Fool Me Once, Shame On You; Fool Me 5 Times, And I Have Lost A Lot Of Money
The last two years have presented investors with some shockingly “unexpected” stock market reactions. We have seen many news events hit the wires which were supposed to result in disaster for the stock market. But, what has occurred has likely confounded most of you that have used news to guide your investment activities.
Remember back to the Charlie Hebdo attack in France, the Fed rate hike in December of 2015, the certain “crash” calls in February 2016, Brexit, Trump, the Fed rate hike in December 2016, etc. We have experienced many news “shocks” which were supposed to cause serious damage to the market over the last several years. Yet, the market was still able to provide us with a 600 point rally up to 2400SPX from February of last year.
For those that have been looking for that elusive stock market crash for the last two years, has any of the reality of the market made you question your thesis about market news and fundamentals?
We have had so many news events that were supposed to crash the market, as presented above. Moreover, almost everyone you listen to today is clear that the markets are trading well above their fundamentals right now. So, maybe news and fundamentals really do not drive the markets?
Yes, I know this is akin to blasphemy, but at some point you are going to have to question what you think you know about markets. I mean, if the great majority of the market is trading or investing off these news and events and fundamentals, and they have found themselves on the wrong side of a 600 point rally from the February 2016 low, should that not tell you something?
You see, I am not beholden to fundamentals or news for my directional bias about markets. Rather, I view that market sentiment provides me with all that I need to know. If the general market is too bearish, then the market tends to move in the opposite direction. If the general market is too bullish, then the market tends to move in the opposite direction. But, we need points of extreme sentiment to often market larger degree turning points.
As you can see from our analysis during 2016, this perspective worked out almost perfectly in ascertaining just about every top and bottom during the year.
And, consider that 2016 was the year where we have seen the most whipsawed investors in quite some time, especially since most were expecting the news events to drive the market lower.
Back in early November of 2016, we were forecasting a strong rally into year end, which we expected to continue into 2017 NO MATTER WHO WON THE ELECTION. Yes, you heard me right. It did not make any difference to us who won, as the market sentiment was suggesting that we will likely see a strong rally into the end of the year and beyond. In fact, we were not expecting any real type of pullback/consolidation until we struck the 2400SPX region.
But, once we struck the 2400SPX region, we began to look for a consolidation, as you can see from the attached daily chart. While it is possible that this consolidation may be just about complete, my preference is that it still pushes us out until the middle to end of April before this consolidation is completed.
However, please recognize the more bullish potential we still see in the market going into the summer. We still expect that market to rally towards our next higher target between 2487-2547SPX, with an ideal target at 2501SPX. And, even beyond that, there is potential for the market to move beyond 2600SPX late in 2017, or early into 2018. So, I still think it is wise not to feed the bears just yet.