I know that the market, based on a variety of metrics, seems expensive, and I know that after such a long bull market, a bear market would seem like it’s overdue, but these things are not very good predictors of whether we’re actually entering a bear market or not because these have both been true for a very long time now and it would hardly be surprising to see them continue to go on for some time still.
I also know that there are narratives at hand: the Fed isn’t our friend here now and there are geopolitical events menacing us. And yet, with these, too, they are not terrific predictors of whether we’re entering a bear market either. As I’ve pointed out before, the market doesn’t simply collapse the moment the Fed raises rates. And even if the market had a history of doing so (it doesn’t), they haven’t even yet raised rates. And: Russia hasn’t yet invaded the Ukraine. And so what are we to make of this? The market weakness seems to me to be fear generated by anticipation. Bad things happening is a good reason to evade risk. But thinking about bad things that might happen and haven’t yet happened may not be a good reason to evade risk. Now, what sort of person evades risk at the mere thought of bad things? I suppose it would be emotional market participants. Folks prone to panic. And those are precisely the sorts of folks who sell bottoms (and who buy tops when they get too excited at highs).
I want to point out a few things that tell me a story that I think is plausible here. Let’s look at the S&P.
- At the green arrow splash, we saw evidence of heavy institutional selling
- At the red arrow whirlpool to hell, we saw evidence of record retail liquidation (to the tune of over a trillion dollars)
- Immediately after that (orange arrow), and ever since, we’ve seen record Dark Index prints
Now, putting these together, if you think we have much lower to go, then you believe that institutions introduced volume near a low not much higher than the low at which retail was eviscerated, and then you have to believe that all of the dark pool activity is retail diving right back in at the same prices they were just driven out from, and that they’ve continued to go all in at only slightly higher prices. And frankly none of that makes very much sense to me.
Rather, I tend to believe that institutions move markets to their benefit. And in this case, it seems to me that they had a good idea as to precisely where they needed to take the market to push all the dumb money out. And once they were out of the way, they’re likely accumulating like mad because they believe we’ve still got a long way to go. At the very least, whoever bought that record volume low will want to distribute at much higher prices. And we just haven’t seen any signs of a long distribution here yet.
And so, to my mind, it seems that “they” knew just what it would take to push a big part of retail out before the next major markup. That’s what I think here. And review the evidence I pointed out in that earlier post: everything I said there remains true regarding sentiment, the macro stuff, all of it still seems on track here. Taking this in conjunction with a plausible bullish wave count and I think 4900 is a real possibility soon.
That said, I’m not blindly bullish here, as my many detractors seem to want to believe. If things get ugly, I’m not going to just gape at the screen. I’ll respond to things as they develop if they deteriorate. But as things stand now, I’m not too worried yet and I think the nexus of probabilities continues to point up, if not even very strongly up for the time being.
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