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May
01
2017

What Happened to the Stock Market Crash experts were predicting
Sol Palha

Any jackass can kick a barn down, but it takes a carpenter to build it.- Sam Rayburn

One jackass (oops we mean expert) after another, has been predicting that this market is ready to crash. The problem is that these brain surgeons have been making this argument for so long it almost sounds like the definition of insanity. Insanity boils down to doing the same thing over and over again and hoping for a new outcome. These predictions are so off the mark that they make a broken clock look fantastic which happens to be right once or twice a day depending on whether you follow military time or not.  This market is unlike any other market; it has moved from being the most hated bull market to the most insane bull market of all time. In such an environment technical analysis is technically trash and fundamentals are fundamentally flawed. In fact, for the most part, market technicians have no idea of what they are talking about; they figure that by studying someone else theory or drawing squiggly lines on some chart they can decipher the market. 

We have dealt with at least 15 so-called expert technicians who claimed to have found the Holy Grail; in the end, their theory was full of holes and could not account for sudden and rapid trend changes. Technical’s do not drive the markets, and neither do fundamentals; emotions drive the market. Understand the emotion, and you can identify the trend. Identify the trend, and you can determine the primary direction of the market. If the trend is up, then you don’t need to worry about crashes or correction; the market will not crash when the primary trend is up. It will, however, experience corrections, all of which will prove to be buying opportunities until the trend changes.  Simple, prudent money management skills will protect your profits and reduce your losses.  Fundamental analysis is even worse; at least technical analysis can be useful when combined with sentiment analysis. Fundamentals boil down to pouring over standard data, and you are usually looking at what happened and not what will happen. We will not spend more time on that topic as in our opinion fundamental analysis is in today’s markets is a total waste of time.

Let’s look at the NASDAQ as it recently achieved a very important milestone

What many experts fail to understand is that a bull market starts only after the old high has been taken out. Until that occurs, it’s not a real bull market. In that sense, the NASDAQ bull has just started. For over 15 years the NASDAQ struggled to overcome this hurdle. Jack in the box is what comes to mind; so like a coiled spring, it is ready to trade a lot higher before it breaks down.  The NASDAQ has already broken past the psychologically significant 6000 level, so the odds are fair to high that it should roughly double from its breakout point; a move to the 9000-10,000 ranges might appear insane now. Experts would have felt the same way if someone told them that the Dow would be trading past 21K after it dropped below 7,000 in 2009.

Don’t expect the upward journey to be smooth; the higher the Nasdaq trades, the more volatile the ride will be. In the interim, it would not surprise us if the Nasdaq eventually dropped down to the 5200-5400 ranges with a possible overshoot to 5,0000 before testing 6700.

Sentiment data

Sentiment continues to paint a fascinating picture as it indicates that for the 1^st time in decades the crowd is not driven by panic or euphoria; they are uncertain, and uncertainty is the 1^st stage of fear, so that means we are a very long way off from hitting the Euphoric zone. Overall, looking at the situation from a mass psychology perspective what we stated in 2014, 2015 and 2016, continues to hold; this bull market could end up running a lot higher than the most ardent of bulls could ever envision. It has already caught some of the most ardent of bulls by surprise; some of them even turned negative this January.  

A back breaking correction needs at least two elements; the masses should be euphoric, and the market needs to be trading in the extremely overbought ranges. At the moment, the market satisfies only one of these conditions. A small wave of selling will propel the masses into the hysteria zone, which will create a mouth-watering opportunity. Markets don’t crash when the masses are in disarray; they crash when the crowd is jumping up with Joy.  The experts will probably confuse the next correction for a crash, but what can one expect from individuals who have been on the wrong side of this Bull market since its inception.

Conclusion

Uncertainty seems to be the order of the day; experts are uncertain, and so are the masses. Last week two stories were published on the same day; one was arguing for a crash and the other one stating that the markets are going to rise. What’s different this time around is that everyone is universally confused. That should be scary right. Everyone does not know what’s going on, so something bad is likely to occur. Well, that is what they want you to believe, but as students of Mass psychology, we find this line of thinking to resemble that of those housed up in Ward 12.  Market Update April 20, 2017

The stock market is trading in the overbought ranges, but the markets are more likely to experience a correction than crash as the sentiment does not support a crash. Also, the NASDAQ recently broke through a zone of major resistance and in doing, so a new bull market was triggered. This bull market is unlikely to end before the NASDAQ trades to the 8500-9000 ranges.  In between, we expect corrections ranging from mild to wild, but they should not be classified as crashes.  Given the strength of this market, the odds favour some sort of correction in the summer, and unless something changes dramatically between now and then, the Dow will probably not trade lower than 19,500 on a monthly basis.  Until the trend and the sentiment change, strong corrections should be viewed through a bullish lens.

Sure of their qualities and demanding praise, more go to ruined fortunes than are raised. - Alexander Pope

 

The Tactical investor is the place where Mass Psychology and Technical analysis converge seamlessly to keep you on the right side of the markets. Emotions are the driving force behind every human action, so understanding what the masses do and how they think is imperative when it comes to trading and long term investing.  Market Sentiment Analysis is key to determining long-term trends.  Stock market crashes or strong corrections should not be feared as long as the trend is positive; they should be embraced for they provide the astute investor with the opportunity to purchase grade A stocks at a significant discount. 

Instead of trying to predict where the Stock market is headed, the emphasis should be on studying the herd. It is the change in the herd mentality that dictates what the market does. The reason most fail in this endeavour is that they do things backwards, they treat the market as a separate entity and try to find out what it is doing and then determine what the crowd will do. When in fact, what they should be doing is looking at the crowd and then using the information to determine how the market will react. It is the group/crowd that drives the market.  A market soars to new highs or crashes to new lows because of the way the masses are interpreting the situation.  How can you predict something if you are not looking at the source? Human beings are the most illogical of all animals. Despite having the power of reason and logic, they are the only creatures on this planet that will go out of their way to make sure they are in harm's way.  When you understand the mass mindset, trying to time the markets takes on a whole new meaning. This is why at the Tactical Investor, we dedicate an inordinate amount of time to studying the herd; we want to know what they are doing, why they are doing and if the Market sentiment has reached a boiling point or not.   This data can be coupled splendidly with technical analysis to render a clear image of what is going on in the markets

At the Tactical Investor, our focus is not only on Technical analysis, for technical analysis spots the symptoms of the disease, but it does not identify the cause.  The trend indicator blends the best elements of Technical Analysis with the relevant field of  Mass Psychology as understanding the Market Sentiment plays a key role in identifying future trends. Our investment philosophy is very simple, identify the direction and stick with until it ends. We could list a plethora of reasons as to why you should join our service,  but instead of doing that, we will let our past calls speak for themselves

 

 

 

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