Has the market bottomed: Potential Playbook

Has the Market Bottomed?

Feb 26, 2023

Has the stock market bottomed?

In pulling off this feat, the bears would throw in the towel, propelling the markets higher due to short covering. The bulls thinking that all is well, would buy the rip, and then when everything looks fine and dandy, the guillotine is likely to fall. Tactical Investor

This chart provides an overview of how the big players will probably try to set both the bulls and the bears for a massacre. They don’t make as much coin when they target only one group. How would they do this? One sure way to trick both the bears and the bulls would be to make the Dow and several other indices break through their downtrend lines and create the illusion of a new bull. In this case, this would correlate to a move to the 34,300 to 34,650 range. In pulling off this feat, the bears would throw in the towel, propelling the markets higher due to short covering. The bulls thinking that all is well, would buy the rip, and then when everything looks fine and dandy, the guillotine is likely to fall.

The Borrowed Playbook: Lessons from 2008-2009

Interestingly, despite the strong rally the markets have mounted, bullish sentiment is trading significantly below its historical average, informing us that the big players borrow from the playbook used during the 2008-2009 correction. More importantly, it seems to be working magnificently, we might add.

Has the market bottomed, and what is the playbook? Scare the masses so severely that they refuse to invest in the Market for years. While the masses sit on the sidelines, the big players can continue accumulating shares in the best companies at a fraction of their original price. This technique can’t be used all the time. Otherwise, the crowd would catch on. It appears that it is employed every 12 to 14 years.

Confusion and Opportunities in Market Sentiment

Another factor contributing to confusion in the market is the recent attempt by the AAII Investor Sentiment site to create their version of a “Greed Indicator.” While measuring the spread between the Bulls and the Bears may be a commonly used method, we believe it is not the best measure of fear. Instead, we suggest combining the neutral camp with the bearish camp and subtracting that total from the number of bulls to get a more accurate picture of investor sentiment.

The neutral camp comprises individuals who are hesitant to take a position, including defanged bears and dehorned bulls. By overlooking these individuals, we risk misinterpreting the market sentiment. However, this confusion can also provide opportunities for savvy investors to build long-term positions.

Conclusion

When the masses are scared and running for the exits, it often signals a market bottom is near or has already occurred. This is because when fear is at its highest, many investors sell their positions, creating oversold conditions in the market. This can create a buying opportunity for contrarian investors willing to go against the herd mentality and buy when others are selling.

However, it’s important to note that this is not a foolproof strategy and can be risky. It requires understanding market psychology and technical analysis to determine when a market bottom is truly in place.