“What would you do if you were stuck in one place and every day was exactly the same, and nothing that you did mattered?”
– Bill Murray’s character “Phil” in Groundhog Day
With a few minutes left in the trading day, it appears the major stock averages will end slightly lower following yesterday’s strong rally. It was a wild ride today with stocks bouncing between 3-digit gains and losses to close down by just a few points. In light of the recent declines, it feels good close near unchanged on the day but we are not yet out of the proverbial woods. A re-test of the recent lows is likely still ahead before we clear this correction and begin to head higher…..for awhile.
An old trading adage suggests the low reached in December by the major stock averages represents support for the upcoming year. If that price is breached then more downside is likely ahead. However, if the price holds then a successful re-test has likely occurred and stock prices are likely to resume their rise.
Well, the low for the Dow Jones Industrial Average in December was 23,921 and occurred on December 1. Then, on Groundhog Day, the current selloff began in earnest. The low reached on Monday was 23,923 before closing about 400 points higher. The average then climbed 800 points yesterday before today’s whipsaw action.
There is no coincidence that stocks, on Monday, fell to the low reached in December and held. It is also not surprising that stocks have rallied from that test of support. What we also believe will prove unsurprising is a retest of the ~23,900 level. This will be the real test of whether the rally will resume from here.
So, we will be paying attention to the Dow Jones Industrial Average (and the S&P 500 Index) to see if we fall back to the 23,900 level over the next several days. This represents a decline of almost 1,000 Dow Jones Industrial Average points. So, just like Bill Murray’s character in Groundhog Day, we might have to endure the craziness that began on Groundhog Day one more time before we move on. Will it take 6 weeks like Punxsutawney Phil told us we will need to wait for warmer weather? We do not think so.
Sincerely,
Kessler Investment Group, LLC