Stocks have tumbled since last week’s Federal Reserve meeting, with the benchmark S&P 500 index skidding another 24 points (1.2%) on Tuesday, and losing ground through mid-day Wednesday.
Is that so bad? Not necessarily.
In a recent presentation, I went into some detail about the technical aspects of the market’s deep August dive. I noted that the 14-day Relative Strength Index plummeted to 16.8% on August 25.
Since 1950, there have been only 17 unique instances (not counting repeat occurrences in the same calendar year) where the RSI fell below 20%.
In each of the previous 16 cases, the S&P 500 index went on to break — at least marginally — its closing low recorded on the day of the RSI low.
So the odds, based on history, are overwhelming that, sooner or later, the S&P will “test” its August 25 closing low at 1867.62.
But here’s the potential good news. When the test occurs fairly soon (within, say, eight weeks) after the initial low, the market typically performs a lot better in the following weeks and months than if the test is deferred.
Thus, if you’re rooting (as I am) for Wall Street’s great bull run to continue into 2016, you want to get the test over and done with—soon. Specifically, you would like to see the market go back to probe its August lows before the middle of October.
Every down day takes us closer to completing that task.
Of course, down days are always accompanied by unpleasant headlines. That’s the nature of the beast, as seasoned investors understand.
Cheerful news reports don’t push stocks down!
In August, it was the commodity rout (oil in particular) that drove the selling. Now it’s Hillary’s latest venture into pharmaceutical price controls, plus a nice dash of uncertainty introduced by Volkswagen’s (VLKAY) multibillion-dollar emissions scandal.
If we tune out the screeches and squawks of CNBC, though, we can observe that the market is retreating in a much more orderly fashion than it did in August. Far fewer individual stocks are scraping new 52-week lows.
Traders are building a much smaller “panic premium” (VIX) into options prices, versus the August peak. (See chart.)
These are the first hints that the upcoming test, when it occurs, will prove successful—in the sense that a strong Q4 rally will follow for the headline U.S. equity indexes.
One of the most attractive sectors right now, thanks to a sizable price drop in recent weeks, is healthcare.
How fickle Wall Street’s moods are! Just a couple of months ago, the Street’s big, brave blusterers were barking at you to buy healthcare — and especially the high-flying biotechs — because the aging of the industrialized world’s population supposedly guaranteed fat profits.
Now all those windbags are cowering in their corners, terrified that someone with an ego to match their own is strutting across the national stage. But the political stars are aligned quite a bit differently today than in 2008.
Even if Mrs. Clinton is elected next year, she’ll have far less support in Congress for her healthcare proposals than Mr. Obama did for his in 2009-10.
In short, I suspect that the recent selloff in pharmaceutical and other healthcare stocks greatly overstates the likelihood that the Clinton “gouging” manifesto (or anything like it) will get enacted.
