After setting up a website and seeing how digital platforms fight a never-ending battle for eyeballs, I understand the pain of trying to supply valuable content from a scarce pool of noteworthy and novel facts consistently.
However, to me it borders on the grotesque seeing so many articles flare up lately pronouncing a new bull market in equities, or how close we should be to a bottom and how we should act on one.
I remember a WSJ article from last year, that actually pointed out a true market dynamic. It was that for a market bottom to occur, the majority of people need to capitulate. However, “they’ve forgotten what that feels like.”
People have indeed forgotten. Overbearishness is currently used as a contrarian argument to start buying. There’s overbearishness according to whom? We’re in a prolonged downtrend, which has technically not reversed by a long shot, while bull advisors already again outnumber bears by a ratio of 1.6:1. Such is usually seen many months into a new bull market, while the current rally struggles to even get its first footing right.
Articles recommend buying past tech leaders near their 52-week Lows after 70-80% declines, and various services and academics (e.g. a few here or here) conjure the “birth of a new bull” with economic numbers.
However, this equation is upside down. Published economic numbers (which are by definition from the past) don’t predict that the stock market will bottom now or in the future. It is quite the other way around: The stock market front-runs the economy by a significant span of time.
The stock market is a discounting mechanism for the economy. The market bottoms whenever it bottoms. I know how trivial this sounds, but in this statement lies a gem … look at the action of stocks, and you will find a bottom without fumbling in the dark.
The only thing that shows where the market will go is the behavior of the leading stocks of that market. Thus, stocks are the earliest indicator of the economy bettering.
And right now the leading stocks, which are way too few in numbers in the first place, are rolling over and howling like beaten dogs.
People have taken the recent performance of the Dow Industrials as a sign that all is well again. Remember, it’s the thinnest of all the indices, and is full of defensive-sector stocks where capital flees when the going gets hard.
This is a precarious moment, and capital protection will remain key.
