2019 Bull or Bear?

I've been wrestling with my thoughts about where this market is headed for some time. Coming into 2018 I was medium term bearish because there was too much complacency and the market got very overbought having gone straight up for all of 2017. I was also wrestling with the notion that the January top could have been the bull market top. I mentioned the possibility of a 20% drop to wring out the complacency that had built up to that peak. Here's some things  I also said earlier in the year:


" If we are to assume that the bull market is still in tact, before it's ready to resume its upward march on a sustainable basis I expect to see the opposite of what we saw at the peak. I expect to see bears outnumber bulls 2:1, major outflows and the permabears coming out of the woodwork claiming that the bull market is dead. It will take some time but I believe that the lemming stampede into to ETF index funds will get undone and we will see a lemming stampede out of them at some point this year which could crater the market. "


We have seen the above play out. The SPX declined 20% off its high, AAII bears outnumbered bulls more or less about 2:1 for 3 weeks now, there have been heavy fund outflows and the the market hit extremely oversold level and you have seen people calling this a bear market. The market has unwound that ridiculous move from September 2017 to early January 2018 and I believe that if the bull market is still alive, is now in a position to resume its advance in a sustainable way given the severity of the oversold condition and clearing of excesses. But, what if this is more than just a severe bull market correction?  Could this be the start of a big bear market like 2000 or 2008?  I see conflicting signs. What I'm going to do now is act as an attorney for and against a bear market presenting arguments of either case. 


Here is a checklist of many things that have preceded a big bear market:

The economy is widely considered as being strong from the public's point of view (check), unemployment rate is historically low (check), consumer confidence is historically high (check). There was a bubble of some sort that burst (check - cryto). The Fed is raising rates for at least a year (check) and is unfazed by signs of slowing growth (check). Just prior to the market peak, the rise in the stock market became increasingly narrow with only a  handful of stocks driving it  (check - FAANGS).  Traditional market valuation metrics near historical highs (check). Housing is rolling over (check). Heavy inflows to equity funds (check).

Here are arguments that the bull market is not over yet: 

In 1987 and 1998 the markets experienced a sharp 20-25% decline but it did not end those bull markets. In 1987 and 1998, the economy did fine but the market got ahead of itself and complacency became acute just like the market did coming into 2018. A major decline was needed to clear out the excesses and to rebuild the wall of worry that bull markets must climb.

Bull markets are born on pessimism, rise on skepticism, mature on optimism and die of euphoria. The bull market was hated pretty much every step of the way until 2017 when we finally did see optimism/complacency but it could hardly be characterized as euphoria. Sure, there was euphoria in bitcoin but it wasn't tied to the stock market/economy  (except for some parts of the the semi-conductor space)  to nearly the same degree as the internet and housing bubbles were and so its fallout should not lead to a recession like those other 2 bubbles did.

Although rates have risen, real interest rates are barely positive and therefore not restrictive for borrowing/growth. At prior bull market peaks real interest rates where at 3%+. The yield curve as measured by the spread between the 2 and 10 years never inverted and therefore not signalling recession and its recessions that have led to the 40%+ bear markets. . Only the 3 and 5 years got  inverted which is not a recession signal. There has never been so much attention being paid to the yield curve like this which makes it less likely to be something to worry about. 

We never saw a large flood of low quality IPOs in 2018 which is something you typically see near a major peak signalling greed/euphoria. 

Given how long pessimism prevailed it wouldn't be unreasonable to expect that optimism can prevail for a few years before the end of the bull run and we only did see optimism for about a year or so. The same goes with consumer sentiment. Yes, it recently hit levels which are closer to the top end of the historical range but before you sound the contrarian alarm bells you need to realize that consumer sentiment was abnormally low from 2009-2014 and so so it would not be unreasonable to see sentiment stay "sticky" on optimistic side for a few years. That is what happened in the mid-late 80's and 90s. 

The fiscal deficit was never this high at the start of a major bear market, whereas typically at the start of a bear it is low and declining or in a surplus which is a drag on economic growth (deficit spending adds to GDP, a surplus takes away from GDP). 

This waterfall type decline we're experiencing is what you typically see in a severe market correction or the final phase of a bear market, not the beginning of one. The only time this was not the case was the crash of 1929. When prior big bear markets began, the initial decline from the peak was a lot less severe and the economy had been showing clear signs of contracting.  That's not what happened this time. This decline appears largely self inflicted due to a botched Fed policy stance  and political fumbling which can be undone in 2019. There are some leading indications  of decelerating growth but nothing to suggest the economy has hit a major turning point. 

Just prior to major bull market peaks credit stress was clearly rising. Just prior to this decline credit stress was low and has recently been rising modestly, likely tied to the collapse of the oil price.  We could (and likely) will get a downward blip in economic activity in the coming months, but to see the market drop 20%  like this without any visible material weakness in earnings or the economy smacks of panic/forced selling.
 
Alright, so now that I've laid out the bear and bull case I want to discuss some X factors that are unique to this market cycle:

We have a Fed head in Powell who is too hawkish and painted himself into a corner. After those big declines in 1987 and 1998 we had a market friendly Fed one way or another come out say "we got your back". In 1998 the Fed actually slashed rates by 75 bps. We don't have market friendly Fed right now which is not a good combination especially in the face of slowing growth. I believe at some point Powell will have to significantly backtrack his 2019 outlook and may have to actually cut rates. The flatness of the yield curve is saying right now that monetary policy may be tight, not excessively tight, but tight. One way or another, the markets will force the Fed to act. The question is at what point? Are they going to act only after the market drops another 15% and it's painfully clear the economy is tanking or will they admit they made a mistake and act sooner? Or does it ever matter if the Fed acts? 

We have been in an ultra low interest rate environment for so long that even though interest rates have only risen modestly by historical standards the negative impact of rising rates on borrowers could be larger than what would normally be expected because  people/corporations may have been addicted to these low rates for so long.

We have a US president that bashes people on twitter daily showing signs of metal illness in my opinion.  His administration seems to be unraveling which is causing him to lash out even more. According to an article I read 62% of top-level White House positions have seen turnover under Trump as of December 2018. I kind of get this sense that the wheels are falling off here. 


We also have markets dominated by algos which exacerbate movements to the upside and downside which makes comparing the stages of a bear market to other ones in the past less reliable. Maybe won't just see just a moderate decline in the first leg like in the past.  It's important to not get head faked and to focus on the fundamentals and expectations/sentiment. 

On the positive side of X factors we have China pledging stimulus for 2019 and seems bending to make a trade deal. A recession does not seemed to be baked in the cake at this point. The Fed created a self inflicted wound which is not too late to undue. If they can just find it in themselves to admit their mistake and back off it would do the market a lot of good. 

So in conclusion, I remain agnostic about the market for 2019 as I can see the possibility of both  very positive and very negative outcomes. Things were much clearer to me last year at this time. In the short/medium term, the decline has caused sentiment to tun quite negative and the market got sufficiently oversold to at least warrant a multi-week rebound regardless if this is the beginning of a big bear market or not. But I still think we haven't seen full capitulation yet. Even if you think there will be a bullish resolution to this decline, history has shown that the market doesn't simply do a V rally from the bottom and never look back. There would likely be some base building with retesting or break of the initial low.  I also get the sense that despite the negativity that's out there, there may still be too much bottom fishing and a fear of missing the rally from trader types. Even some noted permabears like Hussman have made mention of the oversold condition of the market. That to me says any bounce will likely not last. We haven't seen the VIX break 40 which to me suggests that a full capitulation is lacking. I also noticed that Wall Street strategists are too bullish for 2019 although targets are being slashed daily.  So, it wouldn't surprise me to see the market do well into early-mid January but stay on guard. 

I welcome any comments to discuss what could be in store for 2019.

Powell still didn't listen....Mr. Market obliges with a left hook to his jaw.

In my last post I said that the Fed wasn't listening to the market and if they continued not to do so, things could get really bad. Well, despite collapsing oil prices, weakening US housing, emerging signs of stress in the credit markets and ongoing weakness in the global economy, the Fed still hiked rates in December and softened its stance only marginally implying 2 hikes next year rather than 3 and no change in its autopilot plan to unwind QE. The market is rightfully now worried that the Fed is in on track to make the classic mistake of tightening policy in the face of weakening growth prospects which in the past has led to  recessions. I know Trump didn't do Powell any favors by continuing to criticize him on Twitter and urging him not to raise rates, but Powell could have just hiked in December  and said "since the last time I addressed you, we have seen some signs of decelerating growth and a marked decline in short term inflationary pressures.  As such, we are going to be much more flexible with our original plans to hike rates next year and unwind the balance sheet".  If he said that he would put Trump in his place and give the Market the assurance that it was looking for without boxing himself into a corner. Instead Powell decided to play the tough guy and show Trump and everyone else who's boss. Well, Mr. Market showed Mr. Powell who's boss

The good thing about the market declining this hard is that it creates awareness to the authorities that something could be wrong whereas a gradually declining market could give way to complacency - like  the frog in boiling water vs gradual warming water analogy. Powell has come under tremendous fire. Given the market's reaction and heavy criticism of him, he probably realizes that he was wrong and somehow now has to come out and backtrack on his stance without losing too much face....and he needs to capitulate soon.

I will post more soon,

The Fed is not listening so step aside

Markets have resumed their slide after a large rebound a couple weeks ago. In my last post I mentioned that the Fed needs to change their tune or else it will risk damaging the economy beyond just a slowdown. So far, no dice. In his last address to the market, chairman Powell gave no indication that the Fed intends to change their intention for further rate hikes. Unfortunately, the Fed looks to be at risk of repeating the mistakes it has made in the past basing decisions on what it sees in the rear view mirror rather than looking ahead of what's in front, not taking early signs of a slowdown/troubles seriously enough. US housing is in a clear slowdown. Inflation has been picking up but it's not by any means run away inflation and with oil prices and commodity prices in general slumping, especially the former,  future inflation figures are bound to come down and therefore the Fed has justification to say "Ok we're not going to be in a hurry to raise rates any further for a while." It doesn't help though that Trump is criticizing the Fed. That  could make the Fed even more resistant to change their tone as I'm sure the Fed doesn't want to give the impression that it's caving in to political pressures. Then of course there's the impact of the trade wars which are starting to bite adding more to the pain. If the Fed doesn't wake up and smell the coffee soon, then things can get really bad.

You have all this hoopla about how positive markets have historically been after a mid term election and the Nov-May seasonality trade. That may have been partly the reason for the markets having such a big rebound. I have never been a fan of  these type of seasonality studies as a good predictor for the markets. Seasonality has very little tangible connection to the drivers of the stock market -it's not much better than astrology if you ask me. And always remember the motto of this blog. If lots of people are putting on the mid term election/seasonality long trade there is good chance it won't work or not work as easily as expected (down big first then up).

So is this the end? Is a bear market nigh? It could very well be but if the Fed blinks and if the US and China broker a deal to end the trade war the bull case could very well be back or at the very least there would be a rip roaring rally. I continue to remain agnostic about the market as I have been all year. I can see the risks to both the bull and bear case here but the bears are getting the upper hand. During times like this the permabears tend to come out of the woodwork and their arguments tend to look convincing when the market is declining.  Don't get brainwashed by these broken-clock is right twice a day clowns. A lot of these people are just miserable fucks. This is not to say you should ignore bearish arguments....just take them with a grain of salt and be open minded to the contrary.

Markets sending a message to the fed....will they listen?

Since my post the market climbed a little higher before succumbing to a sharp drop which is being blamed primarily on the sharp rise in long term interest rates. Although I describe the move up in rates as "sharp", the 10 year yielding 3.2% is still quite low historically speaking, however, corporations and individuals have been been used to low rates for quite some time and so any notable increase in rates will have an impact.  You also have to look at the flips side of higher rates which is that it's a benefit to lenders but overall history would suggest it's a net negative for the market when there's been a prolonged rise like this. I believe the current rise in rates could be digested by the economy and not derail it IF the fed can back off and signal that they are done hiking for the time being. Higher rates appear to be taking a bite into the economy as per the continued slowdown in housing which I warned about last post. Just look at the home builder sector as per XHB..,shambles. Trump has been critical of the Fed and more importantly the market has been critical. It appears that the Fed's motto is this "we'll keep raising rates until something breaks. " which is a fucking stupid philosophy. As Cramer recently said, the Fed is willing to burn down the village so that it can save it later. The Fed should be proactive and anticipatory. Rates have gone up a considerable amount since 2016. Yes, they are still historically low, but you need to give the economy time to adjust. And there is no sign of run away inflation either. The internet and globalization has really put downward pressure on inflation and people have constantly underestimated this impact.

Cramer has been sounding the alarm bells hoping that his message will be heard by the fed. He's got enough pull for them to hear it, but will they change their tone? I think they will. I think ultimately memories of 2008 will make them and I think that the lower the markets go in the short term, the better off it they will  be in the long term because a weak stock market will give the Fed a nice hard slap to the face to stop hiking.

As I predicted before, I don't think the Fed will hike in December or if they do they may signal it will be the last one for a while unless they turn out to be blind, stubborn numbskulls...which maybe they will turn out to be.

Bull Market hits new high....barely....but watch out for slowing housing

There's a lot of media attention lately about how the bull market made a new milestone by hitting a marginal new high and is now 3454 days old, but as I type this the market has since reversed a bit off those highs. Articles that discuss the bull market point out how it's been met with skepticism all throughout it and the funny thing is that it  has been these same media outlets that have fueled that skepticism with their constant negative articles. I've been documenting it here for years about how the financial media has been poo pooing this bull run since day 1. So then, should we view this widespread acknowledgement of the bull market as a contrary indicator signaling  the end of the bull market? I think that's being too cute but it could very well mark a temporary top.

At the ultimate top I expect there to be a full embracing of the bull market. We saw a glimpse of that in December and January but the correction that followed quickly extinguished it. We saw heavy fund flows from Nov- Jan turning negative and flat since February and that's a good thing if you want to have that wall of worry rebuilt for the bull market to climb on. I was hoping to see more volatility throughout the summer to put the market in better position to push through the January peak but it didn't happen. It would seem to me that if we continue to rally here the odds of false breakout would be high but when it comes to making short term calls like this I'll admit that I can certainly get it wrong. I've made some good calls and bad ones too when it comes to the short term and that's natural because the shorter the time frame the more that randomness plays a factor. It's more important to get the long term trend right.

Something that's not really capturing the financial media's attention as much as it should be is slowing housing in the US which probably can be attributed to higher rates. This is very important as most recessions tend to originate from a housing downturn, not bullshit like what's happening in North Korea, Turkey, Italy or what Trump tweeted at 3am while taking a dump. At the very least, a slowdown in housing will put the brakes on US growth and if the Fed is slow to realize this and they keep hiking rates, it can turn the slowdown into outright contraction and that can eventually tip the economy into recession. With oil prices and commodity prices moderating and with memories of 2008 still relatively fresh, I think there's a decent chance the Fed will be able to see the risks of continuing their expected rate hike path and they put a stop to it much sooner than people are expecting. Everyone is expecting another 2 rate hikes before the end of the year and more to come in 2019. I think the expectations for 2019 will be proven dead wrong and we may not even get a hike in December. But I'm not going to hold my breath with the Fed as history shows they can certainly get it wrong when it comes to turning points in the economy. It will be an interesting next few months...

Recession in 2020? Don't bet on it

Since my last post we saw the market decline a little bit and then stage another rebound. Markets have been going sideways for the last 4 months. Bears will say that the market is topping while bulls will say that the market is just consolidating after that torrid run from September to January. I'm siding with the bulls at this point. What I see here is a market that is adjusting to a higher interest rate environment and with the economy showing no material signs of stalling with inflation still under control it's too early to say that the economy has hit a cyclical peak which would usher in the next recession. I still think there is a reasonable possibility of some scare in the market in the coming months that sends it below the 200 DMA and really flushes out weak holders. That type of cleansing would go a long way to propel the market to significant new highs. Of course, the market doesn't always give us what we want or when we want it.

I also think that the prospect of 3-4 rate more hikes by the fed won't happen...at least not as quickly as the market is pricing in. It simply seems too much too soon especially when the rest of the developed world i.e. Europe still hasn't followed suit. I think the Fed is a lot more mindful of the consequences of raising rates too quickly and inverting the yield curve.

I've been hearing/reading  a lot about how the consensus view from economists is that a recession in going to happen in 2020. When have these "experts" as a whole ever correctly predicted a recession? The answer is never. Given the motto of this blog which by now you should be a believer in after the countless number of times the market has humiliated the consensus view, we should expect a recession well before or well after 2020. What would be more surprising? To me it would be the latter.

Another thing I keep hearing/reading a lot about is how we are late in the cycle and that we need to position portfolios accordingly? Really? Were these same people telling you 6-7 years ago that we were early in the cycle and that you should be super bullish about the market? Of course not. The consensus has been chronically underestimating this bull market cycle from day 1. Yes, there have been times when the consensus felt bullish like what happened in late 2017 but the market corrections that followed extinguished such bullishness and turned it back to cautiousness/pessimism and we are seeing this process play out right now however I don't believe we have reached an extreme yet. Deep down people are looking over their shoulder for the next bear market/recession and like I said, I believe it will either happen a lot sooner or a lot later than 2020 unless the consensus view shifts in the future.

If we go back to 1994 and 2004 you will see that we are similar phase in terms of the interest rate cycle whereby rates were rising for the first time in years from recession low levels. The markets had turbulence during those 2 years and basically traded sideways the entire year. Once the market sensed that the economy was able to handle the rate hikes without stalling much and that the fed was going to stop raising rates for the time being, the markets took off again to make new highs.

I ask myself, where could I be wrong here? Didn't we see some classic signs of a bull market top like the cypto bubble bursting and the January blow off top fueled by a mad rush into ETFs? It's certainty possible but my gut says to be skeptical because that could very well just have been a flash of euphoria and there's room for more before we truly reach an extreme. I never got the sense from the media or from the investing public that they have truly, fully embraced the bull market. Plus, monetary conditions are not tight which is what you also see at the peak. What the January peak could very well represent is similar to the 1987 peak whereby structural bull market conditions were still in tact (growing economy, non-tight monetary conditions) but investor optimism got too high and Mr. Market had to punish them. When the market hit bottom after the 1987 crash, optimism turned to deep pessimism.  People feared a recession and even a depression would be immanent as comparisons were being made to the crash of 1929.  Perhaps we will see this type of deep pessimism before this consolidation phase that started in January has truly run it's course.

Market in precarious position

Since my last post we saw the market have a strong rebound as I expected which was got totally undone which was also expected. With the SPX now at the 200 DMA there could be a knee jerk bounce again but I wouldn't hold my breath. I don't expect this downdraft which began in January to be over until we see true capitulation and fear. I suspect we will ultimately get a break below the 200 DMA and all these technical and momentum types get shaken out. As I mentioned in recent posts, the bullish herd expects the yield curve to go inverted to signal the end of the bull market and that created complacency. It looks like Mr. Market  plans to make fools of them or at the very least punish them with a 20%  decline to get enough people to believe that the bull market is over before it resumes course.

We have to also consider the possibility that the bull market has indeed peaked and we are in the early stages of a bear market. As I said before, I didn't see all the conditions that would suggest this to be the case but who's to say that the market is going to give you everything you want to see? That is seldom the case. Major trend changes happen by surprise and that by definition means unexpectedly.

 I would call myself market agnostic at this point. The bull case is not dead by any means. What we could be seeing now could be reminiscent of 1994 and 2004 which were periods when the fed was normalizing interest rates which eventually created turbulence as the market became concerned that the fed would go too far. In addition, as rates go up it makes stocks relatively less attractive as a competing asset class and it lowers intrinsic values of equities as the present value of cash flows are discounted at a higher rate and rising rates results in higher borrowing costs. On the flip side, higher rates implies an improving economy and provides higher income for savers and those are positives for stocks and so you get this tug of war action because of these pros and cons.  Ultimately though,  it's rising interest rates that have killed bull markets and so the more the fed hikes the greater the chance that the negatives will outweigh the positives and I think we reached that tipping point in favor of negatives. One of things I think we need to see happen for this rout to ultimately end is when the fed changes its tone and starts hinting at the end of this rate hike cycle or at least a prolonged pause which led to the end of the routs in 1994 and 2004.

The possibility of a full fledged trade war between the US and the rest of the world is also weighing on the market. As of now the tariffs being imposed by all are not significant but the concern is that things could escalate. Last year people feared that Trump would hurt the markets and they were wrong or at least premature in this fear but now it seems that Trump is purposely poking the hornets nest to create attention for himself in some sick way and it's starting to spook investors. As I said a few months ago, political risk could be something that actually matters this year. So, you have a combination of risking interest rates, rising political/trade turmoil coinciding when people have piled into ETF index funds like lemmings at a time when the market was overbought on multiple time frames 9 years into a bull market. Not good! It will take some time but I believe that the lemming stampede into to ETF index funds will get undone and we will see a lemming stampede out of them at some point this year which could crater the market. 

The purpose of the market is to make fools of as many men as possible.

What a February it's been so far.  Bubbles popping galore. Crypto bubble pop, weed bubble pop, short VIX bubble pop and perhaps ETF bubble pop. Markets have taken quite the dive and we got the fabled 10% correction that so many have been calling for since the summer. While there is certainly concern out there, I don't get the sense of doom like in previous corrections and that's a big problem. The message that seems to be out there is "relax it's just a correction the economy is fine". Sorry, but that's not what long term bottoms look like. "Now is a time to hunt for bargains"says Cramer. Not what long term bottoms look like. Fed chief Dudly calling the drop "small potatoes". Not what a long term bottom looks like. Trump calling the drop "a big mistake". Not what a long term bottom looks like. That's what you call complacency. What you need is fear.

Throughout this bull run that began in 2009 there was usually a wall of worry for it to climb upon. There was always some concern, some issue that kept people from fully embracing the market and that wall of worry is what a healthy bull market needs to climb upon because concerns/worries  keep expectations low and as they get resolved the markets adjust by moving higher. Coming into the new year that wall was crumbling as the prevailing consensus was that it was blue skies ahead as the global economy was experiencing synchronized growth. Near the most recent peak, the market got extremely overbought on multiple time frames, sentiment as per AAII and other measures were at extremes and there was a surge in fund flows. So, has this 10% correction cleared out these extremes? Not so, at least not yet. There has been a pullback in bullishensss and there was a decent outflow last week, but I don't think that's enough. If we are to assume that the bull market is still in tact, before it's ready to resume its upward march on a sustainable basis I expect to see the opposite of what we saw at the peak. I expect to see bears outnumber bulls 2:1, major outflows and the permabears coming out of the woodwork claiming that the bull market is dead. Notice that the permabears have been fairly quiet. Where is Roubini? Where is Prechter? Pretty quiet  now after having their asses handed to them for 9 years calling a crash at every turn.

The other question I ask myself is "did we see actually see the bull market peak"?  Not all the signs were there but some were. Most bullish strategists seem  to think ""there's no inverted yield curve and so not to worry about a recession and therefore major decline in the market". As the motto of this blog goes, the purpose of the market is to make fools of as many men as possible. Once there is a consensus about something there will come a point where too many people are positioned the same way and eventually Mr. Market pulls the rug from underneath their feet. Major declines always catch the majority by surprise. So maybe we don't get a recession but we do get a major decline anyways like in 1987. Or we do get a recession and a major decline? Either of these scenarios would catch the herd by surprise.

In the short term the market is oversold enough to have a rebound but I would be very careful in assuming that it's anything but a dead cat bounce  until we have seen the extremes that marked the top get completely reversed. I don't know how long that could take. When you start seeing headlines saying "the bull market is dead" and people are fleeing from stocks that's when you'll know a real bottom is close.

The good news about the crytpo bubble bursting

It's clearly game over for crypto. I said before that the sooner the crypto bubble pops the better. News about crypto ETFs being pulled and credit card companies beginning to ban it is a GOOD thing (although I was hoping for  an ETF rollout so that I could buy puts on it). The longer this crypto mania would have continued the greater it would have infected the general economy when the inevitable collapse happened. Hopefully the fallout to the economy will be minimal although it's tough to say at this point how much unwinding of leverage and capital destruction this will result in. I for one will NOT take this fallout lightly. I really need to find out what kind of damage this has resulted in.

If that was the bull market peak...

Major selloff this week. So, was that it? Did we just witness a blow-off top to cap this 9 year bull run? Well, I've been saying repeatedly on this blog: Bull market peaks are made when there is tight money and euphoria/greed. There was definitely flashes of the latter with the bitcoin craze and weed craze which I think are over, but we didn't see tight money because inflation, although picking up, is not a problem at this time.  The yield curve did not invert and therefore, no recession would appear on the horizon and that's what ends bull markets. In 1987 there was a similar situation where the market had been soaring for months, greed was in the air and there ended up being a 25% crash. It's debatable as to whether you can call the 87 crash a bear market. To me, I look at it as a major pullback in the bull market that began in 1982 because the drop was swift and short lived.  Be prepared for the possibility of this type of drop because the markets have simply gone up in a straight line for a year. The trigger of the 87 crash was arguably rising bond yields in the face of a market that had been so strong for months and that made people start to get jittery. Then a bill got passed that made mergers & acquisitions less appealing (M&A was in a frenzy at the time) which created more selling pressure and then there was the popular use of portfolio insurance, which arguably was the straw the broke the camels back and was largely responsible for creating the biggest one day market collapse in history. This time around we have rising bond yields. We don't have portfolio insurance but what we do have is a mindless amount of ETF buying that took place during the past couple years. If sentiment turns negative let's see how how the appeal of low fees holds up during a  meltdown whereby ETF holders have no escape as they are held hostage to the indicies. ETF selling could exacerbate a correction into a full blown panic especially if there is leverage behind these purchases.

Be very careful at this junction. Markets could have ST bounce but I suspect that we are going to see a much larger correction at some point to clear out the excesses that have accumulated. I expect to see YTD gains wiped out at the very least. So, bottom line I don't believe we are entering a bear market but it may feel like one soon enough.

Optimism Phase with flashes of Euphoria via weed and blockchain stocks

The market has gotten off to a rip roaring start up about 4%. It's been a breathtaking move these past 5 months. I've read somewhere that the Dow Jones is the most overbought in its history which spans over 100 years! I remember back in the depths of the 2008 meltdown how insanely oversold the market got in November of that year. Overbought markets are not necessarily a sign of a top, it can often signal a long term breakout but even in such cases, a resting phase tends to follow where the market consolidates. That has to happen at some point. Many have been calling for a 10% correction since at least September and have been made to look the fool. That's the thing about trying to play a correction in a bull market. It's very, very difficult to time and even if you get the timing right, the correction often doesn't go as deep as you were expecting.  Now, having said all this, if was was ever a time to be on the lookout for at least a consolidation it would have to be about now given the sentiment surveys and signs of excess with the weed and blockchain sectors. We are clearly in the optimism phase of the bull market with flashes of euphoria.

People are blindly piling into these 2 hot sectors despite the likelihood that most of these companies will never be profitable. I've been around long enough to know that investing on hype in the long term is a guaranteed loser however in the short to medium term if you are a nimble trader you could do well. At this point however, if you get in  you'd be arriving late to the party. I overheard an adviser at a conference the other day talking to his client about ways to play the weed sector. The average retail investor is very keen on this sector and bitcoin/blockchain too and that to me says stay away. Sure, they can go higher but I'm always looking to be one of the first people at a party, not the last. You jump in now, you need to be a trader, not an investor and have one foot out the door. That's not my style. That's essentially gambling.

The interesting thing about the bitcoin mania is that there is also no shortage of warnings about it being a bubble with a crash being immanent. Warren Buffet recently chiming in that he's certain crypto will end badly one day. If we go by the motto of this blog it would suggest that if a crash were to happen, it won't be just yet. It suggests that the market will first frustrate and shake out a lot of the skeptics just like it did in 1999 with the tech bubble and 2006 with the subprime bubble and then the rug will be pulled out from underneath everyone. So, we could very well see a lot of chopping and flopping with the price of bitcoin  before it rolls over perhaps later in the year.  As such, I'm staying away from this sector but I do want to bet against it one day as I agree with Buffet and don't ever try to write this guy off as being old and irrelevant. Nobody is infallible but this guy has been right far more times than wrong and you don't get labeled as one of the greatest investors of all time for nothing.

I remember when Buffet came out with his bullish "buy America" call on October 18, 2008 when the S&P was about 945, obviously a great call in the long run but in the 5 months that followed the S&P went down another 30% and I bet a lot of people thought he was a fool and lost his mojo.  The skeptics of crypto may have to go though a similar baptism of fire with many of them capitulating or least becoming silent. We'll see how this plays out...