Sentiment Speaks: Have You Felt Like A 'Genius' In This Bull Market Or Have You Felt Lost?

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Avi Gilburt
Summary

Bull markets tend to make anyone looking to the long side as a "genius."

It seems many abide by arbitrary perspectives about what a bull or bear market entail.

I am looking for a near term pullback before we attack the 2800SPX region in a meaningful way.

There is an old adage in the market which says that “everyone is a genius in a bull market.” What that really means is that as long as you keep looking to the long side in a bull market, you will be seen as a genius.

But, remember, one of the main perquisites for maintaining “genius” status is that we must be in a “bull market.” So, how do you know when a bull market is coming to an end?

Many view a 20%+ decline as suggesting we are in a bear market. To explain the extent to which many hold fast to this perspective, allow me to provide you something that I witnessed recently.

A few months ago, when we were still in the 2800+ region, I posted a warning on another article for a drop to the 2100-2200 region, while noting that we were still likely to remain in a bull market. The author of that article chided me for this perspective. While I raised cash when we broke the 2880SPX support region, this author held his longs during the decline to the 2300 region, and claimed that since it was not a bear market, he was right for doing so. His perspective was based upon us not being in a bear market because the SPX declined 19.8% based upon his calculations using a “closing basis” for the market. I just shook my head in disbelief.

How or why investors came up with that arbitrary 20% number is simply beyond me. And, I can assure you that it is an arbitrary number because we can see declines larger than 20% and still remain in a larger degree bull market. But, does that mean you should hold or not protect your longs during a 20-30% decline?

You need to understand the larger context of the market in order to understand this perspective. Unfortunately, most market pundits, analysts and investors lack the tools for understanding the larger context for the overall market. This leaves them simply guessing, and makes them no different than a retail investor or even an average stock broker.

And, the guessing becomes comical sometimes. Too many place their reliance on events as being market drivers. This leads to quite unusual results.

Recently, when the Brexit plan was voted down in the UK, many were quite certain this would cause “chaos” in the market. Yet, the S&P500 rallied 30 points that day, and continued to rally another 40 points thereafter. Not exactly the “chaos” many were expecting, unless “chaos” is a new code word for a market rally.

Another similar example is the US government shut down. Yet, the market has managed to rally over 300 points off its December low while the government shut down continues. In fact, when the announcement was made regarding a deal on opening the government on Friday, the market did not even flinch.

So, what happens when the market does not react as expected? Silence... followed by “well, it’s time to move on to the next event which will undoubtedly move the market.” It seems that a pre-requisite to being an analyst, pundit or investor today is a lack of short-term memory.

Most of what you read about markets attempts to make “logical” sense of out market moves based upon current events. But, in so doing, you fail to recognize the most important fact about markets: they are emotionally based environments, not logical ones. Therefore, one of the most important tools you need for your toolbox is an understanding of market psychology and how it directs the markets.

As I have said many times before, I know of no other analysis methodology which provides better context to understanding the market than Elliott Wave analysis. Back in the 1930’s, an accountant named Ralph Nelson Elliott identified behavioral patterns within the stock market which represented the larger collective behavioral patterns of society en masse. And, in 1940, Elliott publicly tied the movements of human behavior to the natural law represented through Fibonacci mathematics.

Elliott understood that financial markets provide us with a representation of the overall mood or psychology of the masses. And, he also understood that markets are fractal in nature. That means they are variably self-similar at different degrees of trend.

Most specifically, Elliott theorized that public sentiment and mass psychology move in 5 waves within a primary trend, and 3 waves within a counter-trend. Once a 5 wave move in public sentiment has completed, then it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply the natural cycle within the human psyche, and not the operative effect of some form of “news.”

It was this analysis methodology which had me preparing for a 20-30% correction in the market right before we dropped last year. And, it was this analysis methodology that warned me that a break of 2880SPX could set off the 20-30% correction we had been expecting. While I had ideally wanted to see us over 3000SPX before this correction began, when we broke 2880SPX, it provided me a strong warning to raise cash.

Moreover, this same analysis suggested that the current phase of weakness was targeting the 2250-2335SPX region before a larger degree rally may be seen. While the cash market came up about 10 points short of our target zone, the futures struck a low of 2316. Unfortunately, there is no such thing as perfection when it comes to non-linear environments, but I think we have done quite well in guiding those that follow our work.

For now, my expectation remains that the market is involved in a corrective rally, which will likely take us much higher than most would expect for a “corrective” rally. In fact, the job of this corrective rally is to generate enough bullish sentiment to make most market participants believe that a drop back down to the 2100-2200 region is highly unlikely. And, thus far, I think it has been doing its job rather well. Yet, I think we have higher to go still.

In fact, even before we topped and dropped down to our target for the first leg of the decline to the 2250-2335SPX region, I have been preparing my members of The Market Pinball Wizard that the rally back will likely take us to at least the 2800SPX region. And, again, I think the market has been doing its job rather well. However, I don’t think it will be a straight path up to 2800+. The greater majority of the time, these corrective rally’s trace out an a-b-c path, with the b-wave being a pullback phase. So, I am looking for that b-wave phase to take hold in the coming weeks before we head up to 2800.

But, please keep our longer-term expectations in mind as you approach this market. If you raised cash along with me on the break down below 2880SPX, then you must also keep in mind that you need to deploy that cash again where you see good opportunity when the market gives you a sale. Our longer-term expectations do not expect a major multi-year bear market until the market rallies to at least the 3200SPX region in the coming years. So, when we drop into regions where the potential upside dwarfs the potential downside, you should be looking to deploy that cash for this final segment of the bull market which began in 2009.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.