by Jean Josse
It has been a little over 3 months since our last commentary where we predicted that the market was likely to begin a big trending rally as we cleared almost 2 years of a range bound S&P500 and other major indices.
Ranges are very important as they serve to washout any excesses from the previous rallies such as in 2016/17. Many traders and investors during the last 2 years were on the sidelines because of the whipsaw nature of range bound markets, specifically rallies followed by steep corrections.
Once markets finally break out of the range, like they did in October of 2019, many investors don’t initially trust the move since they’ve seen so many rallies fail over the previous 2 years. The 4th quarter of 2018 was a prime example of this as investors had fresh memories of the S&P500 losing 20% in a few short months.
As we have mentioned multiple times, the one major difference from the fall of 2019 to that of 2018 was the fact the Federal Reserve reversed course and pursued an easy money supply environment. In late 2018 the FED was raising interest rates and reducing the balance sheet (unwinding QE).
Fast forward a year later and the FED was lowering interest rates and expanding the balance sheet. In addition, the European Central Bank began a new round of QE (quantitative easing). Couple this with positive China/US trade developments and you had the recipe for a major rally. All of this in hindsight, but let’s be clear that we never wavered from our bullish stance. (see commentaries from October and August)
So, where do we go from here? At Glass Bead we never want to solely rely on grand predictions. We are formulating a most likely scenario based on probabilities in which we consider many different factors including macro-economics, fundamental analysis, technical analysis, psychological analysis (using sentiment indicators), and lastly good old fashioned tape reading in which we have many years of experience in various market environments.
One thing is for sure, patterns repeat themselves over and over again in the stock market. The reason is simple. Human nature is the same today as it was 20 years, 50 years and even 100 years ago.
Technology has had a major impact on the way markets trade but human emotions such as fear, greed, hope, regret, FOMO will never change. Understanding how these emotions play-out in the overall market is something we pay very close attention to at Glass Bead.
Right now, we are seeing high levels of Greed in the market and this is one reason we believe a correction is imminent. There are many examples of individual stocks that have had tremendous moves driven largely by momentum traders and market technical (short squeezes). There are other factors that we are looking at that point to the start of a correction which we would be happy to discuss over the phone or via email.
We are still very bullish over the intermediate term as we are in a favorable investing environment driven by ample liquidity and low interest rates. Short term (60-90 days) we believe this is a good time to take some chips off the table and wait for what we believe will be a much better entry point in the weeks and months to come.
Please understand that at Glass Bead our primary objective is Capital Preservation when we see clouds on the horizon. When everything is going up it is very easy to get caught up in the belief that markets can go up forever. This is why it’s important to have a strategy which will protect you during the inevitable downturn but will also make you money while you stay invested during the good times.