"Life Turns on a Dime"

Life Turns on a Dime - John Preston ? ? ? ? ? ? ? ? ? ? ? ? ? August 14, 2024

This morning a wit asked rhetorically, “Did the world end in the last 14 days?”? In three days - Aug. 1,2 & 5 - a message was being delivered to investors they hadn’t been expecting, an “expectation breaker.”

Only 3 weeks ago, on July 23, 64.2% of investment newsletter writers were "very bullish", the highest rating since ‘87. July 10, right before the current pullback began, the VIX, a fear gauge, was 12.85/100, but on Mon., Aug. 5, it had spiked to 65.73. That same day, the CNN Fear & Greed Index rose to 24/100, noting Extreme Fear. IBD is now recommending 0% to 20% equity exposure. Leading groups - oil, gas, copper, gold, and silver - reflect investors' defensive posture.

Is this like October ’87, the tech bubble of 2000, the financial crisis of ‘08-09, or the Covid market of ‘20? Some metrics suggest as much. The big drop in the three sessions after July 31 shocked investors. At the time, the NASDAQ seemed to be righting itself from a decline that began on July 11. At the close on July 31, the NASDAQ was down only 5.7% - then all hell broke loose. Starting Aug. 1, the NASDAQ shed 12% in three sessions, or 2,083.05 to the August low, 15,708.54.

Was this pointing to the end of something? Was the Fed too slow to act? Was the long-feared recession at hand? Understandably, the short, sharp retreat would make investors fearful, hesitant, and pessimistic. Aug. 5 was the end of a 17-session decline and ended with an exclamation point! As shocking as the culmination of the decline was, the 12% pullback’s duration was 31% as long as the prior uptrend, under the low end of a typical 33% to 66%. What was unusual was the extent, as the pullback relinquished 86% of the prior uptrend from April 22.?

In life, setbacks do come out of nowhere, however, the market provides context - reversals are sharp, sudden & unexpected, but historically short. Hearing the phrase, “turns on a dime,” is likely to give way to a pessimistic interpretation. However, turns in an upward direction appear to also be sudden - some have turned up decisively in as few as 3 days, like after Brexit in ‘16, but usually in 4 to 10 trading sessions.?

Aug. 5, a high volume, positive reversal day appears to have been the turning point. The market had been preparing for the turn as measured by the extent and duration of the pullback. Is the uptrend sustainable? Time will tell, but confidence will return with a follow-through day and the penetration of the 21-day moving average.?