Bull & Bear markets are based on Perceptions

 1st published in 2004 but has been updated in April 2018.

Bull  & Bear  Markets Follow the Same Pattern 

If you examine any longterm chart  (one that contains 20 years plus worth of data) you will notice that the experts are full of rubbish when they cover the topic of bear markets. Over the long run, every single one of them has been wrong because if they were right the market would not recoup its losses and soar to new highs. Therefore in that sense, every bear would have lost every single penny if he had held his or her short indefinitely.  Hence the concept of bear market investing is total nonsense for the average investor. It only makes sense for the professional who is willing and ready to jump in and out of the markets very quickly.

Get rid of your entrenched views and focus on reality instead.

The concept we are going to cover could anger some people with entrenched views and by the way this article is not against Gold. What one needs to remember is that Gold represents a sector of the market and no sector can trend upwards forever.  Hence, the Dow is likely to trend upwards far long than Gold in the long run.

We performed a search on the net and found several definitions for a bear market. Rather than list them all here and waste time and space, we will conclude by saying: there is no standard definition for a bear market. So it is open to interpretation, just as is almost everything in the financial arena.

We have chosen to define a bear market in terms of the  “The Trend is your Best Friend” concept.

April 2018  Comments

The markets are today are putting in patterns that match those of 2003 and 2009.  In other words, the patterns are more indicative of bottoming action the topping action simply because, for the most part of this bull run, the markets were hated. Investors did not want to allocate money to this market, so in, some ways, this could be viewed as the 1^st leg of the Bull Run that the masses will eventually embrace.

At this stage of the game, we would not be worrying about a bear market for market sentiment is still too negative and there many positive factors one of which is the massive Tax cuts that will provide the energy for this market to run higher.  Secondly, even though the Fed has decided to raise rates; interest rates are at historically low levels and they would have to rise significantly before they have any impact on this market.

Lastly and most importantly, the trend as per our trend indicator is still positive and so that means every pullback has to be embraced regardless of the intensity.

Final thought, most bears and bulls are arrogant, they both usually overstay their welcome. In our opinion, if the markets are getting ready to put in a top, then a small amount of money should be put aside to purchase puts.   The main effort should be directed to building a list of top quality stocks that you can jump into when the markets start to crash.

Remember that Bull  & Bear markets are triggered by the same factor; emotions do the talking. The masses always overstay their welcome in both scenarios.  Never let your emotions do the talking

Using this definition, we  can make the following assertion:

 

The Trend is your friend in Both Bull  & Bear  Markets

Bull  & Bear markets are based on trends; if you can determine the trend you won’t overstay your welcome in either scenario.  The masses are notorious for letting their emotions do the talking and that is why they always buy at the top and sell at the bottom.

Looking at the trend, we see the super primary trend of the Dow is still intact. In fact–get ready to hold your breath–we would have to break below the 1500 level to say the super long-term uptrend is over.

If one looks at any stock, it usually has three stages: the super primary trend and then 1-3 more branches before it corrects. At this point, it can fall back to the main trend line and then slowly return to its old former highs and even surpass them or completely vanish from the face of the earth. Looking at the Dow, you will notice that it has had four branches in total, which is rather extreme.

Overextended markets experience strong corrections that are often mistaken for bear markets

The market overextended itself to the maximum point, and it’s only logical that it should regress back to the mean. Since the upward move was so outrageous, it follows that the downward move should be equally outrageous.

So far we have just broken below the 4^th branch, which is entirely understandable and expected since the market had reached insane levels. But take a look at the chart. We could not even break below the 3^rd uptrend line, nor even touch it. This means that this market still has plenty of life in it, and all it did so far was wring out a fraction of the excesses in it. The NASDAQ had a more severe correction, and the reason is simple: the NASDAQ went from a place where one speculates to a place where individuals started to speculate as if they were under the influence of a potent hallucinogenic drug.

The stronger the pullback the better the opportunity

Take a long-term look. This pullback has been rather mild and in reality, nothing to be worried about yet. The new thrill-seeking investors, who were so busy getting high every day as they saw their portfolios soar in value every single week, got smashed with a super dose of reality when the market decided it was time to take a breather and rid itself of some the excesses. And since the NASDAQ was the place where speculation was the most rampant, it follows that it should also be the place where the correction would be the strongest and the fastest.

We have not even touched 7,000 nor breached it. Had we done so, this would have indicated further weakness. If we had breached it, we would have to break below 5,000 to invalidate the second main super uptrend line.

So where do we stand now? If you look closely, it sounds like we are in the process of completing a wedge formation, which will be very bullish if we break out of it. Also, we are slowly making higher lows, which is another bullish indicator. Another major bullish indicator is that for over six months now the number of new highs has seriously outpaced the number of new lows. This shows that the internals of the markets is improving and getting stronger.

When priced in Gold, the Dow is just trending sideways

What is fascinating is that Gold is also putting in a beautiful wedge formation when priced in South African Rands, which adds further credibility to the theory that the Dow is doing nothing but adjusting to the high level of currency inflation.

So in the short-term, it looks like Gold and the Equity markets can keep chugging up, however, Gold will be the final Victor since it has just begun its major uptrend.

I believe with the above data one can draw the following conclusions:

A pullback to the 8,800 to 9,000 area would be very healthy for this market. However, it is not necessary. If we pull back to even 9,400 to 9,500, it will serve the minimum criteria to provide the necessary ingredients to start the next phase of this rally. So far there is nothing incredibly spectacular about this rally when one looks at it regarding a stronger currency.

In summary, most of the move was due to a currency adjustment: the US dollar getting hammered to death and the markets just adjusting to reflect this inflationary process. (You can’t expect the market to stay at the same level if several hundred more million or billion dollars are chasing the same number of stocks.)

Dow Targets

If we can hold in the 8,800 to 9,000 range, then the outcome looks rather interesting. Esoteric cycle analysis (our proprietary indicator at the Tactical Investor) is suggesting the following targets if we can hold the above ranges:

1st target will be a break of the Dow over the 10,000 range
2nd target 10,500
3rd target 11,400
Extreme target 11,7000

Then we start the process that I call the crash and burn as the market corrects and comes back to a normal level. But before it does, an insane level of pain has to be felt. So when all is said and done, this market could end up in the 1,500 to 4,000 point range.

As we are living in unpredictable times, it would be prudent to own some gold and silver bullion

As John Maynard Keynes puts it, “Markets can remain irrational longer than you can remain solvent.”

And if you are nervous about the markets, then listen to Mark Twain:

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Mark Twain 1835-1910

If you claim to be a contrarian, then at the very least you can take the time to look at what I have to say. Understand that I am not pushing these opinions down your throat, but only providing other possible scenarios from the ones most of you have been given to date. Don’t shoot the messenger just because he is delivering a message that does not fit into your pre-built expectations scenario.

 

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Mass Psychology or Contrarian Investing