Stock market bulls this fell into yet another bull trap this week. The market managed to rally for two days this week and then smashed to give up all of those gains and more yesterday as the DOW fell over 1,100 points in a stock market slaughterhouse. As I wrote Monday – “don’t let anyone kid you, this is a generalized market sell-off” in process.
First, take a look at a chart of the S&P 500.
The market had a big wonder rally on Tuesday, but the gap down Wednesday on the open put all of those that got tricked into buying the rally into a classic bear trap. Many in the markets have never been in a bear market before and really don’t understand what is going on. What is worse is things such as the Robinhood app have such little information on them that they can’t even put the daily price action in meaningful context.
As you can see, the S&P 500 peaked out right below 4100 and below its lower 200-day Bollinger Band. The S&P 500, and the Nasdaq, aren’t just trading below their 150 and 200-day moving averages, but also below this lower 200-day Bollinger Band. Markets trading below that indicator like this are in a strong decline, and that is what is going on.
Despite the big drop Wednesday, Fidelity traders once again piled in on the action trying to buy many of the same fad stocks again that were hot over a year ago.
It’s awful to keep seeing AMC and GME on the list.
Yesterday, though, they also tried to pile into shares of Target and Wal-Mart as they were both crashing.
Both companies reported disappointing earnings this week due to higher costs. Inflation at the oil pump, for one thing, makes it more expensive for them to move goods from the warehouse to the consumer box stores where they are sold.
At the end of my Monday post I talked about how to actually buy in a bear market.
The trick is to look for assets classes, ETF’s, and stock sectors that hold up while the stock market drops.
I showed a chart of how gold fell with the stock market in September of 2008 and then actually held up in October and November as the stock market kept making new lows. That was the bottom for gold from then on.
My point is, if we see gold hold up while the stock market has another leg down that would be a huge buy signal.
Gold did go up yesterday while the market dumped, so this may be starting to happen.
Gold is still up year to date a little bit, but more important the gold/spx relative strength ratio is trending up, showing us how it is still outperforming the market as the market declines.
As far as crypo goes – the recent weeks shows us once again how useless it is for rational investment allocation.
It’s great for gamblers, but not for people who want something that contributes to making a lower sharpe ratio for a portfolio.
But Robinhood won’t show you what the sharpe ratio is on your account when you log in, so what do Robinhood app players care?
The encouragement of wild risk taking either through the use of margin or just buying wild volatile stocks and assets, by things such as the Robinhood app and people like Cathie Wood, is the biggest contributor to the size of the volatility in the markets now.
How many bull traps set by the bears will it take before Fidelity traders sell in panic and we get a real bottom?
Check out this video by David Skarica on real long-term investing strategies.
-Mike
