Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs

Stock-Markets / Stock Markets 2018 Apr 25, 2018 - 03:39 PM GMT

By: Sol_Palha

Stock-Markets

Adopt the pace of nature; her secret is patience.
Ralph Waldo Emerson

For a long time, we have been stating sharp pull-backs should be viewed through a bullish lens. In this article published in Nov 2017, we stated the following; 

View strong corrections through a bullish lens. This game plan will remain valid until the masses turn bullish or the trend turns negative.  The stronger the deviation, the better the opportunity. Tactical Investor


 In the above article, we also noted that the trend had to remain positive and sentiment should not turn bullish. Things worked out well up until Jan of 2018.   In January bullish sentiment suddenly soared to a six-year new high and at that point, we knew all was not well.  For until that moment the market was soaring to new highs on negative sentiment, illustrating the principle of “a market climbs a wall of worry” to its fullest, but that all changed in January.

Interestingly, the Dow missed the low-end targets we issued in Nov by 1400 points, so does that mean the upward journey is over.  Before we answer that, understand that nothing trends up in a straight line; a healthy market always lets out doses of steam on its upward journey; sometimes the pullbacks are minor, and sometimes they are very strong. At the time we noted that the markets were extremely overbought and even went on to issue possible downside targets if the markets decided to let out some steam. 

 While the Dow is trading in the extremely overbought ranges, any pullback will most likely end in the 21,000-21,500 ranges.  For the correction to pick up steam, it would need to close below this level on a weekly basis.  As the trend is still positive, the odds of the Dow crashing are very low. At the most, the Dow would test its breakout point which falls in the 18,900-19,200 ranges unless the trend were to turn negative suddenly or the masses suddenly embraced the market with gusto.  At this point, the trend is strong and showing no signs of weakening.  Remember that the markets can remain irrational for much longer than most traders can remain solvent by betting against it. Tactical Investor

Instead of letting out steam, the markets overheated and continued to surge to new highs almost on a weekly basis until Jan of 2018. At that point, as we stated above bullish sentiment soared; the masses embraced the markets with gusto; in fact in Jan Bearish sentiment dropped to a multiyear low of 15% and bullish sentiment soared to 60%.   

So back to the question we asked before.  Does this mean the end is near?  That’s the billion dollar question and articles such as the two posted below whose sole function seems to be sensationalistic rather than realistic don’t help improve the outlook for the average Joe. Both articles were published on CNBC.

Stock market looks 'pretty fantastic' despite rising yields: Art Hogan

'Epic’ market bubble is ready to burst, and stocks could plunge, strategist warns

A stock market crash is not likely at this moment, because the market has pulled back sharply several times since January and the masses are nowhere near as bullish as they were in Jan of 2018.  Given the massive run, this bull has experienced the current action though painful from an emotional perspective is well within the norm. No market can trend in a straight upward line forever; the equation must balance.  We expect volatility to remain an issue until bearish sentiment surges past the 50% mark; a move to the 60% ranges would be ideal

The crowd is becoming anxious as evidenced by the data below:

Anxiety Index March 14, 2018.jpgBNB March 29, 2018.jpg

While the bearish sentiment still has some way to go to before it hits the 50% mark; bullish sentiment has pulled back strongly, and the number of neutrals has surged. Neutrals are bears with no teeth and bulls with no ba**s. Contrast the above reading to those from January 8, 2018.

BNB Jan 8 2018.jpg

Bearish sentiment was at a multiyear low back in Jan of this year; in fact, based on those sentiment readings the current pullback is minor. It is easy to get drawn into the “hysteria” and forget just how far this market has risen; the market is taking a well-deserved breather.


Conclusion

As this pullback was long in the making, the action is going to remain volatile until the bearish sentiment soars well past the 50% mark. From a psychological point, the only way to completely destroy this surge in bullish sentiment and to ensure it rises slowly would be to decimate the morale of the masses, and that’s what’s taking place now. 

While a crash spooks the masses for a while, nothing destroys investor morale more than uncertainty. When a market looks like its crashing; they are sure that the sell-off will continue.  Regardless of whether they are right or wrong, the perception of being right is there, and that’s very important.  The masses want to know what to expect and when they don’t, uncertainty sets in. Uncertainty is fantastic when it comes to the markets for the masses keep jumping from one camp to another; each jump demoralises them more and more.  This demoralising effect is very powerful for it provides the investor that has no emotional stake with an unbelievable long-term opportunity. The other way to demoralise the crowd (and this does not occur often) is for the markets to pullback extremely strongly; for example, losses of 30% or more over a very short period.  Market Update April 17, 2018

Dow April 24, 2018.png

This correction is likely to end in 23,400-23,800 ranges, with a possible overshoot to the 22,500 ranges.  The Dow would need to close below 22,000 on a monthly basis to indicate that the outlook is set to worsen. 

The Dow is likely to trade over a wide range, and the moves are expected to be very volatile; be ready to deal with intraday moves of as much as 1200 points in a day. The markets need to move to the extremely oversold ranges, and if you look at the MACD’s on the above chart, you can see that they still have room to trade before getting into that zone.  The rapid up-down action is the best way outcome because it achieves two objectives; it demoralises the masses and helps push the markets into an oversold state.  Until the trend turns negative, strong pullbacks should be viewed through a bullish lens.  We would build a list of stocks we would love to own and use pullbacks to build positions in them.

All the king's horses and all the king's men can't put the past together again. So let's remember: Don't try to saw sawdust. Dale Carnegie

by Sol Palha

www.tacticalinvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

© 2018 Copyright Sol Palha- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sol Palha Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in