Broker Check

Healthy Pullback? or Panic?

September 21, 2020
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Refer to our previous blog: Clockwork?

Since the beginning of the month the markets have been in correction mode finally breaking the recovery trend from the Covid lows in early March.  We mentioned that we believed a healthy market correction(pullback) would be an additional 3-5% below where we closed on September 8th. 

Today’s continued downward price action puts us at precisely 3% lower than we were on the 8th!  While we aren’t ringing a bell to signal that this short downtrend is over, we are definitely beginning to see certain stocks and industries that are looking prime to buy at a discount.  Most of the movement in the S & P 500 has been lead downward by the FANG stocks, which hold such a heavy weight of the index.  Based on the earnings from Q2 and the level of pullback that we’ve experienced thus far, many of the price movements look relatively attractive at these levels.  

On a more technical note, the RSI which previously was at a massively overbought 80 has pulled all the way down to 37 or so.  30 is the key metric on the RSI to flag ‘oversold’ conditions and while we aren’t totally there yet, we would not be surprised to see the downward momentum begin to slow from this point.  

Adding to the volatility over the weekend is the passing of Ruth Bader Ginsburg one of our 9 Supreme Court Justices, with the unexpected event of having to fill that seat or not weighing on market sentiment. This coincides with some pre-election market volatility and the continued up and downs of Covid19 headlines.  All things aside, a 10% discount from the previous all-time high on the S & P 500 looks like an area where we’d be more risk neutral to risk on than harvesting deep cash for an expected market dive deeper. 

Should the pullback begin to feel panic stricken as we mentioned in our previous blog, we’d look at key levels on the S & P down to 3139 and its 200 day moving average at 3105.

The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend.