Home Stock Market Commentary Don’t Let Anyone Kid You, We Are In A Generalized Market Sell-Off...

Don’t Let Anyone Kid You, We Are In A Generalized Market Sell-Off And It’s Tough – Mike Swanson (05/16/2022)

On Friday, the DOW went up over 400 points, with the Nasdaq gaining over 3%, and after the close and over the weekend people came out calling it the bottom, but didn’t we just see a wonder rally two weeks ago when the DOW went up 900 points in a day? A lot of the most heavily shorted stocks went up the most on Friday. Even ARKK went up 11%, and GME and AMC had big one day rallies too, so a lot of Robinhood types are feeling hopeful.

Unfortunately, there is no reason to think that Friday’s move was a real bottom.

My guess is that we’ll see the S&P 500 trade around the 3850-4075 price zone for a few days or even a week or two and then have another leg down, much like it did when it went sideways around 4200 or 4450 in April.

While it is the stock market action that mesmerizes everyone, in the end the single most important fact in the financial markets is the simple one that bonds began a secular bear market last year. Since bonds trade opposite to interest rates, when rates went to zero in 2020 that made a secular bond bear market inevitable. People had plenty of time to make changes before it started, but most did nothing and still are doing nothing about it, even though this bond bear market is the biggest factor impacting the stock market and will continue to impact all of the markets for the years to come.

When bond yields are less than the rate of inflation there is no reason to buy them and holding them means losing money. One is better to be in cash that can then be used when the markets really do bottom or use the proceeds of bond sales to diversify into commodities, precious metals, and foreign markets. Investing strategies involving diversification like that should leave the 40/60 bonds/stock allocation in the dust. Throw out the 40/60 portfolio model and take a look at the Yale Endowment model as something to learn from.

When people lose money in the markets they often lash out at manipulators or blame a conspiracy for their losses – I’m sure you are seeing people doing this on social media now. How many crypto people are claiming that whales are making the prices to drop so they can buy cheaper? What they don’t understand is that manipulation is done on the upside and not on the downside. They look to blame others instead of taking responsibility and control over what they are doing and trying to figure out how to adapt and adjust to them. That makes tough times only get tougher for them. And we are in a tough situation in the markets now. It isn’t fun for anyone.

I believe the markets entered a tipping point two weeks ago when the S&P 500 closed below its March lows and its lower 200-day Bollinger Band that turned a decline in the stock market into a generalized sell-off that is now impacting everything. The price action reminds me of what happened in the financial markets in September of 2000 or September of 2008. When the stock market averages broke down in those months selling hit everything for a few weeks. I’m not saying we are heading for a financial crisis like what happened in 2008, but we’re just in a period where everything can drop down for a bit. In 2000 gold got hit and made a bottom months ahead of the stock market low, after the decline that started that September, and then outperformed the stock market for over ten years.

The S&P 500 is still trading below its lower 200-day Bollinger Band. When the S&P 500 broke below its 4100 level the losses simply multiplied and spread. People on margin had to start to sell. The selling caused the crypto coin market to malfunction last week. Something else crazy is likely to happen before this is over. That’s just what happens with declines like this, but such selling pressure is what makes a generalized sell-off and is likely what hit gold, silver, and mining stocks in 2008 and is causing some pressure on them now. Silver closed below $22 a few days AFTER the S&P 500 closed below 4100.

I’m bullish on gold, silver, mining stocks, commodities, and energy stocks, but I’m going to be a sober bull and recognize that they could all dip a little bit more before they turn up and breakaway from the stock market action like they did in the Fall of 2000.

I wouldn’t be shocked if gold doesn’t fall down to $1750, its support is at $1800 and then the $1700-$1750 zone.

After its recent drop, its not hard to think that gold could easily fall into the $1700-$1750 area. However, the gold/spx relative strength ratio has been going up even with the dip in gold. That means that gold is still outperforming the stock market and is a place to be invested. Just like gold did in 2020, look for it fall less than the stock market on this generalized sell-off in the financial markets and then go up faster and better than the stock market once it is over!

I think the key for everyone in the markets is to be in a position to be able to buy when this market decline is over and to be patient until there are signs that it is really over, which means to wait for real panic selling. The VIX is likely to be at least over 40 before this is over and I’d look for down day with more selling than buying among Fidelity traders to mark a real bottom.

Stock trading and investing is a lot harder than it looks. There are lot of people who got into the markets in 2020 via Robinhood and really got themselves tricked by an illusion. They saw people show them big gains in individual crypto coins or screenshots of Robinhood accounts with AMC up a lot and thought that is normal and that making money is just as easy as being in the next hot thing, but it’s a lot harder than that and a lot more complicated than the impression given to them by the market action of 2020 and 2021. If you are new and don’t know what the VIX is, don’t understand the 200-day Bollinger Bands, or have losses much larger than those of the S&P 500 then you don’t know really know what you are doing. You need to stop and read up on technical analysis and investing. You need to buy and read some books and make sure you have a real money management strategy.

Few will tell you that, because they know most people don’t want to hear that, but it’s the truth and millions of Robinhood traders wiped themselves out in the first quarter and millions more will do so this quarter too due to simple laziness to put in any effort to learn.

That’s what happens in bear markets, just be a little bit slower, a little bit too lazy to move, and it eats you while others get away from the bear attacks.

The Robinhood traders today are no different than the daytraders of 2000, because human nature has not changed since then.

People saw internet stocks go bust in 2001 and real estate go bust after, but convinced themselves that the stock market bubble of 2021 was not a bubble. They watched Cathie Woods and listened to others mimic her technobabble instead of consider the ramifications of facts such as this:

The real question isn’t why is the stock market falling this year, but why did it go up so much that it became a bubble again in the first place?

The most important thing for bonds is that the bond market made a secular bull market peak when interest rates went to zero.

Likewise, the most important factor for stocks now is the simple one that they went into a bubble that peaked out last year and so are now in a bear market.

How do you make money?

When you have a generalized sell-off taking place you have to be very careful and you have to focus on the few sectors and stocks going up on their own in a bull market of their own. You need to focus on those things outperforming the stock market. Even with its recent decline of last week, gold is still up year to date while the Nasdaq is down 24.83% so far year to date.

Again, what I think is happening now is that when the S&P 500 broke to new lows and below its lower 200-day Bollinger Band we got a point where the market drop has brought enough losses to cause some to have to sell to get off margin or others to just want to cut risk and raise cash and that creates some selling in everything.

That happened in 2008 and in the fourth quarter of 2000.

See how the market broke that September below the lower 200-day Bollinger and summer lows back in 2008.

The action the other week reminds me of the point I have circled on this chart for the S&P 500 when it dumped below its lower 200-day Bollinger Band that September. Gold fell in October towards $700 after peaking around $1000 in July. It also bottomed out and formed a positive divergence against the stock market in October and November and went up way ahead of the ultimate stock market bottom in March of 2009.

I’m not trying to suggest we are repeating what happened then with the economy, real estate, or even the stock market, but that we seem to have begun a generalized sell-off two weeks ago in the financial markets just as one started in September of 2008.

Personally, I don’t think the stock market is going to crash, but I could see the S&P 500 giving up 50% of the gains it made since 2020. That would take it down to the 3400-3600 level, probably by the end of the summer. I can see gold going to $1750. I can’t predict it, we can only watch how it unfolds and wait for signs of a real bottom. Things could turn out worse and that’s why having cash reserves is key in a time like this. It’s the only way to be able to buy when it is over.

I started a public portfolio a few weeks ago, but I doubt I’ll be making any trades in it this week.

Let’s see what happens.

As far as making successful trades in this market, consider this. Most people are losers in the market. Terrance Odean did a study of over 100,000 brokerage accounts over a year and found half the people lost money in what was a bull year for the markets and only about 20% make outsized returns above the return of the averages. It follows you don’t want to be doing what most people are doing. Well, most people in the crypto market you see are proclaiming themselves to be HODL’ing while most active stock traders we can track on Fidelity are just trying to buy the same stocks that were fads a year ago and now are trading well below their 200-day moving averages.

The real trick as I ‘ve said before, is to buy what outperforms the market. When the market drops the best things will hold up as the market declines and breaks away from the averages and goes up. You can see how gold did that in November of 2008. So watch gold closely and if it repeats that behavior in the coming weeks buy it! And watch other things and buy when they do the same thing! Throwing more money at the same broken stocks like everyone else is doing is the loser’s strategy. What I’ve talked about here is the winner’s strategy. Market declines like this bring an opportunity to implement it.