"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair...."
So did Charles Dickens begin his epic novel "A Tale of Two Cities." How apropos it seems for the start of this week's column.
The events of last Monday in the overseas markets, while we observed the Martin Luther King, Jr. holiday, were, depending on your position in the market, all that Dickens implied in his well chosen words. If you were short, you are on top of the world, the best of times. If you were long, it is seen as the worst of times. If you went to cash in the late summer, you will be called the wisest of the wise. If you just entered the market with a healthy list of buys, you likely feel foolish.
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And for all the other emotions, just pick the phrase that best describes your mental atmosphere. Somewhere in his sentence you will find yourself well described, I am sure.
But, on to the matters at hand. I told you last week that I would include my Super Chart and its Keyline this week, so let's go to that chart to begin our review and comment on the events since last column.
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I have included the last eight years of the chart so you can get some better perspective of what the current action looks like in comparison to the down move in 2000-2003. Note, first, that the big red Keyline is currently at S&P cash index 1,412 on the chart and that the close as of last night was at S&P 1,338, or 72 S&P points below the Keyline.
I have told you before that the Keyline has only been crossed 16 times until this event several weeks ago. This 17th cross was to the downside. I have also told you that the Major Market Turnaround (MMT) does not occur until we have had six consecutive weeks of closes below the Keyline. Tonight's close will mark the fourth week, if we close below the Keyline at S&P 1,410.
I should also tell you that since 1965, the year I chose to begin the Super Chart data, I have not had a cross up or down of more than 20 S&P points that did not also turn out to be a full-fledged MMT. Based on that history, and since we have crossed the Keyline to the downside by over 85 points, I feel fairly confident that this will be a MMT, too. But, hey, there is always a first time, right? We still have two weeks and a day (11 trading sessions) left. Hmmm.
Key Support Levels
Be that as it may, let's get to the important stuff. I have drawn in the key supports that exist below the current Keyline reading at 1,412. Each of these levels will present a potential bottom for the selling that is taking place now.
The supports are:
Support #1 at 1,325. We closed at that level last Friday. On Tuesday, we penetrated this support and went intraweek to 1,270. But at the moment, we are above the 1,325 support and rallying.
I am not sure we will close above 1,325 tonite, but if we do, I expect that we will most likely try to rally to the Keyline or at least 1,400. But, if we don't penetrate those levels, I expect we will test this 1,325 level again somewhere along the line. If the 1,325 holds the second time, we could then easily rally back to the Keyline a second time.
If you will note, at the end of 2000, after we broke the Keyline, we actually rallied back to the Keyline two times before the market finally let go and fell to the 2003 low at about 800 on the S&P cash index.
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Will we suffer a similar fate again? Of course, no one can tell you that. But, I would expect we will know soon, possibly even before the end of April.
Why April? Because that will mark the 90-day point since that latest interest rate reduction and the congressional stimulus package hit the streets. Typically, that's the minimum time to begin to feel the effects of such moves. If the market likes the effect, we will rally. If not, then you should be aware of supports 2, 3, and 4.
Support #2 is at 1,235 — 90 points below the current tested support at 1,325.
Support #3 is at 1,145 or 90 points below #2.
And support #4 is at 1,055 or 90 points below #3. Yes, you got it right. Note that the supports are exactly 90 points apart. Now, there is no special reason for that, unless you are a cycle analyst. The cycle analyst would explain it to you in terms of time and price, but that is not my bag. So, we will just accept that the unusual setup exists and go from there.
I have included these four support levels to give you some mile markers of sorts as the current selling progresses. As I said, no one knows for how long or how far the current move will go, but to have this roadmap will help you aplenty.
What to Do Now
Now, what do you do in a market environment like this? Well, that is not too hard to tell. I have had 40 years of these events and I can tell you that the response varies little.
First, take a close look at your portfolio. I suggest that you eliminate any holdings less than 12-15 months old that have lost over 10 percent from their entry price. Go to cash in this way.
Second, look at all your other holdings that are older than 15-18 months. Are these ones you want to keep for some important reason? If so, keep them. If not, sell them, too. Just be sure that you see good qualities in the ones you retain, i.e. big caps, good dividends and a strong dividend history with good coverage of the dividend payments (at least two to three times, I would suggest), best if there is some measure of "blue chip" character to the stock, and preferably an average price of purchase for the stock that is below the current market price by 15 percent or more.
These are your long-term holds, and you will likely have a good shot at cost averaging these holdings with the cash you raise by selling your present losers and, from my experience, well before the markets resume their upward ways. Yes, this too shall pass and we will go higher one day. For now, the adjustment in markets will have to have its day.
Finally, before I go, I will leave you with these words of the legendary Jesse Livermore, one of the greatest speculators of the early 20th century. "There is only one side of the market to be on at all times, and it is not the bull side nor the bear side, it's the right side."
Right now while sellers rule the roost, keep your powder dry and be patient. Patience must have her perfect work, so the saying goes. That is very old, sage advice for just about everything in life, especially in the stock market, especially right now.
Well, that's about it for this week. We have not seen the likes of this volatility for many years and the experience will be one you will surely remember. Go slow, and if you must invest on the long side, just put a toe in the water, not your whole foot or, heaven forbid, your whole leg. Okay?
Do hope your coming investing week is a good one. Meanwhile, you keep in touch. I do! See you next week.
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