Continued loses over the last few weeks have many investors understandably concerned about the direction markets are going. Though many have stated a 10-15% correction was overdue and that volatility was abnormally low, now that we've seen a double-digit correction, the question is: Where do we go from here? Is the beginning of a new bear market or was the drop last month just another machine-led Flash Crash in an ongoing bull market?
Legendary technician and market historian Ralph Acampora of Altaira Investments provided his thoughts in a recent interview with Financial Sense Newshour.
Prior to the Dow’s recent 1,000-point loss, Acampora thought the market was going to see at least a 15 to 20 percent correction, he noted.
“I would say, right now, looking at the current market, we made a near-term low,” Acampora said. “In fact, this market should have a very spirited rally.”
When it comes to the S&P 500, Acampora said we might see 2,040 to 2,060 on the upside. Then, following the rally, Acampora expects a retest of the lows.
“There’s going to be some kind of a selloff,” he said. “And it fits in with the seasonality of the markets’ September-October period. Now the question is, do we make a new low (during this coming selloff)?”
“I think we’ve seen most of the decline,” Acampora stated. “If we make a new low, I think it will be very, very quick, and it won’t be as deep and severe as what we saw. I think we’re in the bottoming process. I need a little more evidence. I need that selloff after the spirited rally.”
Traditionally, 75% of bear markets are accompanied by rising inflation, oil prices, and interest rates, along with a very aggressive Fed, and an economy going into decline, Financial Sense’s Jim Puplava noted. But this isn’t what we’re seeing, and other factors appear to be at work when it comes to the recent turmoil. The presence of high-frequency trading in the markets had an impact on how these declines played out, Acampora noted.
“This is cyber warfare that we have going on,” Acampora said. “If there were human beings at the post that day, we would have never seen that kind of decline.”
The result was that investors saw an awful lot of damage happen very quickly.
“In the old days, a specialist would step up, go to the floor governor, and say ‘listen, I can’t open the stock,’” Acampora said. “They would talk about whether he opens the stock down a point or half a point. But they had to get permission to do that. Today, I don’t think there’s anything like that.”
Now that we’ve seen the second HFT-fueled 1,000-point selloff on the Dow – the 2010 flash crash being the first – we’re learning that markets have a ways to go before they figure out how to deal with these kinds of rapid machine-led declines.
“What it did technically to a lot of graphs, it just ripped them apart,” Acampora noted. “Support levels were breaking like eggshells. Trends just got crushed. Just from a shear technical point of view, there’s been a lot of damage that has to be corrected.”
This doesn’t mean new lows are inevitable, he said. What investors should do now is look to identify new strength in different sectors, Acampora added.
“Classically, the groups and sectors that go down the least in the selloff are going to be your new leaders coming out the other end,” he noted. “I’m watching very, very carefully for those potential shifts in leadership.”
Now might be the time to shop for blue chips with healthy dividend yields.
“You get these sharp selloffs, and you get (dividend) yields that are so attractive,” Acampora said. “(If) you’re talking about quality blue-chip stocks, and you have a long-term horizon, this is the kind of market you do (that in).”
Ultimately, Acampora, a secular bull, doesn’t see another bear market forming.
“I’m not in the camp that we’re going to get a 50 percent decline,” he said. “I can’t say for sure we’ve seen the absolute low. But so far we’ve done enough damage to at least get a very spirited rally. … Come the end of October, I think we’re going to know for sure if this is all washed out completely. I have a feeling it will be.”
News out of China could cause more volatility, he said, and he reiterated that sector rotation will be important going forward.
“That’s called relative performance, relative strength,” he said. “The institutions, the guys with all the money, that’s exactly what they’re looking for. … Rotation from one sector to another is the lifeline of every secular bull market. Because you can’t have the same leadership all the way up. It’s got to rotate.”
For now, the best thing to do is pay attention and note trend changes.
“Just be patient,” Acampora said. “It will be volatile, but it will bottom out.”
Listen to this full interview with legendary market technician Ralph Acampora by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekday premium podcast by clicking here.
