Technical Talk: Two Clashing Views on the Market’s Direction

What do technical signals from 2008 and 2016 suggest for equity investors today?

Amid the current volatility, we have been examining chart action in major U.S. equity indexes for key signals. In a previous column, we featured readings on the Russell 3000^® Index in the midst of the March equity selloff. At the time, we believed our preferred technical signals were nearing oversold conditions, an indication that the heavy selling pressure seen at the time might soon be easing.

Indeed, that view roughly coincided with a bottom in the Russell 3000 on March 23, 2020. But an update on the chart (Figure 1) for April 21 appears a little more cautious, in our view. We believe that such readings are a normal part of the ongoing bottoming process for the market.

Reading Key Technical Indicators during Prior Periods of Market Volatility
Price (top) and price relative to 150-day moving average (bottom) for the Russell 3000 Index, April 21, 2005-April 21, 2020

Source: FactSet. Data as of April 21, 2020. A moving average is a technique often used in technical analysis (see below) that smooths price histories by averaging daily prices over some period of time.

The information shown is for illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

But looking at the current moment through the prism of history, for us, the chart calls to mind the old Clash hit, “Should I Stay or Should I Go?” Should investors “go” (sell) because market conditions are similar to the deep-seated factors that drove the Global Financial Crisis in 2008, or “stay” (remain invested) because the environment is more like the transitory volatility experienced during 2016?

Let’s take a closer look at the chart. The first arrow, reflecting the 2008 timeframe, suggests that investors “go,” but that was a time during which the health of the entire financial system was called into question. A move below the index’s 150-day moving average was another negative signal from a technical analysis standpoint. The second arrow points to the worst of the 2016 market selloff, prompted by fears of a significant economic slowdown in China. This correction, although severe, didn’t threaten the health of the financial system and suggested that an equity investor “stay” until the storm passed. On the technical side, the Russell 3000 also breached its 150-day moving average, but was able to recover at a much quicker rate than 2008, which was considered a positive signal.

We believe the latest exogenous shock to the markets caused by the pandemic crisis suggests that investors should “stay” and patiently allow the market to go through what we would consider a normal corrective phase. We believe that we have seen most of the price correction, but still need to patiently endure the periods of additional volatility that may ensue. In the meantime, we are watching for several signals to give us a potential “all-clear” reading. A good start would be for the price of the Russell 3000 to get back above the 150-day moving average, in our view.  Until then, the Clash song likely will stay on repeat for some investors.

That said, we believe that in particular, one segment of the equity market presents a compelling rationale for investors to stick around: the shares of innovation growth companies. As Lord Abbett Investment Strategist Brian Foerster opines, “The economy is increasingly evolving into a binary story of two types of companies. You are either an innovator, or a company vulnerable to the disruptive effects of innovation.”  We think investors should “stay” with great companies that are innovators in their field--and that display positive operating and price momentum.

We believe combining fundamental and technical analysis is central to our efforts to generate returns—and manage risk. We will continue to provide updates each month to help equity investors make sense of current technical trends—and the opportunities they may present.