Melt-Up or Roll Over Of The DOW Index?

April 14, 2019

Having trouble making sense of the market?  Do you feel like you are living in some sort of a parallel universe where almost everything happening in the market seems to be the opposite of what you have learned should happen?  You are not alone so let’s try to make some sense of it.  This weekend I will present two possible outcomes for the stock market and the rational behind them.  We will also look at some out of favorite stocks in a bull market.

I see myself more of a market strategist than anything else.  What I have learned after actively watching the ebb and flow of markets for almost 40 years is that the simplest approach is typically the best approach for us mere mortals.  Sure we may be able to score a few short term trades here and there, but the amount of effort and focus it takes makes it unrealistic to make it ones primary investment approach.  It takes an investment professional to consistently make money as a trader.  Those of us who work for a living are best served trying to ride a bull market and not get too wrapped up in the day to day motion of the market. But to ride a bull one must know an awful lot of things, because it takes an independent critical thinker to buy a bottom and sell somewhere near the top after a market fully expresses itself to the upside.  He must be able to divorce himself from the crowd and believe in himself.  He must be able to be comfortable being alone from time to time.  To me the most important thing is to understand where the market is in the greater scheme of things.  I say this because it is my personal approach to investment to find and be in a bull market and to avoid bear markets at all costs.  My observation is that those who listen to Wall Street’s advice to be in the market at all times is suicide.   Bear markets destroy investors and they ruin ones ability to ride the next bull market upward due to the psychological damage they incur.

It is my considered view that we are in the final topping phase of this 10 year bull market.  It is extremely broad and stretching over a 2-3 year period.  The length of this suggests it may  be not just the top of the last 10-year cyclical advance, but could even be a secular top of the bull run since 1982.  It would usher in a shift out of the favored asset classes of the past replacing them with a whole new class of assets to power the next bull market.

Making Sense of the past 2 years

I have chronicled the action in the general stock market over the past two years.  It was actually somewhat textbook in the way it unfolded until recently.  After the Trump election the market entered a Phase III advance where the public finally entered into the market and embraced the risk.  By December 2017 they abandoned all fear jumping all in.  This can be seen on the chart below in the 2-month period from Dec 17-Jan 18.  This was a case of classic bull market buyers’ capitulation, throwing all concern for risk aside as fear of missing out took over.  After the severe sell off in Feb 18 the market recovered throughout the year into a typical early fall peak.  The FED had been raising rates slowly over the past 3 years and finally found the bubble bursting point in late fall.  After the sharp 19% decline by December 24th the FED made a total 180 degree reversal.  The new stance became to stop raising rates and announced an end to their balance sheet reduction. Since then the market has been celebrating Powell’s successful medical operation of removing his spine.  The FED has returned to its roll of the past 25 years of stock market money supplier and cheerleader.

Above we see how the vertical rally since December 24th has now ANNULLED the bear market signal of December 14th. This does not mean we are in a bull market, just that the previous bear signal is no longer in effect.  So we are in neutral territory as far as Bull/Bear market classification.

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During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.