“JC, how can you be buying stocks up here?”
“JC, stocks are overvalued”
“JC, stocks have gone too far too fast”
“JC, aren’t we due for a correction?”
I’ve heard some version of this every single day since the Spring.
These are the types of questions that come my way during bull markets. I don’t get them when stocks are in downtrends, that’s for sure. Different types of questions come in those environments (How low can we go? Aren’t we due for a bounce? etc)
I remember vividly throughout the second of half of 2019 getting asked these sorts of “When do we turn bearish JC?” questions while we were obnoxiously bullish stocks. My answers typically revolved around a deterioration of market breadth. In other words, last year we were seeing more stocks making new highs, more sectors participating and more countries breaking out. That was the trend. I told the journalists and clients that if/when we started to see the opposite (fewer highs, fewer sectors and countries) then we would reevaluate and change our approach.
That finally happened in late January of this year. So we acted accordingly.
Fortunately we’ve been incredibly bullish equities and spending almost all of our time looking for stocks to buy, not looking for stocks to sell. That has been very rewarding for us and anyone following along which, as it turns out, is a lot of people. That makes us really happy.
But that doesn’t change the fact that we’re always trying to imagine what a market environment might look like with stocks under pressure. What else is happening around the world if owning stocks is a bad idea.
I laid out 4 big ones a few weeks ago. So make sure you’re caught up on those. I think they are very very important and should be a great indicator of selling pressure to come. We dove in deeper on one of the 4 last week, so check that out here.
Besides some of the Intermarket relationships likely to signal that selling pressure is coming, what else can we look for as a warning sign?
Well, in my experience (both good ones and bad ones), periods of aggressive selling are regularly preceded by many failed breakouts. “Whipsaws” we call them. Legendary trader Ed Seykota even wrote a song about it. (Warning: The song is very catchy and will stay in your head all day. You’ve been warned)
Go back and see, you’ll find whipsaws all over major indexes and even in specific stocks and sectors right before the major selling pressure comes. This is a classic characteristic of the beginning of downtrends. October 2018 was one of my favorites.
Today we find ourselves in a position where if we’re going to have whipsaws, this would be a perfect place for them to occur. Check out what the Dow Jones Industrial Average and NYSE Composite look like:
Look how prices have just recently broken out above their Q1 highs.
Are these real breakouts? Or they will turn out to be fakeouts sparking aggressive selling in stocks around the world?
To be clear, there is absolutely zero evidence here that these are failed breakouts. In fact, by our work it’s quite the opposite. Stocks should continue higher and we remain obnoxiously bullish.
The bearish whipsaws are only valid if these indexes are back below those former highs. Otherwise, these are just regular, perfectly normal “uptrends”.
BUT, if you’re wondering what it might take for us to start changing that tune, if you’re wondering what we’re talking about as a team internally to start turning the corner and looking for more shorts, this is one of them.
We’ve got 4 Intermarket relationships that we’re focused on as well as the potential whipsaws above.
If we were to get some kind of correction, I think it’s one we want to buy. But even still, we’ve ALREADY gotten corrections underneath the surface. If you take a look at many of the largest stocks on the planet, most of them have done nothing over the past 4 months: $AAPL $AMZN $NVDA $FB etc
If you want to zoom out, take a look at the Dow Jones Industrial Average and Dow Jones Transportation Average, arguably two of the most important indexes on earth, until recently they had done nothing for almost 3 years. To me, it looks like they’re just getting going, after a multi-year correction.
Zoom out even more. Look at Emerging Markets, 13 years of no progress. Same with US Financials, still negative since the 2007 peak.
How about Europe? Down over the past 20 years. Down!
Japan? Should we even go there?
Are you looking for a correction? In many cases, and on many timeframes, it certainly appears like we’ve already gotten them, and now we can move on.
Is that the narrative you’re hearing out there? That we’re closer to the beginning of a new bull market, and not near the end of one?
I don’t hear that narrative at all. People think I’m crazy when I tell them that.
It’s probably not a bearish indicator.
Let me know what you think? Am I on to something here or not a chance?