Date: January 27, 2020

The Excuse to Go Down

Last Friday, after what seemed like Coronavirus avoidance, stocks reversed sharply to the downside. Been there before. Got a tee shirt. One day patterns look amazing on a chart when they work, but foolish when they don’t. Today, it looks like we will see a nasty down opening which most are blaming on the spread of the virus over the weekend although some have wrongly opined that this is all about Bernie Sanders’ rise in Iowa. That’s just nonsense. Markets don’t care about the election right now. If Bernie was really surging, you would definitely see healthcare become one of weakest sectors.

Anyway, as I written about and mentioned in the media, very strong trends that grind and creep higher day after day after day typically do not end by going sideways. While they last longer than most people think, they usually end by a short, sharp decline that wipes out days and weeks worth of returns. That serves to punish those who jumped on the bandwagon very late in the game.

For many weeks, I have been discussing what has become among the most greedy sentiment on record. That’s still the case, but even this small decline should begin the repair process. Last Friday, I wrote that “A short-term pullback is long overdue and everyone is looking for one. However, remember one of the market adages. When it comes, investors will either not buy the dip or it will be the dip that they finally shouldn’t buy. Right now, I am betting on the former.”

Let’s see the extent of the damage done today. Heading into 2020, so many people were looking for or hoping for a decline back to 3000 on the S&P 500. With the big January rally, that would now amount to a 10% correction. I don’t think that’s in the cards right here.



Paul Schatz, President, Heritage Capital