Stocks sank on Friday topping a week of frustration and anxiety for investors in… everything. Solid economic results continue to dampen moods despite their implication that the economy is strong, because the Fed’s ire is ever-present.
Below the belt. Now, I am not insulted if you don’t open my daily chartbook… um, daily, though I might be slightly insulted if you didn’t even realize that I attach it every SINGLE DAY. Have I gotten your attention now? I am sure that you are well aware of the fact that I like charts. I feel that, in a lot of cases, visual aids help explain a complicated story far better than words can. If you throw in some quality gesticulating, highlighting, and amplification, you end up with a knowledgeable listener. Yes, indeed, I am that guy that always seeks the whiteboard, and yes, I am that guy that used to have chalk all over my clothes in the olden days when blackboards were still black. Today, I satisfy that urge by creating these charts from scratch every day. On them, you will find, all of what I believe, are the most important technical indicators to give you a good snapshot of what’s what. Yes, I often paste a bunch of charts in my daily notes which I typically screenshot from my beloved Bloomberg terminal (thanks Bloomberg, I love you too ). There is a reason that I am rambling on and on about charts. This morning, I am going to paste a chart from my own chartbook. One from this very morning!! Have a glance and keep reading for the explanation.
This is a snapshot of page 4 in my daily chartbook. It is a price chart of the S&P500. You know that index that we talk about when we say “stocks.” It is, perhaps, the most broadly followed stock index the world over. Now, I am not saying that it is the best index to follow, it isn’t , but because so many people do follow it, we should at least pay attention to it and see if we can glean anything from it. So here we go… buckle in.
The most important thing to note on this chart is that, on Friday, the Index closed below that solid blue line on the top portion of the chart. That line is the 200-day simple moving average. It is literally the average of the last 200 days of the S&P500 closes. It is a very old and basic indicator, and it is most likely one of the first things that most analysts are taught. If you step back, squint your eyes, and focus in on only the blue line, you are able to see the long-term trend of the market… without all that noise that keeps us up at night. The longer the moving average, the more noise that it filters out. That is a good thing, however, one has to be careful not to filter out so much that it loses its accuracy. Anyway, there are many well-published strategies on how to use simple moving averages, and I think all of them are worth understanding, but one of the most basic ones is often overlooked, because perhaps it seems too simple to have any import. What if I told you that just about every hedge fund manager looks at this, but will never publicly admit it? Are you interested? Sure, you are. Here it is. If an index closes below the 200-day moving average, that is a signal to pull back. Pull back means a lot of things, but for the sake of our conversation, let’s just say, it is a good time to pay close attention. Why, because it is a bearish signal. Before you go and do anything silly, pay close attention to the next paragraph of CAVEATS.
I am going to start with the most important caveat. THIS IS NOT A TRADING STRATEGY AND IT LOSES MONEY, so don’t try to trade on this. As I said above, it is simply a bearish signal. That can mean many things, but most importantly, you have to realize that the market is errant, and it often does what is inconvenient for you at the moment. That means that the Index can quickly turn right around and make new highs. In fact, you will also note on the chart that there is support just below Friday’s close. The red line just below at 4216 and the dashed black Fibonacci line at 4207. Stocks often bounce off these support lines. Further, many technical analysts will wait for a few closes below a support line or moving average before confirming a signal. Confirming? That is my final lesson for the morning. When I said most hedge fund managers, assets managers, technical analysts, traders, etc. secretly watch this, they indeed do, but all of them use it to confirm all sorts of other indicators they watch. For a simple example, a fundamental analyst may have her doubts about a stock due to financial weakness, but she may wait to change her call on the stock until she witnesses a bearish market signal… like a close under its 200-day moving average, implying that it broke below where it closed, on average, over almost the past year of trading days (there are 260 of those in a year). Again, I want to be completely clear that this is only one signal that professional investors use alongside many more sophisticated models… but it is a powerful one, because it doesn’t happen too often.
Obviously, I found it important enough to bring it to your attention. So, what should you do? If you are a regular reader, you know how often I emphasize long-term perspective… that is because it always wins, and the numbers prove it. So, if you have a long-term perspective, then what should you do? Do nothing. However, if you were thinking of buying some oversold stocks, you may want to watch price action over the next few days before rushing in. If things turn around and improve, then proceed. If things get worse, continue to watch until the Index begins to close above the blue line once again, because that, my friends, is a bullish signal… with all the same caveats from the past 2 paragraphs. I will spare you another chart this morning, but if I peeked your interest, go to your favorite internet site for charting stocks and look at a daily chart of the S&P500 for as long as it will allow you to and add a 200-day moving average. Can you see it? Of course, you can, that is why professionals all watch this indicator… though they will never admit it .
STOCKS THIS MORNING
Chevron Corp (CVX) shares are lower by -2.69% in the premarket after the company announced that it is acquiring Hess (HES) for $53 billion. The companies believe that they will together achieve run-rate cost synergies that will improve cash flows for both companies over the long term. They are both trading above their 200-day moving averages. Dividend yield: 3.62%. Potential average analyst upside potential: +12.6%.
Walgreens Boots Alliance Inc (WBA) shares are higher by +3.95% after JPMorgan upgraded the stock to OVERWEIGHT from NEUTRAL and raised its price target citing strong management and an opportunity to cut overhead. Over the past month, 76% of analysts have changed their targets for the stock 0 up, 10 down, 3 unchanged. The stock has been trading below its 200-day moving average since last December. Dividend yield: 9.02%. Potential average analyst upside potential: +27.3%.
LAST FRIDAY’S MARKETS
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