The Stock Market Is Trying to Knuckle Up? Should You Be Worry?

The Stock Market Is Trying to Knuckle Up? Should You Be Worry? ...

  • Despite the stock market''''s recent sell-off, sticking to your investment plan is still the best strategy.
  • There''''s evidence that the market may bounce soon in what is known as a relief rally.
  • It''''s important to remember that even though this year has been tough, the stock market always rebounds eventually.

This year, the market has had a lot of problems.

The issue is quite complex.

If you want to know how much of last year''s high-flyers are down, the S&P 500 is in correction territory, down more than 12%, and the NASDAQ? Yes, it''s in a bear market, down more than 20%. You don''t even need to know how many of last year''s high-flyers are down. Let''s just say it''s a lot.

Your portfolio is a sea of red, and your head may be spinning.

It will be appropriate.

It may not be tomorrow, next month, or this year, but the stock market is a fantastic wealth generation machine, and as a result of the dramatic sell-off, the chart will just be another data point.

Nothing more. Nothing less.

Don''t believe me? Look at the arrows in the following chart showing the historical prices of the S&P 500 ETF (SPY) since 2007. The Great Recession, quantitative tightening in 2018, and COVID in 2020 made for terrible markets, but the market eventually stieg.

Still need proof? The S&P 500''s year-to-date return is the worst in 30 years. However, the S&P 500 has increased by 887 percent since 1992. Quite simply, there were some shady moments in the early 90s, but there is still a lot to do if you don''t have to.

Stay the course

When stocks recover, I''m unable to anticipate it anymore moments stutter investors out during massive tapes. However, the pain experienced by emotionally driven panic selling is palpable.

I couldnt take it, so I sold it all. So the markets are rallying, but I can''t believe it. It will not last. There''s something wrong for equities to move higher.

In my career, I had heard this argument many times. After successful completion, the seller becomes the buyer again, but only after missing the greatest move.

Remember that the average return during a bull market was 38 percent, compared to the 12% average return in the second year, and the markets had a 10% annual return since 1926.

However, it isn''t going to be missing the first year of the bull market. It can be costly if you sell something, leaving you out of even a few of the best-performing markets.

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According to J.P. Morgan Asset Management, a $10,000 buy-and-hold investment on January 1, 2002 increased to $61,685 on December 31, 2021. However, missing the ten best days over that span reduced the nest egg to $28,260. If you weren''t in the market during its best days, you gave up 334 percent in cumulative returns.

Even after the Great Recession, 2018''s fourth-quarter swoon, and 2020''s COVID-driven craziness, wetter things out. When stocks fall, you cant do anything correct. When stocks fall, but when they rise, we feel like Midas.

I do not know when the market will fall. Nobody has a crystal ball. But I do know that market pain is high, and investor sentiment is harrowing. The total put/call ratio is bullish below 1; this is among the lowest readings since the early 1990s. The number of stocks trading 5% or higher below the 200 DMA is relatively high. And the volatility index (VIX) is back above 30 for the first time since the March lows.

Carley Garner of Real Money Pro says in "There Could Be Light at the End of the Tunnel"

The VIX spends most of its time under 20 but can expect immediate rises. Historically, the VIX has struggled to break above 35 to 40 but did during the Covid crash and the financial crisis. Nevertheless, any stock market selling accompanied by a VIX peak near 35 has generally resulted in a stock market recovery. A head-and-shoulders pattern is exactly how it sounds; it is a three-wave rally in which the two shoulders post lower highs than the middle rally (head).

A fire is generating energy.

Is the Fed''s next interest rate recommendation the spark? It may not be surprising that the May 4 meeting is already pricing in a dump truck full of tightening, including rate increases, and a run-off of bonds on its balance sheet. If not, then maybe we get a buy the news rally.

Garner''s Resurrecting

"Some of the mistakes that led to corrective action in stocks might have taken their course,," says the president. It should be noted that the Fed hasn''t always been capable to follow through on its rate-hike campaign ambitions (remember 2019/2019?). Perhaps the market has priced in higher rate hikes than the Fed will be able to, or need to deliver."

Or maybe the spark will come from somewhere else in Real Money''s market reconearlier this week. GDP is decelerating. It''s encouraging because inflation will fall, and the Fed will not need to hike as much as its forecasting?

Again, pure speculation.

Despite the fact that if the market sells off a bit more, it will well get oversold (at least short-term), and if the market is oversold, it might not take long to light a fuse for a rally.

Is It that you can offer Helene Meisler, the top stock, who uses oscillators to help determine if bulls or bears are favoring.

Bears still have control, but Meislers indicators might become more useful in the coming days. Meisler says:

I can now tell you that by the end of this week/early next week the indicator stops going down. It doesn''t exactly spur upward, but it does stop going down. That is a sign of "oversoldness" short-term.

If so, then a real money pro''s switch this week might be prescient (if you missed Monday''s Smarts column, here it is again).

In his diary, Kass reaffirms his growing bullishness today.

As the Bee Gees stuttered, emotion has taken over the marketsA market recently dominated by overly passionate and emotional activity is an opportunity for tactical trader and investorTypically, such an opportunity is not borne out of selling (to those who "don''t give a damn") - but the emotional selling might provide a birthright for reasonably appealing entry points.

The Smart Play

This year, its a trading tape, so it paid off to sell rallies at resistance and buy the market at support. However, individual stock picking has been a different story. You either embraced the business cycle trade I discussed when Smarts first launched and hung in there, or you was screwed up.

I''m still concerned about a traders tape, but focus on late-cycle stocks is better than buying high-beta, early-cycle discussions hoping for snapbacks. Eventually, early-cycle stocks will form actionable entry points. However, we''ren''t there yet.

Is the 200-day moving average on your price chart? Is the 200-DMA rising or declining? Is the stock market current price above it or below it? If you are a short-term or intermediate-term trader, chances are you are favoring buying strong stocks on pullbacks rather than pawing through past high-flyers hoping for glory.

It''s impossible to select exact bottoms consistently. But you must be aware that all you need to do is be in front of them. Right now, indicators indicate we might be within reach of an actionable rally. If we get caught up a bit more, try taking a few things here and another.

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