What should traders have learned from the Nov-Dec 2018 crash?
There is only one answer really; fear pays poorly. We sent out an inordinate amount of updates during the crash phase, as we did through every crash like phase the market has experienced over the past several years. The reason we did this, was to prove in real time that giving into fear is a waste of time, money and good health. Once again the so-called crash of 2018 will have to be labelled as the crash that never was.
One day the market will experience something that will fall under the “crash” category that all the experts have been warning since the inception of this bull. For that to occur, bullish sentiment will have to soar to the extreme ranges and remain in that zone for an extended period.
Long before this pullback, we stated that this bull market would soar to heights that would surprise even the most ardent of bulls, and that prediction has mostly come to pass. Some of the most ardent of bulls started to keel over as early as 2016, and the last strong correction virtually knocked all of them out. So where did they err? Over-reliance on old systems; the paradigm has changed, the players have changed, and as a result, the perceptions have changed. When it comes to the markets; the main driving force is emotions (perceptions); everything else on its top day is secondary at best.
This bull market is unlike any other; before 2009, one could have relied on extensive technical studies to more or less call the top of a market give or take a few months; after 2009, the game plan changed and 99% of these traders/experts failed to factor this into the equation. Technical analysis as a standalone tool would not work as well as did before 2009 and in many cases would lead to a faulty conclusion. Long story short, there are still too many people pessimistic (experts, your average Joes and everything in between) and until they start to embrace this market, most pullbacks ranging from mild to wild will falsely be mistaken for the big one.
The results speak for themselves; the majority of our holdings were in the red during the pullback, but now they are in the black, proving that one should buy when there is blood flowing in the streets. It is a catchy and easy phrase to spit out but very hard to implement, because when push comes to shove, the masses will opt for being shoved.
We have alluded to the fact that there is a pattern between extreme weather and market action. Extreme weather usually pushes many people to act in wildly unpredictable ways. Look at animals when there is a sign of impending danger they act strangely, humans are not that different. The only real difference is that humans are not aware of this and tend to blame other factors for this irrational behaviour; this behaviour is reflected in and out of the markets. Violent crimes and or bizarre crimes usually surge during these periods. However, one of the best places to see this type of action is in the markets and the action over the past three months is clear evidence of this.
For example, the least probable outcome from Dec 2018 to Jan 2019 was for the markets to mount a strong rally, but that is precisely what took place. This pattern, if it continues, will provide another level (secondary) of confirmation that this bull market is destined to trend a lot higher than the most ardent of bulls could ever dream of.
The global rally in financial markets is unsustainable because it only seems to respond to changes in the real economy when it fits a certain narrative, according to the CIO of investment firm Fasanara Capital.
“I call it fake markets… you know, these days they talk about fake news (but) these are fake markets in a way right?” Francesco Filia, CIO of Fasanara Capital, told CNBC on Wednesday.
Filia argued financial markets had become “complacent” and “insensitive” to fundamental changes in the economy. He suggested while markets appeared to surge higher on so-called good data, a mirrored response lower on negative sentiment had not been evident.
“I think this kind of market environment is both unstable and unsustainable… at some point, something is going to happen that is going to all of a sudden wake up markets as to this overvaluation,” Filia said.
European bourses were trading lower on Wednesday after European Central Bank President Mario Draghi appeared to hint the ECB would be prepared to scale back its monetary policy amid improving economic prospects for Europe.
Why robot traders haven’t replaced all the humans at the New York Stock Exchange—yet?
As in so many other industries, robots have been marching into Wall Street for years. That’s especially the case in stock trading, where algorithms now do the majority of buying and selling. Instead of a boisterous trading floor, these days many US equity transactions happen in a data center in suburban New Jersey. One place where human traders are safe, though, is the New York Stock Exchange, which has roots going back two centuries. The stock exchange has made sure its human presence is protected, for now.
NYSE’s several hundred traders and brokers are the face Wall Street, and form a crucial part of the NYSE brand, which is perhaps the best known in the financial industry. The stock exchange packs a marketing punch few, if any, businesses can match. But given that computers dominate stock trading just about everywhere else around the world—and play a pretty big role at NYSE, too—it’s reasonable to ask whether the people milling around the trading floor at 11 Wall Street in Manhattan are worth keeping around. Critics argue that it’s a façade for television cameras, a kind of capitalist Disneyland.
Stock Market Fake Risk, Fake Return? Market Crash?
With seemingly everyone from the blogosphere to the Tweeter-in-chief chiming in on fake news, have investors considered their risk/return profile may also be “fake”? When it comes to investing, who or what can we trust, is the market rigged, and why does it matter?
For eight years in a row now, an investment in the S&P 500 has yielded positive returns. In recent years, expressions like “investors buy the dips” and “low volatility” have become associated with this rally.
In the “old days”, investors used to construct portfolios that, at least in theory, provided a risk/return profile that they were comfortable with. For better or worse, I allege those “old days” are over. To be prepared for what’s ahead, let’s debunk some myths.
One of the best places to invest in is the stock market, provided one understands how the masses operate. The mass mindset is wired for failure; it is programmed to panic when anything stressful presents itself and that is very dangerous when it comes to the stock markets. In short, as a business investment, the stock market could be considered to be one that provides the best return on capital provided one does not allow one’s emotions to do the talking.
Look at the recent headlines; all the top players are going out of their way to create a mountain out of a molehill. I wonder why? Are they doing this because they love the masses so much? We think not; the idea is to fleece the masses both ways; on the way and on the way down.
Nothing drives the masses more insane then uncertainty. Suddenly create the illusion of uncertainty, and all hell will eventually break loose. All hell is the secret code word for long-term opportunity. Individually these stories are not a big deal, but what stands out is all these comments were made around the same time; it almost seems like a coordinated event.
What was the difference between the Feb 2018 correction and the current one?
At least there was a proper trigger for that event. Bullish sentiment surged to a seven-year high, even though it only maintained this reading for roughly ten days. Had that correction morphed into a back-breaking correction, we could justify it as at least two triggers were there; bullish sentiment soared to a seven-year high, and the markets were trading in the extremely overbought ranges. This time around, bullish sentiment did not even make it to the 54% mark, and our indicators had already pulled back from the overbought ranges. In fact, they were dangerously close to the oversold ranges on the monthly charts.
The next interest rate hike was already priced in and so were the effects of the tariffs. However, when these events were weaponized, they started to become an issue. Now that the big players have seen the benefits of this type of attack first hand expect it to be used ruthlessly in the years to come. However, if you stop and focus on the forest as opposed to a single tree, this weapon will have no effect on you.
After everything was said and done, if you had held onto your shares from the 2008 crash and then added more as the market tanked incrementally, you would have made a fortune ten years later. Let’s look at some random examples. To simplify matters we are going to assume that one lot of each stock was purchased roughly at the highest price during the 2007-2008 top and an equal amount was purchased at roughly at the lowest price in 2009. However, any person employing simple Technical Analysis and Mass Psychology would have achieved a better average entry price, even though they did not purchase at the top or the exact bottom.
How Do Investors Respond to Uncertainty?
Uncertainty in the economy—triggered, say, by a change in government, a diplomatic conflict, or a turn of the business cycle—is usually considered bad news for people who want to invest their money. But a new analysis from researchers at the Yale School of Management and Northwestern University looked at an unprecedentedly wide range of markets and found that investors are more concerned about actual volatility in prices than periods of high uncertainty. Indeed, their analysis suggests that investors historically have viewed periods of high uncertainty as being good news.
Most people are unable to appreciate the difference between risk and uncertainty. When you invest in the markets or in any other asset class, there is an element of risk.
If you have seen investors getting confused between risk and uncertainty then they are not the only ones. Most people are unable to appreciate the difference between risk and uncertainty. When you invest in the markets or in any other asset class, there is an element of risk and also an element of uncertainty. In many ways, you can say that uncertainty is a very extreme form of risk. You can predict risk based on a mathematical formula and set the limits. In case of uncertainty, it is hard to set limits. That is why uncertainty cannot be managed; it can only be insured against.
The markets had already priced in Tariffs and a rate hike, but then things changed. Suddenly Trump had to emphasise that he is “tariff man”. Then he starts taking pot shots at the Fed. The Fed, in turn, takes shots at him, albeit indirectly, and the media goes ballistic. We are not taking sides here, what we are trying to portray is that old news was and is being turned into something sinister. Moreover, not a day goes by without some old nonsense being respun into a scarier version of the original story. When spin doctors are in charge of the media you need to take their sage advice with a shot of whiskey and a barrel of salt. In other words, when they scream you sing and vice versa. Mass psychology states that stock market crashes are buying opportunities; end of story.
Stock Market Tantrums Are Over, But For How Long?
Equities have been behaving like a recession is looming. That dire outlook seems overdone. While major global stock markets were battered in 2018 – and even the initially resilient U.S. Standard & Poor’s (S&P) 500 stumbled – we still expect equities to deliver solid returns in 2019. Assuming no price-to-earnings (P/E) expansion this year, and tagging on a 2% dividend, the S&P 500 could return 8%. Any modest P/E expansion could deliver 12% returns. Bank earnings this week, including JP Morgan and Wells Fargo, are likely to restore some faith in equity markets over the short-term.
Cataclysmic action in the fourth quarter left investors shell-shocked, as U.S. stocks plummeted and over 90% of dollar-based asset classes fell for all of 2018.
Macro monsters from trade wars, Brexit, slowing economic growth, a slump in global property prices, political uncertainty, yield-curve inversions, deficit explosions, technical breakdowns, etc., are lurking everywhere, leaving investors blindfolded while they try to navigate highly volatile market waters in search for a safe destination in 2019.
As we learned in 2018, extremes can become more extreme, long-term trends matter, patterns matter, divergences matter, technical disconnects matter and now we’re dealing with the aftermath and their implications.
My main market message for 2019: Pay close attention and stay fully informed. There are a lot of complex moving technical and macro pieces driving markets and the global economy that make for a foggy outlook for the year ahead.
The new year begins with a gnawing question: Is the stock market correction of the past three months a harbinger of an awful 2019, or a launchpad for a new bull market? While it’s folly to make a decisive stock market forecast for 2019, a few trends hold clues.
On the face of it, financial markets seem to sense trouble. On Christmas Eve, the S&P 500 index hit the 20% threshold for a bear market.
Few experts see a recession, but signs of slowing economic growth are piling up. The 10-year Treasury yield has fallen to the lowest since April, even as the Fed tightens and unwinds its quantitative easing program.
Of all these factors, two stand out because of their unpredictability and consequences: trade policy and interest rates. The trade war can expand suddenly into multiple industries and cause spillover effects. Markets fear Fed rate hikes will overshoot, sending the economy into recession.
Here’s a look at each of the seven factors, plus tips on how stock market investors can prepare for whatever 2019 brings.