Fortune Favours the Brave
Igor Manukhov - Apr 14, 2025
Buy when your hands are shaking.
On April 1st, I raised some cash in the discretionary model portfolio based on something that I saw in the charts. Before we dive into the chart of the week, I want to explain the reason for doing so.
As I mentioned in one of my articles back in February, a key indicator to monitor during times of uncertainty is high-yield bond spreads (the orange line on the middle panel). This indicator reflects the risk appetite of bond investors. When the orange line rises (spreads widen), it signals growing unease in the bond market. On the other hand, when the market declines but spreads do not rise, it is usually a strong indicator that we are experiencing a minor selloff. I haven’t seen a bear market where spreads did not increase. So, this is an important metric to track.
On the other hand, when market rebounds, spreads are expected to tighten. The reason I raised cash is because that I saw that that spreads did not go down in late March despite a strong rally. That gave me a reason to become more cautious. That decision was not based on market price, in fact market was up that day when we sold. I just wanted to take a minute to demonstrate that there is a method to the madness, and it does work.
Now, back to the chart of the week. After all the weakness we have been seeing, the most important question now is: When is it time to buy? First of all, I will say that it is almost impossible (other than by accident) to pinpoint the exact market bottom. The second-best outcome is to buy at a price that you can live with. Remember, the market went down almost 20% since the peak, so you are getting a pretty good price as it is.. Could it go lower? Sure, but when sentiment is this fearful, history suggests we’re much closer to the bottom than to the top.
The horizontal lines on the chart below point to some of the key price levels. Last week, despite all doom and gloom, the market bounced back at around the 4850 – 5000 price level. It tells me that there are a bunch of people that are ready to buy at that price despite all the uncertainty (red line). I would be very comfortable putting funds to work anywhere near those levels if we get there. Even at current level (5200 on Thursday), prices are good for a long-term investor. One indicator giving me this confidence is the Bullish Percent Index (pink line at the bottom). This indicator measure in percentage how many stocks in S&P500 index are trending up at the moment. The current reading of 17% is very low and anything under 30% is considered to be a good time to buy for long term investors. Last time we had a similar reading was back in October of 2023 (green circle). What followed was one of the best rallies on the books.
When the market rebounds, I will be carefully watching upcoming resistance levels at 5500 (blue line) and 5800 (green line). The market has pivoted previously around those areas. Failure to clear those levels would signal more downside risk. Successful rally through those levels will mark the end of this selloff.
In conclusion, I want to emphasize that historically, all bear marks are temporary and what always follows then is the above-average rebound. I am convinced that in year or two from now, people will look back at these times and regret not buying some shares at these attractive prices. But attractive prices only show up with some bad news. As long as you are buying high- quality investments (as we do), you will be handsomely rewarded by the market for braving this storm.
