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Date: November 26, 2018

The Makings of the Bottom

Coming back from being out of the office for over a week is never easy although I received a few emails doubting I was actually away since I sent so many updates last week. It’s not that hard when your kids like to sleep in and you don’t. I got a lot done before any of them, including my wife, starting stirring in the morning.

Stocks came back from the Thanksgiving feast with the bulls firmly in charge early on. This is very unusual behavior as we would normally see strength last week and some give back today. When I ran my numbers and models over the weekend, I saw almost across the board strength and improvement in the face of lower prices last week. That may seem a bit counterintuitive. The stock market went down but my research became more positive. That’s exactly what happened. Prices went lower, but the internals of the market actually improved.

Look at the Dow with the Volatility Index (VIX) beneath it. The VIX spiked to its highest level in early October but has made a series of lower spikes, showing less downside momentum and ripe for a turn in the Dow.

Those conclusions don’t say anything about the next day or possibly week, but it does further confirm that the next significant move should higher as I have been stating for a few weeks. I think the risk/reward is strongly skewed to the upside by a factor of at least 3:1. Looking at the Dow, sure, prices could tick just below 24,000 or 2% lower, worst case. On the upside nothing has changed. Dow 27,000 should be seen in Q1 of 2019. That’s a 5:1 spread. Not bad if I am right.

Volatility is going to remain. Lots of repair work still needs to be done. The incredibly strong seasonals that everyone was quoting last month have fallen flat on their face. Investors have become fairly¬† negative. The news flow isn’t good. Between the Fed, Europe and tariffs, there much to worry about. All the ingredients for a stock market bottom are here.

Author:

Paul Schatz, President, Heritage Capital