No Improvement So Far
Given the severity of the selloff in stocks in late August, it was not surprising
to see the subsequent rally attempts fail. As we noted numerous times in recent
weeks, including September
3 and September
17, bottoms tend to be a process.
Retests Take Many Forms
The expression "retest of the lows" covers numerous market scenarios, including
the historical cases shown below when a higher low was made. A retest can stay
above the recent low, hit the recent low, or exceed the recent low. The key
is we need to see evidence of a sustainable turn on our timeframe; something
that has not happened over the past few weeks.
Does The Big Picture Support An Imminent Low?
This week's video looks at reasonable downside targets for the S&P 500
(SPY), which helps put some more context around the "retest" subject.
Few New Hints On Monday
There was very little in Monday's session that said "today is the final low".
For example, the VIX "fear index" held on to most of Monday's gains into the
close. The chart of the VIX below has shown some renewed improvement in recent
days.
The S&P 500 (VOO) also closed near the session low, with long-term Treasuries
(TLT) closing near the session high, which is a "fear" look, rather than an "imminent
and sustainable bottom" look. Monday's volume on SPY was above average (in
contrast to many recent green days when SPY volume was below average).
Retest Is Not A Prediction
Experience says it remains important to keep an open mind about all outcomes
(bullish and bearish). The term retest can bring some bias to the table if
we are not careful.
Investment Implications - The Weight Of The Evidence
Could stocks post a green day Tuesday? Sure, green days occur all the time
during downtrends. We want to see evidence of a sustainable turn. That evidence
can begin to surface at anytime, but under our approach we need to see it rather
than anticipate it. Therefore, we continue to maintain a defensive-oriented
allocation.
