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Jeffrey D. Medwin

Is a BEAR Market for Stocks Continuing ?

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On February 25, 2020, Jeff Matthews started a Thread entitled " Where are the stock markets headed over the next six months? "  This is a follow up, as the stock market is an on-going event, worthy of our attention and discussion.

 

In Jeff Matthew's thread,  on March 6th,  page 17, I introduced a new chart to many of you,  entitled " Wall Street Cheat Sheet ".  It shows human psychology at various levels of both Bull and Bear market cycles.  A second time, ( on page 24, March 19th ), I re-introduced this chart, and took the freedom to give an interpretation, as to how "I" saw things developing. 

 

Here it is, a third time:

 

  196962435_3-19-20WallStrretCheatSheet.JPG.75345b82bd65e205768ed9c05359454d.JPG

 

 

 

In Jeff Matthew's thread, March 19th, page 24, I pointed out  two unusual and undeniable things :

 

1) We have developed a large price-trading GAP ( down , a space on the  price charts, UNfilled )  coming off of 2020's high prices, at about the S&P 500's 3,300 level,.  This has only occurred one other time in stock market history.  That only other time, was from the 1929 highs. 

 

2) I clearly denoted that the Moving Averages ( 50 Day and 200 Day ) of the S&P 500 has formed what is technically called a " DEATH CROSS" - at about the S&P 500's 3,000 level.

 

Also on March 19th, it was clearly shown ( from weekly charts ) that the overall market was well oversold, with Relative Strength readings below 30.  We were " due " for a rally - rebound.

 

Bear Markets usually have sharp rallies, on its way down to the ultimate nadir.  The first rally, after the initial drop, is usually the best one of all.  It is also the MOST critical rally, for a person owning stocks, to scale-sell into, to develop a cash position, and protect themselves from what typically follows, until there is a CLEAR CAPITULATION ( which we certainly have not had !! ).

 

On the " Wall Street Cheat Sheet Chart " of psychological behavior, the first Bear market rally is what is called the " Complacency " stage of the PSYCHOLOGICAL cycle.  The same people who got trapped and did not for-see the top, ( " I'll sell when Trump gets re-elected, since I did SO WELL in 2019 " ) they will be saying to themselves, " Maybe the Market has bottomed " or " This time is different " , or similar highly-complacent thoughts.   Instead of such thoughts, in Bear markets,  trapped investors should have PROACTIVELY and systematically been SCALE SELLING into this first Bear market rally, as it progressed.  This would likely / usually minimize losses, and build-up a large cash position, which is essentially risk-free to hold. 

 

Assuming the historical down movement in the first quarter of 2020 is the start of a Bear cycle. ......the question becomes: " How does one scale-sell after a decline such as we had in March 2020 ??? 

 

There are NO hard and fast rules !!   Just develop a plan, and stick to it.  Such rallies off the first leg down are often sharp, and might only last 2 to 5 trading days.  1929's first rally lasted the longest, several months, retracing 48 percent of the initial decline, after which, the real damage occurred.  The total drop , peak to trough back then, was 84% for stocks.  Many of the men committed suicide, and  and it took over two decades, for their widows to get even.  If someone is conservative, they could even begin to scale-sell the first Bear market rally on the second sharp day up, as per one's game plan. 

 

There is an entirely different way of scale selling, that keys itself to certain retracement levels of the entire drop.  I would like to introduce you to Fibonacci Numbers, as applied to the stock market.  IF I were a Mutual Fund Manager, and unfortunately had gotten trapped ( as most have ), I would use something LIKE Fibonacci Numbers, as a planned way to do scale selling on a market rebound.  Mind you, no one knows how to sell after this first drop, it is EXTREMELY TRICKY to judge. I don't know how to figure it out, nor does anyone else.   Here is a recent URL, that will nicely discuss how Fibonacci Numbers are applied to stocks, please give it a read.......

 

                                                                                   https://www.investopedia.com/ask/answers/05/fibonacciretracement.asp

 

A couple of weeks ago, being pro active, I computed the 61.8% Fibonacci retracement, based on the 2020 closing high and low for the S&P 500 index. I figured, we've had the biggest Bull market, the sharpest drop, we could have an all-the-way-back to a  61.8 percent retracement - from a still-bullishly inclined public.  Here we go :

 

CLOSING HIGH  minus  CLOSING LOW equals DROP of 1,148.75 S&P 500 points.  Times 61.8 percent equals  709.92 points retracement.  Added to the closing low of 2,237.40, becomes a Fibonacci target level of 2,947.42 on the S&P 500.                                     .

 

Well, Wednesday afternoon 4-29-20, the S&P 500 rallied up to the mid to high 2,940s, and I started acting.  I was buying INVERSE ETFs, TVIX at 177.90 level and SPXU at the market -  at the 14.72 level.  The S&P ran to almost 2,955 early afternoon, and a second peak later in the day failed to exceed that, and the S&P 500 closed 2,939.51, a bit below where I acted, but up 76.12 points for the day, or +2.65% .  I am NOT personally fully invested, just scaled-in some on Wednesday.   Thursday, 4-30-2020, the markets gapped down on the morning's opening, closed down, and in after hours trading, TVIX was 211.14 and SPXU is 15.82.  Good ....so far.  

 

It is interesting to me was that, seemingly from market-action on last Wednesday, others were also acting at the computed 61.8% Fibonacci retracement level of 2,947.42.   Will this be " all she wrote " on the rebound from the March lows??  I don't know.  It is entirely possible this past Thursday, 4-29-20, could be the end of a Bear market rally.

 

I would say, my Bear market scenario gets put in doubt, if we exceed the 3,000 ( Death Cross ) level for more than two to four weeks, and also, if we fill the break-down gap from the top ( a 100% retracement ), at the S&P 500's approximate 3,300 level.   

 

The " big " popular stocks like AAPL or MSFT have hardly been hurt at all.  Will they eventually fall prey?  No one knows, everyone is guessing. You pays yer money and takes yer chances.  We seem to be in the psychological COMPLACENT phase of a Bear Market - as far as "I"  can see it.  If we follow form, we  could have the worse to see, ahead of us.

 

Since I have done cartoons in this thread as a means of communicating, here is new one to view :

 

 

                                                                                             2128928985_4-21-20Cartoon.JPG.be6f6881e2421059f0249916a01e4ab5.JPG

 

 

None of this is meant as Investment Advice, its just my own present personal Stock Market observation.  I have very good company, read what Warren Buffett finally said in public, this past weekend, as to his present views.  He took a 50 Billion dollar loss, by selling out ALL his four airline stocks, and he hasn't bought stocks, with his 130 Billion dollar all-time-high cash pile, because " he feels prices are not yet attractive ".  He said he thought the FED over-reacted, and that they should have let the markets take their natural course.  I agree !

 

Good luck to all.

 

Jeff Medwin

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Well, I was reading this, until I got to the part "Fibonacci Numbers".

 

There is a good reason the word "FIB" is in the word "Fibonacci".

 

Any kind of "Fibonacci" analysis (in the stock market) can not be back tested. Everything, anything YOU do with Fibonacci, is literally "in the eyes of the beholder".

There was no one named Leonardo Fibonacci as is widely believed.

 

The Fibonacci number sequence? Fibonacci Ratios? The "Golden Ratios? Sure. We see this a lot. And in "closed systems" it works, up to a point. It works really well in closed systems with no dynamics. Like the "rabbit" population growth thought problem. But that's not reality.

 

The "golden ratios" (fibonacci proportions) when used for room acoustics for instance, have a purpose, up to a certain point. At lower frequencies the wavelengths interact with room boundaries and affect frequency response. But here the room boundaries are fixed. They are not moving around (like stock prices or number of participants). Indeed, at higher frequencies, there are so many interactions that the room proportions (fibonacci ratios) increasingly have little or no effect. If the room becomes large enough, or outdoors, these ratios have less and less application or meaning.

 

So how do we apply this to the stock market? The prices are constantly fluctuating, the number of participants is diverse and constantly changing. Even the number of shares available for trading on any particular security are changing daily. This pretty much anything but a "closed non-dynamic system".

 

 

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The Wall Street Cheat Sheet chart you have posted is something Justin Mamis came up with decades ago. He outlined an ideal Sentiment Cycle from greed to fear and back again.

 

What is more interesting, is to superimpose a current broad market index such as the S&P500 over it.

image.thumb.png.83c4c029bc49fbfcb3792a4fe8da10c2.png

 

Courtesy The Sentiment Trader.com (highly recommended)

BTW, this is from January of 2019

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The observation regarding a few large "popular" stocks (the so-called FAANG stocks) has significance.

 

In the days since the March 23 bottom 5 stocks in the S&P 500 have accounted for more than 24% of its gain. And that is NOT good.

 

When the S&P 500 had a 35 day rally from a 52 week low (1990-2020) with the top five stocks accounting for <20% of total points gained it was a good sign with only one out of six instances being a fake out 3 months later but all were positive 1 year later with a median return of 20.6%.

 

However, when the S&P 500 had a 35 day rally from a 52 week low (1990-2020) with the top five stocks accounting for >20% of total points gained, every one of these proved to be a false rally with the S&P losing ground over the next few months every time. The reward/risk ratio was horrid. A year later the median return was -18.6%

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"We seem to be in the psychological COMPLACENT phase of a Bear Market - as far as "I"  can see it."

 

Actually, (IMO) a better measure of sentiment complacency is the options put/call ratio. It's also best to sort this out into two categories - the Smart Money, and the Dumb Money.

 

Smart Money are those options contracts of 50 contracts or more (larger institutional players)

Dumb Money - the little guys - less 10 or contracts

 

The put/call ratio hit extreme conditions back in January. There was no fear (very little buying of put options as insurance) especially among the Dumb Money. The red flags were already waving. 

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1 hour ago, artto said:

"We seem to be in the psychological COMPLACENT phase of a Bear Market - as far as "I"  can see it."

 

Actually, (IMO) a better measure of sentiment complacency is the options put/call ratio. It's also best to sort this out into two categories - the Smart Money, and the Dumb Money.

 

Smart Money are those options contracts of 100 contracts or more (larger institutional players)

Dumb Money - the little guys - less than 100 contracts

 

The put/call ratio hit extreme conditions back in January. There was no fear (very little buying of put options as insurance) especially among the Dumb Money. The red flags were already waving. 

Do you believe, like Medwin, that we are headed for a real nasty crash within the next few months that is likely to last quite a long time?

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40 minutes ago, Jeff Matthews said:

Do you believe, like Medwin, that we are headed for a real nasty crash within the next few months that is likely to last quite a long time?

Honestly, as far as I can tell, we're at the "I don't know/It can go either way part".

 

There's been A LOT of conflicting sentiment data. For that I use The Sentiment Trader.com. It's basically taking today's most important market features, and doing some CONDITIONAL historical analysis looking for the same conditions in the past, and comparing with what happened going forward. Many recent studies have pointed to "we are unequivocally past the point of testing the market bottom" to the opposite like what I just posted.

 

From a technical analysis standpoint we're currently going sideways - mid way between 2 highly watched moving averages (50 & 200 day).

 

The volume weighted "Point of Control" price-wise on the S&P is around 3000. We've been bumping up against that repeatedly and not breaking thru. (probably not good)

 

The relative performance of cash verses the S&P using comparative rate-of-change still ranks cash above the S&P using all U.S. stocks.

 

While there's been an absolutely unprecedented swift decline in stocks, there's also been an equally unprecedented and swift response to support not just markets, but everything, globally.

 

What happens from here will depend on what happens with the virus - vaccine, risk management (or lack of it) etc.

 

Back on January 23 all my positions hit their stop loss/exit points. I had been tightening those to a very short 5 day EMA. And that was in response to what I explained in my previous post about small/large options traders, put/call ratio. Still mostly in cash.

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The number of unemployed workers in the United States has just exceeded the entire population of Canada.

 

That is staggering.

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2 minutes ago, geoff. said:

The number of unemployed workers in the United States has just exceeded the entire population of Canada.

 

That is staggering.

Yes, it is.

The question is, though, is this a staggering opportunity? Or, has the staggering opportunity already passed? Or is it still ahead of us?

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Another interesting observation I've made over the years is the relationship between "NOISE" and market bottoms. In the "old days" you could observe this in the stock chat rooms, or even the old fashioned ticker tape.

 

On March 23, I got so many calls & text messages "about the market", in four hours, I couldn't believe it!. I mean like I don't get that many calls and texts all year long. True panic. Makes for a great (short term) buy signal.

 

And so far, that's been the bottom.

 

However, the farther we get away from March 23, the more it becomes like another separate event. In other words, the market could bobble around for a while, and then say, another virus outbreak occurs, and there's no vaccine yet, everything goes back into lock down. Then a new bottom could be put in. For the S&P 500 that means (IMO) 2135 to 2000. If it gets really bad, the "mother of all support" should be around 1560 which takes us back to around October, 2007 - 13 years of discount.

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Step aside, bears!

 

Looks like somebody agrees that the new, managed economy means stock market lows will not be as low and highs will be higher.  I know many will disagree, but all you have to do is watch the news.  They have promised to manage the economy - to do what it takes - to spend as much as necessary - to save "the economy."  

 

Although the newest crisis gave millions and millions of little people direct stimulus, which is unprecedented compared to prior measures such as TARP, it seems the vast majority of the money is still going to the big players.  We have roughly 210 million adults and 120 million children.  Let's do the math...

 

210 million x $1,200 = $252 billion

120 million x $500 = $60 billion

 

The total is $312 billion.  From that, we must deduct people who are not qualified to receive the stimulus - e.g., high earners, illegal immigrants, etc. 

 

But even the full $312 billion is a far cry from the trillions spent.  Where did the rest go?  I am sure there are many places, but I bet the big players got the biggest piece of the pie.  That's how politics works.

 

This is why stock markets can hold up well while mom-and-pop business crash and burn all around us.  It's still a risky scenario, but you might as well take what they are saying at face value - they are going to prop up the economy no matter what it takes.

 

https://www.marketwatch.com/story/were-in-a-new-paradigm-for-stocks-this-analyst-argues-get-ready-for-permanently-higher-valuations-2020-05-19?mod=mw_latestnews

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7 minutes ago, Jeff Matthews said:

Step aside, bears!

 

210 million x $1,200 = $252 billion

120 million x $500 = $60 billion

 

The total is $312 billion.

 

I have a real issue with where the OTHER couple TRILLION is going.

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FWIW, what I mentioned in one of my posts above:

 

Actually, (IMO) a better measure of sentiment complacency is the options put/call ratio. It's also best to sort this out into two categories - the Smart Money, and the Dumb Money.

 

Well, it's happening again. While the S&P 500 has regained a little more than half of it's loss since the March 23 bottom, the smallest options traders (10 contracts or less) (the dumb money) have bought to open a record number of call options (again - the prior record was February 14). This is one of the most troubling data as this group of traders have an excellent history at being wrong.

 

At the same time large institutional traders (the smart money) (50 or more contracts at a time) haven't been betting as much on a rally.

 

When we net out the bullish spread between small & large option traders it also has hit a record high. It has soared over the last several weeks - like it did in 2008.

 

Reminds me of the old Wall Street cliche'...............the second mouse gets the cheese

 

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33 minutes ago, artto said:

Well, it's happening again. While the S&P 500 has regained a little more than half of it's loss since the March 23 bottom, the smallest options traders (10 contracts or less) (the dumb money) have bought to open a record number of call options (again - the prior record was February 14). This is one of the most troubling data as this group of traders have an excellent history at being wrong.

 

At the same time large institutional traders (the smart money) (50 or more contracts at a time) haven't been betting as much on a rally.

I wouldn't put much stock (pun intended) in this "dumb money vs. smart money" observation.  Price is a reflection of demand.  

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46 minutes ago, Jeff Matthews said:

I wouldn't put much stock (pun intended) in this "dumb money vs. smart money" observation.  Price is a reflection of demand.  

Price may be a reflection of demand. But it's also a reflection of supply. The two go together.

 

The options market is telling us something. And this particular "study" has an excellent historical record. It's telling us that the small operators - the people with the least amount of money, the least amount of experience, with the least information are betting the most - record levels - in a highly leveraged fashion - that they think the rally will continue and the bottom has been put in. And they are also buying little or no protection.

 

Perhaps you can explain why you wouldn't put too much "stock" in this observation?

 

Yes, we have seen unprecedented fiscal and monetary response to the crisis created by the pandemic. But we are in uncharted territory. The jury is not in yet regarding the virus, its economic impact, the stimulus or how the economy will respond to it. These kinds of things don't just "go away" in 35 days.

 

What is happening in the options market is just one negative. There are more. More disconcerting to me is there are mostly conflicting "signals" at the moment. Anyone can make a good argument for being bullish or bearish right now.

 

So, if you are a speculator................................

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39 minutes ago, artto said:

The options market is telling us something. And this particular "study" has an excellent historical record. It's telling us that the small operators - the people with the least amount of money, the least amount of experience, with the least information are betting the most - record levels - in a highly leveraged fashion - that they think the rally will continue and the bottom has been put in. And they are also buying little or no protection.

 

Perhaps you can explain why you wouldn't put too much "stock" in this observation?

Because as long as people are buying, it doesn't matter who is buying.  If the public thinks gold - a mere rock - is worth $1,700/ounce, then it is.

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In the option markets, I've always preferred to be a seller, not a buyer.  

 

Sell a covered Call.....sell a covered Put or sell a Credit Spread.

 

Not that anyone cares mind you....but someone might not realize you can be a seller verses a buyer.  Different risks/reward scenario.  There's probably been less than a half dozen times in my career where I "had that little voice" saying it was better to go long verses short.

 

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1 hour ago, Jeff Matthews said:

Because as long as people are buying, it doesn't matter who is buying.  If the public thinks gold - a mere rock - is worth $1,700/ounce, then it is.

Not to be nasty, or start an argument - you are quite wrong my friend.

 

It most certainly does matter who is buying as much as what they are buying. And how much they are buying.

 

Personally, I couldn't care less what the price of gold is, or any other asset.

 

What I do care about, is what is appreciating the fastest - with the least risk. And right now, many components of the MARKET  are showing indecisiveness. They are not showing enough strength yet - haven't proven themselves. In the short term, most of any strength is coming from a group of traders that are notoriously wrong most of the time - especially at extremes - like they are now

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