One of the big characteristics that often separates great traders from mediocre ones is the willingness and ability to sit on the sidelines when it's necessary.
A brief adage we often mention is the distinction between seeing a setup and looking for one. Be patient, prepare your perfect swing, and the setups will come to you.
We never actually know that we've been in a bull market until well after the bottom.
It's easy to look back and pinpoint the March 2020 low or the March 2009 low, for example, and say, "That's when the bear market ended and a new bull market started".
But in real time, when we're going through that transition, how can we possibly know?
Well, classic signs of the end of the bear markets are things like historically bearish sentiment extremes and washout breadth levels.
We obviously had both of those as our sentiment readings this summer were the most pessimistic since the Great Financial Crisis, and only 14% of stocks on the NYSE were in uptrends (compared to almost 90% entering 2021).
Those are the things you see just before the market turns.
Now, what are the things you see just after a market turn, around the 2nd inning or so?
Momentum thrusts.
Relentless buying pressure coming off historic selling. And that's precisely what we've been seeing over the past month.
I’ve got an old pair of Chaco sandals that I’m not ready to part with just yet. But the soles were becoming detached from the footbed, so I had to do a little repair work.
I glued them up and started thinking about rigging a clamp to provide even pressure to help the glue set. Catching sight of a couple of bricks laying nearby, I realized that these would work just fine for this type of job.
Would a well placed clamp or two have produced a more textbook repair? Perhaps. But the bricks I had at hand worked just fine for this.
As many of you know, something we've been working on internally is using various bottom-up tools and scans to complement our top-down approach. It's really been working for us!
One way we're doing this is by identifying the strongest growth stocks as they climb the market-cap ladder from small- to mid- to large- and, ultimately, to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B), they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn't just end there.
We only want to look at the strongest growth industries in the market, as that is typically where these potential 50-baggers come from.
Key Takeaway: Permabulls will almost always complain about rallies being unloved, just as permabears never leave their refrain that downside risks are under appreciated. That is the prism through which they view the world. In the current situation, complacency is rising and optimism is building, both from low levels. After the buying panic seen in the NAAIM data in July, we saw something similar in this week’s data from Consensus Inc (the largest one-week increase in optimism in over a decade). Even though bears still outnumber bulls on the AAII survey, equity ETF inflows are heating up. The shift from excessive pessimism to increased optimism is the most bullish part of the sentiment curve and that is where we find ourselves. Breadth thrusts and surging momentum are cherries on the top.
Sentiment Report Chart of the Week: Strong Momentum Doesn’t Usually Just Evaporate
Monday night we held our August Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.
During our morning Analyst meeting today, the team was looking across a variety of asset classes and sectors to identify the current leaders, and those likely to continue tracking higher if the broader stock market rally is for real.
One sector that stood out starkly was Big Pharma.
There are some monster bases in the process of resolving higher here.
One of the common criticisms of technical analysis is that it's all self-fulfilling prophecy.
Its proponents argue that technical analysis doesn't work by understanding underlying supply and demand dynamics.
Rather, it operates on a single dimension, where market events are caused either directly or indirectly by a preceding prediction by technician that it was going to perform a certain way.
An intuitive example of the self-fulfilling prophecy hypothesis (SFP) is the classic technical analysis principle of support and resistance.
Those who favor SFP argue that markets only sell off at resistance and bottom at support because other traders identified these levels and acted according to technical analysis principles.
After all, a self-fulfilling prophecy is defined as a person or a group's expectation for the behavior of another group bringing about the expected behavior.
