The stock market finally had a week in which it went up after the DOW fell seven weeks in a row. Despite last week’s rally, this year is the worst performance for the S&P 500 starting year to date in over 50 years. Everyone I have been reading over the weekend is looking for some sort of a rally, even people bearish on the market, but most commentators now are saying that the selling is over.
In realty bear markets turn just about everyone into a day trader, who becomes mesmerized by short-term action. Active traders stop trying to buy and hold and turn into people trying to game rallies and jump in and out of the markets. It’s a game that’s just about impossible to win at, because it means going against the intermediate-term trend of the markets.
Buying dips in bull markets is the easiest way to make money, but buying dips and rallies in bear markets only works if you can time getting out before the next dump and that’s a game just as hard to do as trying to short the market during a bull market.
At the same time, most people simply don’t admit to themselves that there is a bear market and just continue to try to do what worked for them before, or expect every rally to turn into a new bull market. They would be best to just stand aside and be patient, but they cannot stop trading they cannot stop gambling as the market daily price moves mesmerize them, and those on Robinhood only see that.
So, on Twitter I see posts like this when I load it up before writing this:
Global stocks have gained $3.6tn in mkt cap w/a positive feedback loop may be forming, as @knowledge_vital puts it, whereby stocks rally, inflation cools, Fed tightening expectations abate, yields drop, Shanghai reopen, recession fears diminish, all of which drives more buying. pic.twitter.com/rrieuyi0ae
— Holger Zschaepitz (@Schuldensuehner) May 29, 2022
There is no way to look at this chart and see anything on it that says this is the end of the bear market.
There is a saying that a bull market climbs a wall of worry.
One could say that bear markets go through multiple bear market rallies of hope until they end in a final panic capitulation in which everyone gives up.
We have yet to see any meaningful signs of such a thing all year.
Yes, the market could rally for a few days here, or for a week or two, or it could start falling again faster than anyone expects, but here are the resistance points to now watch in the S&P 500.
Current resistance on the S&P 500 is now in the 4185-4300 area, the zone of the 1/3 and 1/2 retracement level of the decline and the 50-day moving average.
If you want to buy into this rally that is the area you will have to contend with.
Something you need to notice is how the VIX made a lower high.
That shows that there is no real fear in the market and is warning that the recent low is not the ultimate bottom of this bear market.
Personally, I have ZERO interest in buying this rally.
I like to buy into sectors, markets, and asset classes on dips in bull markets, which is what commodities and related stocks are now in, so that is what I’d look to buy.
How do you define a bull or bear market?
A bull market is when the 200-day moving average is trending up and acts as support and during a bear market the opposite happens.
The way to make money in a bear market is to short the market or weak sectors on rallies.
I already have some shorts as hedges on my long positions so I would only consider adding more if the S&P 500 were to rally or hold up here long enough for the daily stochastics on the S&P 500 to get overbought by going over 80.
There is no guarantee that will happen.
I also am just content to hold the long positions I already own and am not really looking to add to them until there is another dip in the market.
Basically, I’m not looking to do much at the moment in my accounts or in the public portfolio I started at the beginning of this month.
Another way to understand this – is when the stock market is in a bear market most people become so focused on daily action that they essentially turn themselves into daytraders, but most of the time the daily action is meaningless and so are the reasons given for it.
It’s better to think of the market in two time frames.
The first being a long-term or intermediate time frame.
For me looking at the 200-day moving averages makes that simple.
The next is a shorter time frame used for entry points to align yourself with the intermediate-term trend.
The stochastics indicator at the top of the chart is one way to do that to find dips to buy in bull markets or overbought readings to use to sell and reduce positions or short in bear markets.
When it comes to buying if you want to beat the market the way to do it is to buy those things beating the performance of the S&P 500.
For instance if you buy XOM you are more likely to beat the market than if you were to buy something like COIN right now.
Notice how the XOM/SPY indicator is trending up, showing that it is outperforming the S&P 500.
When a stock or sector lags for months, such a trend is a massive warning sign, as you can see for COIN.
The difference between Exxon and Coinbase is obvious.
Exxon earnings are growing as part of the rise in energy prices, as part of a powerful underlying inflation trend in the economy.
Coinbase is a company that went public on this last bull cycle as one of the bubble stocks and linked itself to the crypto bubble, which topped out a year ago.
So, it’s no shocker that the stock is a disaster and the company has been laying off a large portion of its workforce.
Fundamentals and valuations (where you get in) really do matter.
COIN is not a buy here even though it went up 7.98% on Friday unless you are able to predict when that move is going to end and sell.
I own a position in XOM and have none in COIN.
COIN insiders and management have sold BILLIONS of worth of their own shares since the stock went public, while it remains a top 100 position for Robinhood account holders and has repeatedly showed up as a top buy on Fidelity this year.
-Mike
