This market has been training market participants that it truly has no top. And, it will continue to do so for a few more years. But, in doing so, it is going to cause many of you to make a terrible mistake, and it may be just before some of you are ready to retire.
You see, many of the articles and comments I am seeing today continue to suggest investors be fully invested for the long term. They have noted how the stock market “always” comes back. They point to the 2008/09 financial market meltdown and show how the market even came back from that, and how we are much higher today. So, the current perspective has been built within the mind of investors in a Pavlovian manner that if they had remain steadfast in their positions they would be fine in the long run.
During this past 20% decline in the market, I saw analysts and writers affirm this perspective to those following their work and simply held their long positions all the way down. Many suggested to "wait and see what happens” because they simply did not see this correction coming. I even saw one analyst claim that since the market was only down by 19.8% on a closing basis, then it was the right decision to remain long since it did not reach the requisite 20% decline to suggest it was in a bear market.
And, when the market came back to within 10% of the prior all-time highs, they patted themselves on the back and were hailed as heroes by those who follow their work. Yet, I sit at my desk and simply shake my head. Would an investor ever choose to lose 20% (or even 19.8%) of their value if they knew how to avoid it?
There are many reasons why an investment advisor will tell you to “stay the course.” One reason is that he needs assets under management in order to make money himself. And, the more assets he has under management, the more money he will make. So, he is incentivized to keep you in the market.
Another reason is simply that he does not have the tools to know better. How many analysts or writers who have been very bullish for the last several years started warning you about a 20-30% correction setting up for the market in the fall of 2018? The ones that have been warning about a correction have been doing so for the last 3-5 years, if not longer (perma-bears), and are no better than broken clocks. And, the others simply remained bullish and did not see the impending correction looming before us.
Again, they simply do not have the tools to be able to do anything other than what they have been suggesting at all times: just stay invested.
But, the stock market does not grow to the sky. And, maintaining a linear approach to the market, and believing it “will always comes back” will not likely serve you well in the years to come. So, while we may still have several more good years ahead of us, the market is hinting to us now that the music is going to stop. Can you see the hints? Are you getting ready to scramble for your chair?
While it is simply impossible to be perfect and identify every little twist and turn in the market 100% of the time, there are ways to be able to identify the bigger turnings points rather well. Allow me to show you what I mean.
For those that have followed our analysis through the years, you would know that as we approached the end of 2015, we were looking for a market correction from the 2100 region to the 1750-1800 region. That means we were expecting a 15% haircut in the markets. And, as we now know, that is exactly what we experienced.
But, that does not mean we were bearish in the long term. Rather, we saw it as a huge bullish opportunity for those who followed our analysis and were able to take advantage of the opportunity. We were pounding the table about the opportunity for what we expected to be a “global melt-up” for 2016 and forward. And, those that were able to raise cash before the 15% market haircut had cash available to take advantage of that opportunity. Those that “stayed the course” and did not raise cash because they did not know better were not able to take advantage of that opportunity.
Again, as we approached the end of July of 2016, I warned those following our analysis that I expected a pullback in the market as long as we remained below 2192SPX. That summer the market hit a high of 2190, and then turned down as we expected. But, again, I warned that this was likely a buying opportunity before the next stage of the bull market pointing us to the 2600 region. And, our expectation did not change no matter who was going to be elected in November of 2016.
And in the fall of 2018, I warned those willing to listen that we were approaching a 20-30% market correction. Moreover, when we broke below 2880SPX, I further warned that the risk of the downside far outweighs any further upside potential, and noted this is why I went to cash.
I have said this so many times in the past that I feel like a broken record player already. But, I know of no better methodology to understanding the larger context for the stock market than the one provided through an appropriate use of Elliott Wave analysis. And, that methodology is now telling me we are in the 7th inning stretch of a 9 inning game which began in 2009.
For those that want to understand this methodology in a bit more detail, I composed a 6-part series on Seeking Alpha outlining the theory and practical application of this methodology.
And, since the market is fractal in nature, I think this 9-inning game can complete a 100-year long season in the stock market.
If you take the time to review the attached DOW chart, you will see that our Elliott Wave analysis is viewing this current rally off the 2009 lows as potentially culminating a long-term 3rd wave which began in the 1930’s. And, once we complete this 3rd wave, the greater likelihood suggests we can enter a multi-decade 4th wave correction.
So, while the market may be in the 7th inning stretch for this final game off the 2009 lows, when we complete all 9 innings in a few years, it looks like it may be the end of the season.
The funny thing about the way the market works is that when the market reaches its highs, most are convinced that the trend is here to stay. So, even though I have begun to warn of this potential now, and even if I write about this potential as we approach those highs in a few years, many will not heed my warnings due to the predominance of bullish sentiment which will be evident at the market high, when it is always strongest. Yet, that is why so many get caught holding the bag at major market highs. Unfortunately, it’s what makes a market.
If you would like notifications as to when my new articles are published, please hit the button at the top of the page to "Follow" me. Thank you.
The Market Pinball Wizard
"If you want to be on the right side of the market... this is the service for you. Great way to monitor the market and to know your portfolio is still geared with the trend. Avi cares about his clients and in this industry that's very hard to find!"
“While no methodology works in every instance . . .I have never seen anything so consistent”
“I have been following Avi Gilburt for many years now and I think his analysis of the market movements is exceptional.”
“I have been following you for a year and your accuracy is amazing. I am an old timer and I have never seen anything like it.”
Click here for a FREE TRIAL.
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.