The August 2015 low was the first lower low of the trend; until today.
A week ago I wrote a post saying we are in a bear market and shown a charting showing why I think so.
I posted the chart above in January 7th, 2016 to show and explain what lines and trend I am looking at to identify a trend. But this was not my only warning about bearish market. I was posting about my bearish outlook in December when the market failed to create new highs that we were in a bearish trend. You can read my warnings in this post and here.
But in October and November the bull market could be still saved as you can see in the above chart. The trend was recovering from the August selloff and creating healthy new higher lows. It was until FED raised rates. Then the entire story started changing.
Here is the same chart again a few weeks later proving we are in trouble and that bigger trouble is ahead of us.
As you can see, there are a few significant changes:
1) We created a new lower low in a longer term time frame!
This is a big issue. Before we were creating lower lows in a short term cycles basically warning about troubles. This time we are creating lower lows even in a big picture time frame.
2) More selling is coming as we are not that oversold as in August
Take a look at the circles marking the fear and greed levels of the market. Although we are creating a new lower lows in the last 9 months, we are barely in oversold territory. That means, we can go lower and more violently before we see a reversal.
3) Trend slope is sinking further down
As you may know I use 50% regression channel study in TOS to identify the trend. It is a study inbuilt in the platform and it does all the charting based on price action of the market. I do not draw those lines. It is all done automatically the same way as moving averages are drawn.
The dashed grey lines are the only lines I draw manually. The lines you can see I drew in November 2015 and haven’t touched them since then. These are the trend projections lines to help me indicate where the market is moving. I draw them exactly on top of the 50% regression channel lines so later I can see if the market is rising or declining. Since November 2015 market started declining from these lines as you can see a magenta regression lines dropping below the grey dashed lines.
This confirms that the bear trend is deepening.
However. Even in a bear market like this, we may see relief rallies. But expect those rallies to be sold off.
In all this, FED is still clueless and promising more interest rate hikes. As usually, when FED realizes that the economy is already in a recession it will be too late.
People have short memory, but you still may remember when FED and media were all optimistic about economy at the verge of the great recession in 2008 and realized how serious the problem was when we were already in a big selloff and financial houses such as Lehman Brothers admitted that they were already bankrupting.
Unfortunately, we can expect the same from FED. They are still optimistic and they will be again late to the party trying to save the economy by another set of QE as they believe that the previous QE programs worked well, so let’s start another one to save the economy and market.
They will just kick the can down the street. But this time, this medicine may no longer work. Like when you overdose a patient with antibiotics, the bacteria will become resistant to the pills.
Expect worse to come.
· What to do as an investor?
If you are a long term investor, for example a dividend investor, do not worry, this will be over in a year or two. So invest in this slowdown. It will create opportunities and make you richer (if not outright rich). Continue investing into a good quality dividend stocks or mutual funds and you will survive well.
If you are at the end of your wealth building journey, and about to ready to retire, you should have money located more in less volatile products than stocks (unless you are in dividend stocks). Relocating or selling stocks now is probably too late and risky. You should have done this a lot earlier. You should have reallocate in October – November.
I know, providing an advice now when the damage has been already done and after the fact is not much helpful, but if I were to retire next year and my portfolio was in stocks in this market, I would waited it out and postponed the retirement by a year or two.
This is by the way one of the reasons I am learning hard trading options so I can create an income in any market and be free from stocks falling in price during sell offs. I understand, this is not for everybody. So if you do not want to trade, invest hard into dividend stocks to create a dividend income which will also be independent from the price of the stocks.
Even if my ROTH IRA dividend portfolio value drops by 50%, my dividend income will stay the same as many of my holdings are still paying and increasing the dividend (for example, check Realty Income (O) as they increased the dividend recently and the price of the stock went up while the entire market was falling apart).
In 2008 I kept my long term investments intact and invested more into the declining stocks and funds. My 401k account doubled since then thanks to adding more cash into falling stocks and reinvesting dividends and distributions. I plan on doing the same this time. If we see a recession and the market crashes, I will be investing money and reinvesting dividends.
· What to do as a trader?
Depends what you trade. If you trade options for example, as I do, then best approach is to ride the waves and time the market. Do not listen to those who tells you it is not possible, as they do not know what I am talking about.
Last few months I learned how to read the trend. You can easily see when the market rallies and suddenly the rally is exhausted and starts falling apart. That’s the time you want to short the falling market. When the market is falling, there will be times of relief rallies. You may want to ride them and get long again. In these situations I plan on selling call spreads and bull spreads to ride the relief rallies.
Trading bullish trades in this market can be dangerous so I plan on having tight stop loss orders and try to keep those trades short term. I may even stop trading them whatsoever.
Stay save and if you are not sure about the market, its trend, or a trade, then stay away. It is better to stay aside than be in a trade at all cost. It may turn out to be your all remaining cost at the end.
Cheers!
You know, when I start reading people that sound gleeful, happy, or otherwise positive about markets going down, I tend to stop reading. 99% of the people don’t short stocks so that means most people are losing money here, and I see no reason to celebrate that.
The bottom line that I see it is that we are not in a recession, none of the indicators point to saying that we are. The Chinese economy impacts us but not to the degree that we should be going down. Cheap oil is NOT, I repeat, is NOT a reason to wipe away hundreds of billions of dollars in market cap. That these things keep getting thrown around just show that the media and many so called ‘financial experts’ just need to be fed something, and they’ll be happy to regurgitate it.
These swings that have been taking place in bigger and bigger fashion for the last 12-18 months, are not a sign of doom and gloom. And, I’ll tell you one other thing, they would not have happened prior to the HFT computers taking over a vast majority of trading.
But Wall Street would never talk about that, because then it might get a little clearer on why these swings are happening and who’s ending up with the shares on the downswings and selling them on the upswings.
Wall Street and their computers get richer and the rest of us get poorer.
But hey let’s celebrate with lots of happy words and exclamation points!
I have a different view. I am not of course celebrating the bear market, but try to be positive to actually make money in it. That goes to buying stocks and knowing they will go further down (my stance) and wait it out. It is actually a great opportunity for a dividend investor and I want this market to go down. The more the better. Why? Because I will be buying stocks of my interest cheap. As a trader I do not care where the market goes. I want to make money whether it goes up or down. Easy said, not that easy to do.
I disagree with the opinion that our economy is rosy and everything is OK. All data coming in are already in recession; earnings, PMI, inflation, all points down and more slowdown. The world commerce is halted, there is no goods transportation, not even to China, which was the biggest consumer of raw materials. The only “good” report so far is employment. But why I put it as “good”? Because we are seeing shift in employment to more part time jobs and demographic shift. That is scary to me and says that the economy is not as healthy as we are being told (and usually employment data is a lagging indicator and not predicting indicator). So I think we are at the brink of recession, but time will say, right?
My trading indicators – short term and long term, all point downwards and with the current price action in the market, there is no way these indicators will change. And I am talking about indicators indicating trend, so no oscillators or anything similar to that. The market would need a hefty strong earnings data to break this trend and that’s what I do not see coming at all. We will see rallies, of course, but they will just be new lower highs rallies.
Do not be celebrating, but learning how to make money in this market (even driven by HFT);)
Hope you read my post although you do not do it as you said. I do not short individual stocks, but the entire market, so I have my skin where my mouth is. And if you read my post, I thank you for that!
Cheers and good luck!