Is there a case to buy stocks? Yes, if you consider one of the most important indicators out there, the S&P's proprietary oscillator the one that analyzes too much buying or too much selling.
Right now we have too much selling, as the oscillator registers a little south of 5%.
I have been getting this oscillator, a paid product of the S&P, for more than 30 years and it has rarely steered me wrong. In fact, the only time I can tell you it said to buy, which means it fell to below minus 5, and it didn't work - meaning it was wrong to commit capital - was right before the Great Recession. Buys back then sure backfired because we weren't in a garden variety selloff. We were facing systemic risk, meaning the republic was in jeopardy.
I know some Trump-haters feel the republic is, once again, in jeopardy, but I am talking about facing an economic catastrophe. The Great Recession caused a huge spike in unemployment. At 3.6% we sure don't have that now, although one could argue that if employment is weak enough when we get the non-farm payroll number this Friday that could be the beginning of something bigger and more harsh.
Still, I doubt that, so to refresh the when we have a non-systemic risk decline, the S&P's oscillator pretty much says you have to do some buying when we get to minus five, with zero being equilibrium and plus five meaning you have to sell.
The idea is that an overbought reading means too much euphoria and an oversold reading means too much pessimism.
At my old hedge fund, at any given time, I always had a gigantic number of shorts. At minus five I would cover those shorts and I would do pyramid buying as we went down, meaning bigger and bigger buys.
Now, how has the oscillator been during the Trump administration? Has it led us astray? Not at all. We've had four instances over oversold readings: minus 10 in February of 2018, minus six in March and April of 2018, minus seven in October of 2018, and the big dog, minus 12 in December of 2018.
What went on during this periods? First after a prolonged period of placid increases during 2017, in February of 2018, we got a shocking surprise, the president told us he was going slap on steel and aluminum tariffs worldwide in order to get the Chinese to stop dumping through other countries. We didn't know it as the time but there was a cohort of speculators who were betting against volatility and they exacerbated the decline. Terrific buying opportunity provided you weren't that aggressive and bought in pyramid style.
In March the Chinese retaliated and you got another terrific buying opportunity which included a retest which held.
In October? Not so hot. Chairman Powell indicated in a variety of forums that the economy was way too hot and we needed one rate hike plus three more. It sent the market in a tizzy, but buyers didn't seem to realize that the economy was actually peaking.
Traders had to sell the bounce and then buy back stocks when the fed raised rates even as it was getting very clear that the economy was growing weaker. Still you had to stand there and buy because you had to believe that Chairman Powell would see the error of his ways.
He did but if you waited and didn't buy the oversold it was already too late.
I think we could be in a similar situation. As I said earlier, we are in a process of paying less for stocks because of the arbitrary and capricious nature of a president who has decided to turn against the stock market because it has become a hindrance to larger plans.
The pattern, though is to believe that he will either reverse course - remember he is totally erratic - or we will have prices in the man's capricious nature. That's what we are trying to do now. It's brutal but that's just the way the oscillator bounces and bounce it will. Probably soon enough if not right here.