We could not be more thrilled to see stocks selling off. There has been more than enough evidence since the beginning of October to suggest that a more neutral approach to markets and/or selling stocks short has been the best course of action. Passive investing is great, in theory, but markets like this remind everyone that hope is not a strategy. We need to weigh the evidence as it comes in and always reevaluate our thesis.
Over the past couple of years you’d have a hard time finding a bigger US Stock Market bull that me. There was no reason not to be incredibly constructive towards equities. Leaders were leading, consolidations were resolving to the upside and the trends globally were up. We didn’t think it made any sense whatsoever to fight that trend, while many others did. Top callers were horribly wrong for a long time.
Fast forward to the first week of October this year and things had changed dramatically. We were entering into a new regime. This time, in fact, was different. With stocks around the world, sectors and stocks making new lows, not only are we not seeing evidence of a bottom yet, we’re actually seeing an expansion of downside participation and confirmation of the downtrends we’ve felt have been in place for almost 2 months.
Today we’re taking a look at the S&P500, which is the benchmark for many asset managers out there. I’ve said from the start of this correction that a stock market crash is absolutely a possibility, especially if S&Ps are below 2660. So if that’s the case, we position ourselves for one and we hope every day that a market crash occurs. I understand that many people may not like the repercussions of a severe stock market crash, but if we’re short stocks and long treasury bonds, we wake up every day hoping for a crash to come. There is nothing wrong with that. In fact, anything else would be unAmerican.
The 2660 level represents the 261.8% extension of the 2015 correction, which was the last one of these that we saw before the rally from 2016 through early October. If we’re below that, a severe market crash is absolutely on the table, and we hope it happens.
The next levels are 2335, which is the 161.8% extension of the 2015 correction, and then 2135 which were the highs from 2015. I think both are a good possibility.
So what is a “stock market crash?”. It’s hard to define. Let’s just say, you know it when you see it.
What is the best case scenario here? For the bulls, I think it’s holding above 2660. If we can get through the holidays holding those levels, it could be the start of some constructive action and base building which can lead to a breakout eventually in Q1 or so.
I doubt that’s what’s going to happen. The widening credit spreads, expansion of downside participation and overall downtrend in stock indexes and sectors has us continuing to err on further downside.
We’re told by people who don’t trade that we should not have any emotions. They tell us we should be robots. That’s idiotic. We’re humans, we have emotions. The key is to recognize them but not allow them to impact our decision making. If you’re short, you want stocks to go to zero. There’s nothing wrong with that. And I’m still in that camp.
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