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Is the Market Bottom In?

February 13, 2018, 4:08 pm

Exactly two weeks ago from last Friday, Wall Street was riding the biggest January wave in my career. I know the subsequent selling was disconcerting, but as I had talked about in my last blog post I felt this was what was best for the market.

We’ve now seen an actual correction, a 10% dip off of the recent highs, which has become a rarity in this often unstoppable market. There have been some big bounces, too, which is often typical of a bottoming process. Between the fits and starts of selling and buying, traders are now considering whether the market will deflate any further before again turning higher. After all, corporate earnings are on track to expand 16.8% this year as the economy ramps up and tax rates recede, so the fundamentals provide plenty of support.

We saw signs at the end of last week that the selling had already reached levels as unsustainable as January’s buying was. The market swung all the way from overbought to oversold, starting the clock ticking on a bounce.

I always keep an eye on the market, even though my focus tends to be on individual stocks and charts, but with the unusually wild ride lately I think it’s worth reflecting a little on those broad conditions with an up-close look at the S&P 500

SP500 Chart

Technical traders often turn to the relative strength index (RSI, at the top of the chart) to signal when a chart is setting up for a reversal because it has moved too high or too low. A reading above 70 indicates that the bulls are running hot. As the recent rally demonstrated, stocks can run for weeks or even months with only brief pauses, so an overbought reading is not an automatic sell signal. We can enjoy the ride while it lasts. When the price action peaks, the RSI breaks down and we brace for at least a brief pullback.

These dynamics also apply to the other end of the trading cycle, with low RSI readings generally signaling a bounce. A reading below 30 indicates the stock or index is oversold, and they typically spend less time in this condition than being overbought. That’s a good summary of where we are right now.

The S&P 500 remains biased to the upside over the longer term and the fundamentals are intact. That makes me think that the index will eventually regain enough momentum to get back to and even beyond where the last bull run left off.

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