Yesterday’s decline took us down through prior support levels that had held ground on several occasions during the last month or so. In essence, we had been trading in a band with 1000 on the S&P 500 as the upside and the 2001 lows of 820 on the downside. In technical jargon, when the markets break through either support levels on the downside or resistance levels on the upside, the theory is that the new range on the upside or downside should be as wide as the prior range. So, the theory goes, with a 180 point prior range, the new support level on the S&P 500 would be 820 minus 180, which is 640, with the new resistance level as 820, which was the prior support level. Got it?
We do pay attention to technicals, but like other tools in the toolbox – including fundamentals and valuations – they aren’t a magic elixir that works in all environments. Just as valuations seem to be the most useful at their extremes, technicals may likely be the worst at their extremes. In essence, any stock that is falling should theoretically fall more and any stock that is rising should theoretically rise more. This is the epitome of momentum investing, both in extreme upside and downside markets. Certainly, momentum does work during periods of time, but we also know that trees don’t grow to the heavens nor do all stocks fall to $0. While the $0 target seems plausible in this horrific environment, is that a realistic expectation when gobs of cash is sitting on the sidelines earning a paltry .3%?
All of this takes me to the analogy of sports competitions. We can see momentum in action during the play of nearly every major sport. I am amazed at the scoring streaks and slumps you will find in many fast moving games, especially basketball. Last week, I went to the Cavaliers/Jazz game in Cleveland with my brother, two of our sons, and the Alzheimer’s Association, where I am a board member. During the first quarter, the Cavs took a commanding, double digit lead. During the second, the Jazz took over with a double digit lead, led by Carlos “Boo Him” Boozer. The scores did this two additional times during the final half, with the Cavs ending up on top and winning the game by double digits. It was an exciting game.
What causes the momentum of the game to turn, even when it seems like Lebron James can do no wrong or Carlos Boozer can do no right? How is it that Cliff Lee, the AL 2008 Cleveland Indians Cy Young winner, could have been nearly flawless and unhittable in 2008 and yet demoted to the minors just one year earlier, viewed as a possible wash out? What causes the turn in intra game or intra year play? Do we know? Will we ever know?
I don’t know what causes shifts in momentum, but I do know that it does occur. I’d also bet that it’s pretty realistic to suggest that to find out, you have to stay in the game.
Are you in the game?