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Before we can definitively answer this query, there are a few issues that require addressing. Make no mistake, this comparatively long stretch of selling has been disconcerting for the vast majority of market participants. A twenty percent pullback in the major indexes constitutes a technical bear market and its mere mention is enough to instill stirrings of fear in even the most grizzled, tenacious and risk-tolerant of market participants. Add to that the thematic underpinnings of the ever-devolving geo-political scene and you have the recipe for a sentiment-driven, continuation lower that has no discernible duration or bottom in sight.

However, the indexes appear to be acknowledging the 20% correction technical values for now, and have risen off their lows. On Christmas Eve we saw the Dow drop over -650 points, only to see the biggest one-day rise in Dow history the day after Christmas. An epic 1,086 points. And then upside follow-through on Thursday, where the Dow gained another 260 points. Friday closed lower, but only -76 points.

And while there are plenty of reasons for markets to bounce, not the least of which is the seasonal Santa Claus Rally, this price action is endemic to bear markets. In other words, it is tantamount to a confirmation that we are in a bear market to see these dramatic up moves. And it’s important to acknowledge that, from a cyclical perspective, the market was due for a “rest” from its bull run.

So, where do we go from here?

With one more trading day remaining in 2018, there could be the final vestiges of pension fund buying and so-called window-dressing buying on the part of fund managers and institutional investors. This would most certainly provide an upside bias. But the longer-term market momentum is still to the downside.

Just like the bulls looked to the dips as opportunities to buy, bears look for the rips (rises) for opportunities to sell. Add to that the fact that most of the market is now traded by computers with all manner of algorithms reacting to even the slightest bit of bad or good news and/or economic data, which as we’ve witnessed has sent prices rocketing higher and spiraling lower all in the same day, and the average investor and/or trader has no idea what to do or what to expect.

For almost ten years, the markets have reliably risen off their lows. And BOTD, or Buy On The Dip, has become a mantra for market participants. There are even BOTD trading groups that have built their trading strategies around this. Heck, I’ve employed this strategy on numerous occasions. But nothing lasts forever. And it’s quite possible that we’ve finally come to that place where the phrase, “This time it’s different” may be the rule and not the exception.

Expectations must change. There’s a need for shifting mindsets. I’m not saying become bearish, I’m simply saying that market participants need to acknowledge the new reality they are facing. Waiting for the market to recover and make new highs is not in keeping with the current environment.

Sentiment is bearish. Momentum is to the downside. And analysts are revising their first-quarter earnings estimates and 2019 year-end estimates… lower. We’ve seen this before. And it’s prudent to accept what is happening, in order to properly protect your portfolio and “live to fight another day.”

Remember: Cash is a position. And when equity values decline, cash becomes even more valuable. And dividend-paying stocks are viewed more favorably because as stock prices fall, dividend yields rise. However, in a market such as this, it is far better to buy on the way back up than attempt to pick a bottom. There is still plenty of room to the downside for this market to fall.

Stay objective. Accept the new reality. Be honest with yourself and know your risk-tolerance. If you do choose to trade, hedge your positions. This is an unbridled market and it will thrash around as if it has lost its mind, which is ironic, given the fact that it is mostly traded by computers. And that’s a whole new level of market dynamism that exponentially increases the pressure on trader’s minds and psyches.

So, where are we? We’re in a transitional market phase. Not a transformational market phase. At least, not yet. We’ve seen a few of these “wake-up calls” during this bull market and they’ve all been resolved. And the bull has found a way to continue its run.
Will it happen this time? I have no idea. I can only trade what I see and feel – if I choose to trade at all.

Some days, I simply watch the market go through its gyrations. Other days, I get a feel for the price action and I participate. After almost 30+ years of market participation, I’ve learned who I am as a trader and how to interpret the language of the markets. And, most importantly, when I’m in sync… and when I’m out of sync with the markets. There’s no shame in not trading. In fact, it’s a form of valor to simply let the battle rage on without you.

The 2018 markets have had something for everyone. Bulls and bears alike. The world is an unsettled and uncertain place – more so than it ever has been. And we know the market detests uncertainty. However, at what point does uncertainty become the only certainty? That’s basically a play on the adage, “Expect the Unexpected.” At some point, the market prices in uncertainty. Or does it?

So, are we at the end of a trading era? Or, is this an opportunity of a lifetime?

Or… is it both?

Only time will tell.

There’s just one last thing to keep in mind: the market always recovers. It must. The natural gravity of the market is to go higher. This is a market truth.

The only question is: when will it recover?

Happy New Year, Everyone!

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4 Comments
  1. Ethan 6 months ago

    Excellent description of how markets are acting now, Mr. Golden!

    • Seth Golden 6 months ago

      @ethan Wayne Nelson is the author and made a great contribution with this article outlining his experience in the market and general thoughts for our subscribers to consider. Good work!

    • Author
      Wayne Nelson 6 months ago

      Thank you for your comment, Ethan.
      Glad you found value in the article! There will be more for your perusal and consideration.

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