Everything in the markets has been pulling back over the past seven months in what has become a very vicious bear market. I believe it’s going to continue and it’s best to wait before doing any serious buying, but that is now how most small traders are playing this market now. People like Cathie Wood continually claim that every down week is a buying opportunity and millions of people listen to here. A lot of people want to trade rallies and even daytrade, so the futures being up this morning makes many want to buy and they get angry at people who express caution. The WSJ had an article this weekend showing how small traders are trying to pile in. Consider this quote from the article:
“In March, individual investors bought $28 billion of U.S.-listed stocks and exchange-traded funds on a net basis—the largest monthly sum ever recorded by Vanda Research since it started tracking data in 2014. Between April and June, that slipped to about $25 billion a month on average, though that is still much higher than prepandemic levels. In April through June of 2019, for example, that number averaged $3 billion a month.”
“This trend seems particularly contrarian when institutional investors are doing the opposite. JPMorgan Chase & Co. estimates that institutional investors have taken $258 billion out of the stock market this year, according to an analysis of public order flow data through July 5.“
I would assert that these people have no clue what is going on in the markets, but what is clear in the article is that people interviewed in it have no strategy for what they are doing besides I’m going to keep buying and buying and hope it goes up.
I want to buy too, but I want to show you a safe strategy to do so.
That is to simply wait for the next pullback in the markets and to watch to see what holds up.
Typically that is what leads on the next rally and bull run and this is a strategy to give you a relatively safe entry point.
For example I am closely watching gold now to make new buys.
It’s dipped and I think it could end up falling more as this year goes on, but at some point it will diverge away from the S&P 500 and stop going down when it goes down or starts to go up again.
For instance, take a look at how gold bottomed ahead of the stock market during the giant 2008 crash and bear market.
Gold fell with the stock market from July to October of 2008. But despite that decline, gold displayed powerful relative strength against the S&P 500 as its Gold/SPX ratio went sideways into the Fall stock market crash. Gold made a successful double bottom in October and November, while the stock market made new lows again in November. That was the buy point and after that double bottom the gold/SPX relative strength ratio began a powerful uptrend and gold itself went up as the stock market plunged towards its final bear market lows of 2009.
This is the type of trading action to watch for to find a buy point in the coming weeks for gold, commodities, and other ETF and sectors you may have your eye on.
This is the strategy to win by buying in a bear market.
Doubling down on lagging stocks and ETF’s like ARKK is the recipe to financial disaster.
As for gold, here is how it looks now. Notice the relative strength ratio plot on the bottom of the chart.
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-Mike
