Almost exactly two months ago, I said U.S. stocks were poised for a “rebound.”
At the time, it was a pretty gutsy call.
After all, we were only three weeks away from the market’s Feb. 11 recent bottom. And surrounding that event were lousy earnings, dropping oil prices, China, the threat of a rate hike, the upcoming presidential elections and the ISIS war in the Middle East.
But it turns out I was right.
At the time I made that call, the Standard & Poor’s 500 was trading at 1,937. By yesterday’s close, the S&P 500 was trading at 2,081 – 7.4% higher.
That’s an annualized gain of 45.6%.
I’m bringing this up now not to boast.
It’s because I’m ready to make a new market call.
It, too, is bullish – and again counter to the “conventional wisdom.”
Let’s get started…
The last time I made one of these “market calls,” my “technical analysis” of the charts caught the attention of Bill Patalon, the executive editor here at Money Map Press.
And this one did, too.
At the time, we sat down to talk about it – and I shared that “chat” with you all.
I know many of you enjoyed that talk – and found it useful – so we decided to talk about my latest market analysis and prediction in the Q&A format, too.
Here’s an edited transcript of that talk.
William Patalon III: Michael, you and I talk virtually every day… and some of those discussions can be quite long and wide ranging. But today, let’s focus on your view of the stock market.
Michael A. Robinson: Sounds great, Bill.
WPIII: What I liked about our talks about stocks is that you look at the market from a technical standpoint. And you explain what you see from two very intriguing vantage points. The first is from a pure “Buy” standpoint. The second is from a “confirmatory” standpoint.
What we’re talking about here is the “moving average” metric, which lots of chartists use as “Buy” and “Sell“ signals. Specifically, you’re looking at the 50-day and 200-day moving averages.
For the folks who don’t use a lot of technical analysis, can you start by explaining what those moving averages are and how technicians use them?
Then, we’ll move on and you can explain, specifically, what you’re seeing… and put that into a broader context for your subscribers.
MAR: That all sounds great, Bill.
WPIII: Before we start… let me say one thing for the folks who are reading this. Michael, I realize that you and I both have many sophisticated players as readers. But we also have some folks who are more focused on fundamental analysis than technical analysis. And, of course, we have some newer, younger investors, who may be technical trading novices. For lack of a better term, let’s be “inclusive” in our approach to doing this…
MAR: Meaning we want everyone – regardless of their age or experience trading stocks and other investments – to be able to benefit from the insights and recommendations we bring them.
WPIII: (laughing) I couldn’t have said it better myself…
MAR: (also laughing) Like you, Bill, I was a journalist and author in a past life… (both laughing, now)
Okay, okay… Here’s a starting point that I think will help a lot of people who may not be all that familiar with technical analysis, or charting stocks.
It may help if you tell investors to think of the 50-day moving average as the “institutional line.” I say that because that’s the “simple moving average” that all institutions track.
WPIII: Actually, that’s a terrific point, Michael. There are different “flavors” of moving averages – the simple moving average being the most common.
MAR: That’s right, that’s right. In fact, here’s a tip: When you’re looking at a chart, it’ll usually tell you what “type” of moving average is being used. The “simple moving average” will be noted by a notation that looks like this: 50-day (SMA).
There’s also the “exponential moving average,” or EMA, which gives a higher weighting to more recent prices than the SMA. If you look at a chart, you’ll typically see one or the other marked… so you know which one you’re dealing with.
For now, let’s stick with the SMA… specifically, the 50-day “institutional line.”
WPIII: As you said, that’s the line that all institutional players track.
MAR: Correct. Okay… so let’s say that the price of a particular stock has moved above that line – and is holding steady there above that line. That tells us that, in all likelihood, fund managers are moving in.
Institutional funds – mutual funds, exchange-traded funds (ETFs), hedge funds, pension funds… all those folks – well, they’re too big and are deploying too much money to just jump into a stock with both feet. That would move the stock and broadcast the move.
Instead, these institutions “accumulate” positions. They’re too big to buy all at once, so they buy a little over time, giving the stock great bullish support over 10 weeks of trading, with hundreds of millions of dollars – if not billions of dollars – changing hands.
WPIII: That brings us to the 200-day line.
MAR: Right, Bill. For the 200-day line… well, that’s a sign of long-term support where individual investors are focused. It represents 40 weeks of trading and is also a place where bargain hunters step in and give the stock its final leg of support.
Ideally, you’d like to see a stock trending above both those lines…
WPIII: By “both,” you mean the 50-day and 200-day lines.
MAR: Exactly. And here’s why. When you see a stock trending above both those lines, it tells you fresh cash is still moving in. When they slope down, both can be great places to set “stops,” depending on when you got in. A stock that quickly drops below both is said to be deeply troubled.
WPIII: Okay, so chartists use the SMA as a “Buy” trigger. But now that these points have been crossed, these moving averages are telling you something about where the markets are going. Explain how you’re using these as “confirmatory” indicators.
MAR: It might help if we looked at a specific recent example from the S&P 500.
WPIII: That sounds good, Michael. Walk us through one…
MAR: Okay… let’s go back to mid-February… specifically, Feb. 11. On that day, the S&P 500 hit bottom. Within three trading sessions it had broken through the 10-, 20- and 30-day SMAs – which illustrated the fact that aggressive traders were snapping up “oversold” stocks… across the board.
Just four sessions later, the S&P broke through the 50-day line, meaning institutions were also buying en masse. As of last Friday, it had remained there for 46 straight sessions.
WPIII: Wow… that would seem to be sending a pretty strong signal. So what does that stay about the direction, strength and staying power of this rally?
MAR: That’s the key question to ask, Bill, and it’s a great one.
WPIII: In fact, it was right about here in our earlier discussion that I realized your insights were so good that I needed to share them with my subscribers.
MAR: That’s right… because no one is really talking about this.
The fact is, Bill, that this is the longest stretch the S&P 500 has traded above that 50-day line in months. That’s a lot of empirical data showing the rally was for real.
It means all the concerns about the U.S. Federal Reserve raising rates – and what that would do to earnings, the economy and stock prices – and about oil prices (which caused the January sell-off)… it means that all those worries are in the rearview mirror.
Investors across the board are convinced the market is healthy and a great place to put their money.
Let’s Make a Deal
WPIII: Good deal, Michael.
Okay… so we’ve been focusing here on the S&P 500. And there are certainly many tech firms in that mix. But what does this say about the “rest of tech” – you know, the smaller-cap plays that trade on the Nasdaq Composite Index? And what can we derive from this about the IPO market – which has been pretty rancid this year. In fact, just a few weeks ago, several biotechs yanked their IPOs – pulled back their deals – when it was clear there wouldn’t be a strong reception.
MAR: I think the IPO market will remain soft for at least the next quarter, and maybe through the end of the year. These things move in cycles. And for startups – the ventures that “go public” – the big concern right now is market volatility.
While the market hasn’t been all that choppy in recent weeks, if we look at the market profile over the last two years, we see enough whipsawing to make this a risky time for new IPOs.
Few CFOs want to go through the time and expense of an IPO “road show” – and set a date for the deal to go live – only to see the markets in turmoil just as the shares start trading. Pulling an IPO may be a smart move financially. But from a psychological or sentiment point of view, it’s viewed as a sign of weakness that can impair the pricing of your deal when you finally do launch.
WPIII: IPOs, private equity, mergers: All three have been bolstering factors for stock prices the last few years. And I know that we’ve talked extensively about each of these three types of deals. Because strong markets for IPOs, merger deals and even private equity are good for stock prices, these markets are important to follow. So what are you seeing for them?
MAR: Those last two – private equity and mergers – are going to be strong for the next several months, at least. Raising cash is pretty cheap for private equity firms that either want to take a stake in a startup or existing private company… or that want to do a buyout on a public company (or unit of a public company), which they effectively take private.
WPIII: There’s a pretty similar dynamic at work in the merger market, too. There, the “cheap” money is the piles of cash big companies are sitting on… cash that’s not earning much interest, making it attractive to use in sales and revenue-boosting buyouts.
MAR: That’s an intriguing way to look at it, Bill – and you’re right. Those deals are highly bullish for stock prices, because investors see that there’s a second way for the stocks they hold to advance… in addition to the rallies that are driven by sales and profits.
And cash isn’t the only “currency” companies can use for deals. When stock prices are high, as they are right now, suitors can use their own shares to finance part or all of a buyout. So companies in the hunt for “bolt-on” growth might feel a bit more urgency to identify potential targets and culminate those deals now, while stocks are at their highs.
WPIII: Thanks, Michael.
MAR: Thank you, Bill.
Next Up: Lightning Round
And that’s not all. During this latest long talk, Bill also conducted a “Lightning Round” review of the most promising areas I see in tech.
I’ll share that Part 2 of our Q&A later this week.
See you then.
- Strategic Tech Investor: Why Friday’s “Nightmare” Was Really a Pleasant Dream.
- Strategic Tech Investor: How One Eventful Phone Call Led Me to Predict a “Breakout” in Stocks.