Three Steps and a Stumble

Many years ago the “Three Steps and a Stumble” rule was popularized, referring to a pattern of three hikes in the Fed Discount Rate as a precursor to major stock and bond market downtrends. While not as a relevant, we adopted our own adage decades ago of 3  tests and a tumble, where price support (or resistance) is reached 3 times and is often followed by a breakout of the range upon the 4th probing. This becomes a contrary opinion observation that when a price level becomes obvious, then it’s obviously wrong and will soon fail to hold. Since the October 29th 11% correction low we have now had 3 clear tests and reversals from this 10 to 11% support zone. With prices collapsing once again today it can be viewed as a developing 4th probing of support from which the odds are rapidly increasing that new 2018 lows are around the corner.

Pundits looking for an excuse for today’s sharp 2 to 3% market drop are claiming the weak jobs report today fueled concern of a slowing economy and poor earnings in 2019. Such associations with a jobs report are questions in search of an excuse for the unknown. Clearly if the market had fallen on a strong  jobs report, the headlines would claim employment gains forecasted an overheating economy and thus more credit tightening by the Fed. This has been a market that has sold off despite great earnings, great future earnings guidance, reduced credit tightening fears and even improved prospects of a China and US Trade resolution. The negative news response syndrome we discussed in October is continuing with precious few catalysts out there to propel prices higher. Without follow through actions by China to Buy US products and firmly acquiesce to Trump’s demands, we have a market that needs even lower earnings guidance and more extreme pessimism before cementing a bottom. When investors and pundits talk of a 2019 recession and selling all stock market rallies, that may be the psychological backdrop before stocks are ready to sustain a larger move to record highs once again. When we forecasted the October correction we also talked in November of a corrective price action into the 1st quarter of 2019 with lower interest rates and higher fear factors before the market was ready for another assault to new altitudes. The surprising Santa Selloff has only reinforced this outlook.  



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