From a technical perspective, there is a lot of confusion. The market is not quite in correction, not quite in bull mode, not quite in bear mode—it appears to be betwixt and between.
My view is that you have to look at the long-term charts and count up the “balance points.” Let’s look at the basics. Stocks are in bearish territory when they fall below their 200-day average, and when their 50-day average flips under their 200-day average. So count those two for bears.
Looking more broadly, as we have seen the past three weeks, the S&P 500 is also below its 12-month average, which tends to spell big trouble after an all-time high has recently been recorded. Plus, you have the most defensive groups advancing, including utilities and bonds.
Add a central bank that is skeptical on growth, plunging commodity prices, a currency war brewing in Asia, a eurozone that is distracted from business by a refugee crisis, a growing conflict between the United States and Russia over the course of civil war in Syria, and a presidential nomination race that needs to discount the possibility of a successful run by a demagogic Republican candidate with no experience in representative government, foreign affairs, the military or science.
And finally, mix in recent results reported by industrial and tech giants that are regularly missing quarterly estimates and lowering fiscal-year guidance due in part to macro matters outside their control, such as the rising dollar. All while a tighter job market is making it harder for companies to compensate for lower earnings by cutting labor costs.
All of these could be true and the market still only be headed for a garden-variety “correction,” or a decline of 10% or so. Yet there are complications. At this point, the working assumption has to be that the broad market will retest its August low, which would amount to a 12% loss from the May high.
Falling further from there to the October 2014 low would amount to a 15% loss. That’s still just a correction, in market jargon. If that low doesn’t hold, then there’s big trouble because there’s little chart support from there until you get to true bear territory of -20% from a high.
Still, don’t forget we had similar “corrections” in 2010 and 2011 that came close to the magic -20% barrier but did not cross over on a daily close basis. So, even if worst comes to worst, there would still be a very good chance to see a “kick save” in October, which has been the month of the year most associated with market bottoms. In fact, the second week of October has often seen major market bottoms, most notably in 2002.
One thing (at least) is for sure: Silver suffered a sharp decline overnight and is down nearly 3% in early Tuesday trading. The CounterPoint Options system senses it has fallen too far, too quickly and is due for a rebound.
Buy to open the iShares Silver Trust (SLV) Oct. 16th $13 calls at $1.15 or less. There are several expiration dates available for the SLV October series, so be sure you are buying to open the calls that expire on Oct. 16, 2015.
Once filled, set up to sell half at an initial target of $1.70 limit, good till canceled, and the remainder at the final target of $2.45.
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation, and be sure to check out his Top Stock for 2015 here.
