It doesn’t pay to fight the tape, but the stock market could be poised for a big-time rally once the current selloff subsides, a veteran chart-watcher said Thursday.
“This move lower is starting to feel a bit ridiculous, but we try not to argue with Ms. Market,” said Mark Arbeter, president of Arbeter Investments, in a note. “If and when this thing turns, we should see some rip-roaring rally.”
A relentless six-day selloff pushed major indexes into market-correction territory on Thursday, defined as a drop of more than 10% from a recent peak. The move was attributed by investors largely to fears over the rapid spread of the COVID-19 virus outside of China. The Dow Jones Industrial Average ended the day with a loss of nearly 1,200 points, or 4.4%. The S&P 500 dropped 4.4%.
In a phone interview, Arbeter told MarketWatch that the early push off the session lows had been encouraging, with the S&P 500 finding support after briefly trading below its 200-day moving average at 3,046.91. The 200-day average is seen as an important gauge of an asset’s longer-term trend.
But while the move had raised hopes for a low, the S&P 500 extended losses in a late selloff to end near 2,978.
The potential for an eventual “rip-roaring” rally, meanwhile, is a consequence of the nearly vertical drop by the market from its all-time highs — a move that left little in the way of potential resistance on the S&P 500 chart below the 3,200 level.
Arbeter said he was encouraged by “clear evidence of panic in both sentiment and market breadth measures.” Chart-watchers look for such signs of capitulation, clearing out weak-handed traders, exhausting sellers and paving the way for a rebound.
In terms of market breadth, Monday and Tuesday saw 90% of stocks fall, “which means everything was thrown out,” he said.
Chart-watchers and other market observers have noted a plethora of oversold market signals in recent sessions as the selloff intensified, but some have cautioned against moving to immediately buy the dip. They argued that a “reflex rally” would likely be met with selling pressure as investors who missed the opportunity to sell in the initial leg down use a bounce to reduce positions.
Market bears contend stocks are headed for a prolonged selloff and the potential end of a long-running bull market if the spread of COVID-19 results in a global supply shock.
But Arbeter said he suspected the market was more likely to see a V-shaped recovery, much like the bounce seen in the wake of the December 2018 selloff that took the S&P 500 to the brink of a bear market before giving way to a sharp rally that didn’t see a meaningful pause until spring 2019.