By: Spencer Israel
Call it human nature, or call it people trying to do their best Mark Haines impression. But for whatever reason, everybody wants to be the one to call the bottom.
Last week, as Bill Ackman’s emotional appearance on CNBC coincided with a new low for the day, the “Ackman Bottom” was coined by people thinking that would be the trough. Those people were wrong.
This week, major indexes are hovering around 13% above their March lows. Between that mini rally, the unlimited quantitative easing announced by the Federal Reserve, and the approval of an economic stimulus package out of Washington, you’re starting to see some whispers of bullishness across The Street.
But calling bottoms is counterproductive, and not a viable strategy. As of March 25, 24 full trading days had passed since the S&P 500 made a new all-time high. During this month-long period, the index closed higher nine times.
In other words, if you’d chased each of those up days thinking the bottom was in, you’d have been wrong nine times. This is not the way to approach this market from a trading standpoint (though from a long-term investing standpoint, there’s a case to be made that buying indiscriminately is not the worst idea, so long as you don’t expect any type of short-term returns).
Volatility Begets Volatility
Whether you’re sitting out the market or positioned for more downside, it can be hard to stomach rallies like we got on March 13 and March 24. But don’t let one day change your outlook. With markets as up and down as they are right now—the CBOE Volatility Index is in the 60’s— volatility begets volatility, both on the upside and the downside.
The massive rallies on March 13 and March 24 represent the ninth and 10th best days in the history of the S&P 500. But this is not unusual. Look at the biggest days in the modern history of U.S. stocks. On a percentage basis, a vast majority of the best days in the history of the S&P 500 occurred during secular bear markets.
Source: S&P Global
Only six times in history has the index closed higher by at least 10% in one day: four of those happened during The Great Depession, the other two happened in October 2008 just as The Great Recession was reaching full steam on Wall Street.
With the benefit of hindsight, we can see that every one of those days was a temporary reprieve from what would end up being a months-or years-long downtrend.
All this is to say, we are still in the early days of this mess. In prior bear markets it has taken weeks, in some cases months, of consolidation for the market to form a base and start moving higher. Plus, we still have yet to get any major data points that indicate how bad the COVID-19 damage is from an economic standpoint.
Is there a chance that the March 23 low of 2191 in the S&P 500 ends up being the low of this COVID-19 crash? Yes, it’s absolutely possible. But history shows us that reaching the bottom is rarely that simple.
Active Trading with Lightspeed
Lightspeed, a division of Lime Brokerage, provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.
Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.
Copyright © 2001-2021, Lightspeed, LLC. All Rights Reserved.