Monday, October 13, 2014

The Ebola correction? Oh, PUH-LEEZ!

I know that I had a bearish bias in my last post (see In the 7th inning of a correction), but the late day stock market sell-off Monday was getting a little overdone.

In that post, I noted that the SPX closing below the weekly Bollinger Band is a rare event. In the chart below, I have highlighted instances where the dual condition of 1) the SPX at the lower Bollinger Band and 2) an oversold on the 5-week RSI have existed. We have seen five instances in the past five years and we are seeing a sixth now. I have also drawn vertical lines marking those episodes, where the blue lines indicating that the market rallied soon after and red indicated that the market continued to decline. In only one instance did the SPX continue to fall and that was during the eurozone crisis of 2011.

Not convinced? Here is the chart of the SPX for 2005-2010. Unless there is a clear fundamental trigger for the market weakness, these dual oversold conditions have marked near-term bottoms.

Is Ebola the bearish trigger?
So what's the trigger for this latest round of market weakness? Ebola? Oh PUH-LEEZ!

Imagine the following conversation:
"I'm really worried about the news about ____A____".

"Yeah, if ____A_____ gets you, you're pretty much a goner. I hear that about 10,000 people die a year from it."

"We should quarantine people from _____B_____, where most of the problem comes from. That way we could protect ourselves."
For some perspective, try A="getting shot by a gun" and B="the United States" instead of "Ebola" and "West Africa". Get a grip, people.

While the fatality rate from Ebola is horrendously high, the economic impact of SARS (though not necessarily the human impact) was no doubt higher because of the much higher level of commerce done in Asia. The main economic impact of the Ebola outbreak so far has been on cocoa prices.

Instead of panicking, investors would be far better served by watching earnings reports in the days to come.

Given the obvious lack of a bearish trigger for the market weakness, the odds favor a market bounce that could start at any time. After the reflex rally, however, I remain cautious on equities as global growth appears to be rolling over (see my last blog post In the 7th inning of a correction).


Anonymous said...

possible triggers...
As you say, global growth appears to be rolling over. Or a taper tantrum.

Anonymous said...

And the relief rally will be a bull trap !!