Updated April 2020
Correction vs Bear Market
A sharp correction is what we experienced in Feb of this year. The pullback is sharp and swift, and the fear levels rise significantly. A backbreaking correction is different. The term itself is indicative of the difference. The pullback is very strong but the volatility is insane, and the market appears to be bipolar. Most Experts confuse a back-breaking correction with a Bear Market. The definition of a bear market is arbitrary and someone just decided to come up with a figure that states if an index is down 20% or so its in Bear Market territory. The entire Bear Market theory is based on rubbish because history illustrates that Perma bears never survive. Every bear market gives birth to a super bull market. The focus should be on the new Bull and not the bear that is destined to get slaughtered.
Chaos seems to be the order of the day, and even some of the most ardent of bulls start to question their stance. Every bull market experiences one such correction. However, it is impossible to tell in advance which correction is going to fall under the back-breaking category. Trying to determine which correction falls in this category has a very high opportunity cost. It is tough to break out of the “anxiety stage” if you have been stuck in it for a long time. These traders eventually get their wish of very strong correction, but they are so scared that they are unable to act; they continue to assume that the market will keep going lower and lower.
Correction vs Bear Market: Correction is more likely
We stated in July 2017 that the there would be one correction where the Dow would shed 3500-5000 points.
Without a shred of doubt, we can state that there will be at least one correction that drives the Dow lower by 3500-5000 points before this bull market is over. Market update June 2, 2017.
Two support points come into play. If the Dow closes below 2400 on a monthly basis, then we can expect the pullback to fall closer towards the 5000 point range. If the Dow closes below 23348 on a weekly basis, then the above outlook will also hold. 23348 is the low the Dow set in April of this year. Market Update Dec 18, 2018
As the above support points were taken out, we stated that the next stage was for the market to test the 22,000-23,000 ranges. That has come to pass, the next phase for the market is to tread water while building up momentum to trend higher. This stage is going to be packed with volatility as the market forces the weak hands to dump their stocks. Traders who have gone through this phase before will recognize for it is; a once in a lifetime buying opportunity event.
So do not focus on what happens if the stock market crashes scenario; instead, focus on building a list of stocks you always wanted to own at a lower price. History and Mass psychology both illustrate that Perma bears die broke and that stock market crashes have always proven to be buying opportunities; pull up and long-term chart and try to argue otherwise
Correction vs Bear Market: The Correction is being Blown Up
It looks grim, the media is pumping end of the world type scenarios, strong bulls are showing signs of weakness, and even contrarian investors are starting to break. Pure contrarians are smarter than the masses, but they do have flaws; the smartest investors are the ones that put the principles of mass psychology into play.
They observe the mass mindset, and they understand that even when fear starts to creep into the equation, they are compelled to ask this question: Was the crowd in a state of euphoria when the market topped out? If the answer is “no”, then no matter how terrible the picture might look, the end game is that the crowd is being set up for a false downward move. And the normal response would “why”. Simple answer, this is an advanced form of Pavlovian training.
Sentiment data reveals the Crowd is Nervous
Look at the above sentiment data; in the interim update sent out earlier today we stated that bearish sentiment would come in the 45-47 ranges; instead, it stands at 49, which is almost a seven-year high instead of a five year high. We turned cautious in Feb of this year and put all our plays on hold because bullish sentiment soared to a seven-year high; even though this surge in sentiment was temporary, it was enough for us to turn cautious. Given the current trend, the next update could push bearish readings north of 50. This data was collected up to Saturday of last week. Right now the number of individuals in the bearish and neutral camps adds up to a whopping 80; this combined score almost matches the reading of the 2008-2009 bottom. The last time we had such readings was over 10 years ago. Hence in the Stock Market Correction vs Bear Market story, the conclusion is all but obvious. This market is letting out some steam to build up momentum for the next upward leg.
Now look at the anxiety gauge, this is the lowest reading since the inception of this gauge and given the current trend it could end up redlining next week; we might even be forced to widen the range if the reading is significantly higher than this week’s reading.
Let us look at some other factors
- The S&P 500 is trading 14.3 times below 2019 earnings of $178 per share. However, we if remove the highly overpriced FANG stocks, it is priced roughly 12 times 2019 earnings. The historical average is 16.2
- Value line states that over 100 companies have a forward P/E of 8 or lower; the last time this took place was during the 2008 meltdown but the economy was in shambles at that point, and that is not the case today.
- A lot of fear is being created due to an inverted yield curve; first of all not all inversions lead to recessions, and secondly, there is roughly a two year lag between the inversion and the recession
- Investors are sitting on hoards of cash; this refers to those that were active in the markets. If we include those who have avoided the markets, then one can state that there is a huge group that has missed this entire Bull Run. They will be dragged into this market for the top player’s need many suckers do dump their huge holdings onto.
- The number of “Gloom & Doom” articles is surging, and soon we will have individuals predicting Dow 10,000. Insanity sells; investors were lapping the nonsensical targets of 100K, 200K and the last target of $1 million issued for Bitcoin with straight faces. Very few insane high-level projections have been made for the Dow.
A Brain Surgeon In Action
7 years and counting he predicted that the markets would crash and he is still waiting for that crash. Google him on youtube and you will see him mouthing the same rubbish over and over again
A backbreaking correction is not easy to deal with. In fact, it is hard for everyone to deal with; the only way to get through it is to pull up long-term charts and examine previous corrections. When you look at those charts, try to imagine what the investors felt as the markets pulled back. If you experienced one of these previous corrections remember the thoughts flashing through your mind. One does not have to go back to far; 2008-2009 the markets experienced one of the most brutal of corrections. The master of “Gloom” was projecting Dow 2K during the height of the corrective phase; ten years later, one can clearly see how full of rubbish they were. These same guys are now laying out similar predictions.
The best time to kill a Bull is when it is fat, lazy and arrogant. The current bull is a lean and could turn into a “mean fighting machine” after the recent pullback. For now, in the Correction vs Bear Market argument, the focus should be on a Market correction as the trend is firmly positive.
Stock market Outlook April 2020 Update
Now the Fed has stated that they will inject as much money as they see fit. In other words, the Feds are openly admitting to forever Q.E.
And how have the masses reacted; they are begging for more. Do you have any idea of what this kind of money will do the markets in the years to come? The naysayers can talk all they want about supply lines being backed up for months or other scenarios that they pull out of their rears. The fact is that the market will eventually discount (if it has not already done so) all those scenarios. Furthermore, these experts are severely downplaying the role of technology. Suddenly a host of businesses are going to see that a lot of personnel can be replaced with AI-based technology without interrupting the flow of goods. Replacing them will improve efficiency on a colossal scale.
Once the markets discount all the bad news, this massive mountain of money is going to flood the system, and it is going to make the Bull Run from 2009 look like Child’s play for the amount of money the Fed has already thrown into this market makes 2008 look like a stroll in the park. Officially we think they will throw north of $5 trillion; unofficially the figure could end up being north of $10 trillion.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Sunday night on CBS’s “60 Minutes” that “there is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system.” https://yhoo.it/2JdtRlH
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