru the red line and the RSI drops below 70, then we have some long term decisions to make. We are not there yet. It’s possible that we won’t get to that point for several months or even in 2018. When those lines cross however, it will be time to make some long term decisions…
I’m looking for some price support this week along the first trend line. Maybe it holds? There’s no way to tell… On a weekly basis, I think we need to see more price decline to get us closer to the Mean. On a longer term basis (monthly) we are still good to go in the long term up trend. One thing is for sure, 2018 will not look like 2017 in hindsight…
Please post questions to comments and have a great week!
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