Bullish or Bearish? Week of April 8, 2019

Here are the most recent market indicators:

S&P 500 is above its 200-day moving average = Bullish 

S&P 500 is above its 50-day moving average = Bullish

S&P 500 one-month trend = Uptrend (Bullish)

RSI: (S&P 500) @69.79 = Overbought (Bearish)

MACD: Above zero line but even with its signal line (Neutral)

Daily Intraday Volatility: Moderate

Comment: With help from the algos, the market was able to rally during the week, but on low volume and enthusiasm. The jobs number was excellent but the market yawned at the results, but managed to drift slightly higher.

By several measurements, the market appears to be in a bubble, yet most people don’t realize it. In fact, we won’t know it’s really a bubble until after it pops or deflates. Judging from history and experience, this is a bubble that will not end well (they never do). Unfortunately, no one knows when or how it will end. But all bubbles end, and all end badly and with a huge amount of pain for investors.

I admit I’ve been amazed this market bubble has grown so big and has continued for so long. Think about this: The Fed tried to let the air out of the market bubble by raising interest rates .25% in December, and the market plunged by 20%.

Since December, the market staged one of the greatest comebacks in history. With RSI at 70, we are definitely in overbought territory, so it won’t take much to send the indexes lower.

This weekend, the financial press was filled with positive stock market news, and some of the most bearish analysts are either throwing in the towel or saying “the market will go to SPX 3000 before it retreats.” Even those calling for a recession claim it won’t happen for at least two years.

If there is anything I know about the market, no one knows what is going to happen. Once you realize that no one knows anything, then you will take steps to diversify (if you are an investor) or hedge (if you are a trader). You might be giving up some profits when using hedge strategies but it’s better than losing your shirt when the market either #1. Plunges by 20% or more within a month or so, or #2. Rises to SPX 3000 before plunging by 20% or more.

Meanwhile, here’s a must read excerpt from Lance Robert’s column (his website is listed below). In particular, look at the SPX charts:

“There Is A Decent Probability You Have Never Seen A Bear Market

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. After a decade long bull-market cycle, which only seems to go up, you can certainly understand why mainstream analysis continues to believe the markets can only go higher.

What is concerning is the rather cavalier attitude the mainstream media takes about bear markets.

“Sure, a correction will eventually come, but that is just part of the deal.”

What gets lost during these bullish cycles, and is found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline.

Let’s look at the S&P 500 inflation-adjusted total return index in a different manner. The first chart shows all of the measurement lines for all the previous bull and bear markets with the number of years required to get back to even.

What you should notice is that in many cases bear markets wiped out essentially a substantial portion, if not all, of the previous bull market advance. This is shown more clearly when we look at a chart of bull and bear markets in terms of points.

Whether or not the current distribution phase is complete, there are many signs suggesting the current Wyckoff cycle may be entering its final stage of completion. 

Let me remind you of something Ben Graham said back in 1959:

“‘The more it changes, the more it’s the same thing.’ I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, ‘the more it changes.’

The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound,  then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market.

In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one.”

He is right, of course, things are little different now than they were then.

For every “bull market” there MUST be a “bear market.” 

The sell-off last year, which amazingly enough has already been forgotten, should have been a wake-up call to just how quickly things can change and how damaging they can be.

There is no difference between a 100% gain and a 50% loss.

(For the mathematically challenged: If the market rises from 1000 to 2000 it is a 100% gain. A fall from 2000 to 1000 is a 50% loss. Net return is 0%)

Understanding that investment returns are driven by actual dollar losses, and not percentages, is important in the comprehension of how devastating corrections can be on your financial outcome. So, before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins,” there is a huge difference between just making money and actually reaching your financial goals.

But experience will cure all of that.

See you next week. “


For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter:www.wolfstreet.com

I will notify you of my posts via twitter@michaelsincere

Understanding OptionsUnderstanding StocksStart Day Trading NowAll About Market Indicators