MarketCycle Wealth Management
For anyone that has a mental block about reading financial information, you literally just have to take it one sentence at a time. I always attempt to include definitions on uncommon words such as “Fibonacci.” And there is a PDF/PRINT function at the bottom of the website.
Everyone on Wall Street is waiting for two things to happen before the market can move back up:
- Capitulation is where emotions become too high and everyone wants to sell and move to cash because the market is “going to go down to zero and never recover.” The market spikes down, but almost immediately the market begins to find some stability and to jump higher again as smarter people that can actually handle their emotions begin to buy at bargain levels.
- The VIX (a volatility measuring index) moves to above 40 (indicating a contrarian buy signal), but “40” is an absolutely meaningless number if you look at historical charts; it is one of those things that people believe that is purely random and it just isn’t true.
Mr. Market is smarter than are its individual participants and when everyone is looking for the same things, then something else is always going to happen. So there is a chance that the VIX does not go above 40 (it came close on Wednesday May 11th) and that there is no classic capitulation this time around, but that people just keep waiting in vain for capitulation to occur.
Mr. Market is the ultimate professor of Psychology. This time around, the purpose of this corrrection seems to be to cause so much confusion that everyone just gives up hope… and then the market will go higher again. Confusion? Yes. I normally send out Client Market Updates that might say “today is the exact day of the stock market bottom.” I’ve been able to do that repeatedly. This time around I’m a bit head shy and perhaps hedging my bets. Or am I?
What could drive the market higher from here?
- Investor sentiment is at an extreme low, which is bullish. Emotional panic selling means that the market is near a bottom and ready to move higher again. Corrections (a decline of between 10% & 19.99%) occur, on average, once every two years. The current correction has not been huge, but emotions to the volatility were REALLY huge… worse than the big Financial Crash of 2008. This “death-of-hope” is very bullish; stocks, like the Phoenix, rise again from emotional ashes.
- Negative retail sentiment has bottomed and is now improving.
- Institutional fund managers (who have to report) are now starting to buy the bottom.
- Stock buy-backs by corporations have quickly moved up to pre-correction levels again and this represents a huge amount of money out there buying stocks. Corporations have been buying up shares of their own companies, at bargain levels, out of what individual retail investors have been selling. The company becomes richer, the stockholders become richer and the stock market moves higher because of this activity.
- Margin has fallen sharply from “stupidly” high levels. Margin is money that is borrowed from a brokerage with the intention of investing the borrowed money. But when losses occur, then the brokerage makes you instantly pay off the loan via forced selling of your positions at the market bottom, permanently locking in your losses.
- The overvalued sections of the markets (think technology and crypto-currency) are now back down to earth and looking like a decent buy (even though this is the wrong point in the market cycle to be buying technology). In late-December and again in January, MarketCycle called the coming tech stock crash, especially in the FAANG stocks (Facebook/Meta, Apple, Amazon, Netflix, Google/Alphabet). We also called for Bitcoin to hit $30,000 or less, which it did this past week. $1-trillion has been lost by crypto investors in just 4 months. The die-hards are still calling for Bitcoin to hit $1-million per computer digit. Imagine that nonsense.
- Inflation (higher prices for consumer goods), which is actually the main thing that is negatively affecting the markets, has likely peaked in March and it has now leveled off, leading to a coming drop.
- Lower inflation would allow the Federal Reserve to back off of their aggressive interest rate hikes and this would be incredibly bullish for stocks.
- Supply chain issues are on the mend… the ISM Supply Deliveries Index has already recovered half of its down-trend.
- The post-virus hiring spree is nearing completion, with hiring plans falling (which will lower inflation).
- Most people don’t realize that the United States was the #1 producer of energy in the world, even higher than Saudi Arabia. But when the virus hit, production was rapidly shut down for obvious reasons (such as no driving). Now production is rapidly ramping up again and the extra supply should hit the street relatively soon. Very bullish.
- The U.S. labor market remains strong which means that consumers have money to spend.
- U.S. individual net worth is still at an all time high and ‘total individual liabilities’ has not moved higher despite falling markets.
- Consumer debt ratios are at a multi-decade low.
- In an attempt to come out of their very own private & deep recession, China is tossing tons of $-stimulus at their economy and this stimulus spreads out to the globe. China may not benefit because of continual 100% lockdowns, but the U.S. will likely benefit from this loose money… money on the loose.
- Mathematically calculated U.S. recession probabilities is at 4% six months out; this represents an incredibly low probability. Market corrections ONLY get really bad if there is a concurrent economic recession.
- The My-ratio, the most important investment demographic, remains strong until 2029. The My-ratio compares the number of middle-aged workers (35-49 years old) in an economy to the number of young adults (20-34 years old). Middle aged people invest much more strongly than do the young.
- If history is any guide, then we have 7 years left on the current 18 year long secular stock market bull, so regardless of what might happen in the near-term, the overwhelming odds are that we will be back to new stock market highs sooner than most people expect.
Please see the blue line below. When the number of bearish professional investors (advisors and fund managers) spike to this high of a level, then typically a bottom is about to be formed. At each of these spikes, investors feel that the world is about to end because of “X” reasons that “will never end” and the market “will never recover.” (Chart courtesy of Tom McClellan.)
So, does everyone agree with me that this is still just a typical & routine correction and not the end of the world? No, nobody agrees with me. The other day a friend expressed his concerns that the well known Albert Edwards, Chief Global Strategist at Societe Generale, is calling for the S&P-500 to drop to 3000. I had to point out that Albert Edwards has been bearish and continually (on the record) calling for a stock market crash since 2011, all while the S&P-500 has actually been climbing steadily higher and higher for that entire 11 year period. So, there’s that. When the markets are temporarily going down, the financial press and TV shows repeatedly trot these people out of the shadows. It makes for good publication readership and great TV ratings, but it also causes unwelcome confusion.
Below is the May 15, 2022 chart of the S&P-500 showing the strong (bullish) bounce off of support. There was bullish buying (after the spike down) at the end of the day on Thursday and very strong bullish follow-through on Friday. It was a sort of non-attention grabbing capitulation. On Thursday’s spike down, the S&P-500 hit 3858. In late-December of 2021, MarketCycle stated that we were about to enter a high risk period and we called for a bottom at around 3815. What we just hit was close to our original prediction.
It is funny how investors are worry free when markets are sky high and overvalued and risk is sky high, but they then panic when the risk has already dissipated and markets are lower and offering bargains. Again, risk is very much lower now than it was in January when everyone was euphoric. Will the market be up next week? Have we hit the market correction bottom? Well, what I do know is that, even as many investors are growing more pessimistic (is this you?), market conditions and indicators are rapidly switching toward bullish. Many market corrections have “three legs down” (down, bounce, down, bounce, biggest leg down, up?) and this chart shows the S&P-500 touching our (red) downward sloping trendline three times… with the third touch being mid-day on this past Thursday. I originally drew this red trendline on March 1st and projected it out into the future, waiting for it to be touched this third time.
There is a chance that stocks will want to touch the blue ‘Fibonacci line’ below and then bottom there because a lot of traders are looking for that. Fibonacci is a mathematical equation that dates from 200 BC with continual additional work & updates beginning from that early date. The numbers reveal a pattern that is seen literally everywhere in nature and some people transplant this concept onto investment assets. This may work, at least in part, because millions of technical analysis traders across the globe react to them in unison, creating a self-fulfilling prophecy.
This nautilus shell is designed by nature via a Fibonacci mathematical sequence:
For the upside, there might be, might be, (right now or soon?) clear sailing way up to 4450 on this chart where we would then, as always, carefully re-evaluate. This is all a bit of a moving target and we must re-evaluate anew each and every day. This would have been a shallow technical correction if not for the Ukraine war adding to the drop. Even with that, it would have been shallower without the current Chinese total-shutdowns adding even more to the drop. But odds are that we now start to react more positively (bullishly) to any additional bad news and even the Federal Reserve will do what it always does which it “talk” alot and not actually raise rates as high as they are currently threatening to do. And one thing that I look for is markets starting to move UP on any bad news that should drive them down and that is already happening now. I’m seeing bullish signs.
Chart of S&P-500 stock index on May 15, 2022:
In early November of 2021, right at its peak, MarketCycle predicted that BITCOIN would fall to $30,000 as its first level of correction and that if it fell below this support line, then it might fall even further. This downside target was reached (and then temporarily surpassed) this past week. Total investor crypto-currency losses for the first 4 months of 2022 are now at a whopping $1-trillion! It is possible that crypto speculators are in store for even more losses. Final bottom support is way down at $7500, although it might not reach that level anytime soon. If it did, it would certainly attract my attention as a screaming buy signal.
And we’ll close with this chart of GOLD. The following chart shows MarketCycle’s trading signals for gold since the year 2001… only two buys with one sell in between during a 21 year period. Clients joined with MarketCycle at various times, so not everyone participated in this entire move. This chart shows why people shouldn’t constantly be jumping in and out of investments.
That’s it. Thanks for reading!
MarketCycle Wealth Management is in the business of managing your investment account through rough waters. It is easy, low cost and smart because professional management can easily pay for itself.
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