There is no absurdity so palpable but that it may be firmly planted in the human head if you only begin to inculcate it before the age of five, by constantly repeating it with an air of great solemnity. Arthur Schopenhauer
Financial experts continue to state that the markets are going to crash, even though their record since this bull market started back in 2009 has been dismal to the say the least. To complicate matters, some of these same experts suddenly jump ship and start to paint a bullish picture until the markets start to pull back. Then they falsely assume that the markets are going to crash and start singing the “market is going to crash” song again.
We have developments that would fall under the “perturbing” category; for example, this escalating trade war, which unfortunately China is destined to lose. Markets are forward-looking beasts, and the Chinese markets have all but given the Chinese leadership an almost nil chance of winning this battle. However, that’s a story for another day.
Market sentiment is not extremely bullish, though the bullish sentiment has been trending upwards since Feb of this year. It has not remained in the extremely bullish ranges for weeks on end; market tops almost always occur after the sentiment trades in the extremely bullish ranges for weeks on end. Market sentiment instead has been whipsawing, and that is usually a sign of uncertainty and uncertainty is a very bullish development especially if the underlying trend is up. Crowd psychology states that one should only abandon the ship when the masses are euphoric. As that’s not the case, there is no reason to abandon the ship.
The Market has shed some weight, but given the massive run-up, this market has experienced this falls well within the normal ranges of an acceptable correction. In fact, the Dow could drop all the way to 21,500 without having any effect on the trend.
Our alternative Dow Theory states that the Dow follows the Utilities and unless the utilities drop to new lows the markets will continue trading within a wide range. The utilities have held up very well when one considers all the outside factors; for example, an extremely volatile geopolitical situation (trade wars, disputes with our NATO allies, etc.) and the extremely polarised way the masses are behaving gives one the impression that we are just one step away from a civil war.
The utilities have a very strong layer of support in the 633-650 ranges. It would take a monthly close below 630 for the tone to turn from bullish to potentially bearish. As there is a fortress of support in this zone, for now, it’s a low probability event. The Tactical Investor Dow Theory states that one should pay attention to the utilities and not the transports. Therefore unless the utilities put in new lows, the market is unlikely to take out its recent lows.
Most Major financial sites nowadays are on par with tabloids; their sole function is to create bombastic titles with little to no subject matter to back their faulty assertions. Take Advice from such distinguished sites with a barrel of salt and a shot of whiskey. Focus on Mass Psychology and identify the sentiment that’s driving the masses. The Crowd drives the markets, and if you identify the emotion that’s driving them, you can determine the trend of the market. As we stated before bullish sentiment from a longer-term perspective has been trending upwards, but the masses are not dancing in the streets, so a correction (which is what the market is currently experiencing) instead of a crash is the most probable outcome.
The Dow transports are also holding up well which is a bonus as that’s not a prerequisite of the Alternative Dow Theory; unless they trade below 9500 on a monthly basis, the outlook will remain bullish. The trend is your friend as everything else is your foe.
While there are a lot of negative factors out there that could be used to paint a very bearish picture, market sentiment and price action are not supportive of a stock market crash outlook. However, as the market has experienced a huge run, this current rout should be embraced for the market is letting out a well-deserved dose of steam. Experts have you believe that Bull Markets only trend upwards, but that’s an assertion that’s on par with rubbish. Nothing trends upwards in a straight line and even the strongest bull has to take a breather.
While the situation could turn ugly in the future, focussing on something that has yet to materialise is a recipe for missing the train and trying to play catch up later. As this is a mature bull Market, employing proper money management techniques such as stops, should prevent you from being caught off guard.
Our focus at this time is on mass sentiment and the internal structure of this market. The masses are not euphoric but the markets are still trading in the overbought ranges on the monthly charts, and so from a technical basis more range bound action should be expected. As the trend is positive, consider putting the following slogan into play “the stronger the deviation, the better the opportunity”
Iteration, like friction, is likely to generate heat instead of progress.
by Sol Palha
Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.
© 2018 Copyright Sol Palha- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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