My Oh My… The Music Has Stopped

If you listen to the media or have an active Twitter feed about the markets, you would think stocks have literally collapsed into the depths of a bear market. We MUST be down at least 10-15%! Yet as I type this, the S&P 500 has pulled back all of 6%. It’s a little more than half way to the 10% correction level.The Dow hit my initial downside target of sub 17,000 and the S&P 500 is on its way to 1970 – 2000.

Sentiment has swung dramatically from ebullient in June and July to pessimistic now on its way to possibly despondency shortly. Options traders are positioning for Armageddon. Volume in popular stock market ETFs SPY and QQQ is exploding higher as investors seek the refuge of liquid broad indices over individual stocks.

Technicians are talking about a new bear market and things like Dow Theory Sell Signals and the “dreaded death cross”. (I have written several blogs about Dow Theory and it’s probably time for another.) Market leaders in biotech, healthcare, consumer discretionary are finally getting hit. Market generals, Amazon, Regeneron, Google, Netflix, Facebook, Disney, etc. are being bludgeoned as the music “suddenly” stopped in the game of market musical chairs.

Markets typically don’t bottom on Fridays. I have to find my notes, but I recall Friday being the least likely day for a low although I do remember the post 9-11 bottom being on a Friday. Stocks are currently in the middle of the recognition wave where investors no longer believe it is a mild pullback to stay the course. The masses now believe there is further downside to go. Very light panic has set in. “Sell what you can, no what you want” is often heard. We should be seeing the bears on the popular financial channels any day doing the “I told you so” tour. Cue perennially wrong perma-bears Marc Faber, Jim Chanos, Peter Schiff, Porter Stansberry, etc. They are waiting in the wings!

From my seat as someone who has not been bullish for a while and raised significant cash over the summer, this looks like the beginning of the bottoming process. Unlike the routine and regular bull market pullbacks that just bottom out of nowhere 3-5% off the highs, this one has some more depth and teeth. While the zone to find a low has begun, it may be days or longer. Tops take a long time to develop, sometimes months or quarters, but bottoms are usually not a single day in time. They are quicker yet still require the necessary pieces to be complete.

The markets are a lot closer to a low than they were yesterday and last week and last month. It’s just going to take some more time and patience.

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