Do We Have A BIG Drop Forward? | Buying and selling Locations with Tom Bowley

I’ve a sense that the majority of you’ll say “Sure, there is not any method we have reached backside.”

Let me begin by saying that calling tops and bottoms is GREAT for those who get it proper. For me, it isn’t about calling each inventory market transfer completely; as an alternative, it is about evaluating danger and making an attempt to keep away from the worst final result. To offer you a golf analogy, think about that you just’re stepping as much as a prolonged dogleg par-4 with water all the way in which down the appropriate facet from tee to inexperienced. The protected play is to purpose left and go away an extended strategy shot to the inexperienced. It will be a a lot simpler gap, nonetheless, for those who might fly it over the water and land it within the fairway, reducing off maybe as a lot as 50 yards and go away a shorter strategy shot into the inexperienced. The reward of such a shot is clear, however it’s important to consider the danger of dropping it within the water.

Now again to the inventory market. In December 2021, staying lengthy out there with all of the warning indicators I mentioned again then was the equal of making an attempt to drive the ball over the water. When you stayed lengthy, you dunked a couple of within the water and doubtless made a ten on the outlet. Nevertheless, for those who selected security again in December and moved to money (and even shorted), you then most likely walked off the outlet with a par. Most every thing in life is about evaluating reward vs. danger after which making a choice that is smart to YOU. Nobody else. I can not inform you what the appropriate determination is for you, however I do know what dangers I am prepared to take and which of them I am not.

Pay attention, we’re in a tough bear market, little question. I attempted my finest to warn again in December 2021 and all through 2022 that the RISKS have been extraordinarily excessive on the lengthy facet. Did I do know for a indisputable fact that the inventory market was topping and would fall 25% over the following 9 months? Completely not. I simply knew that water was all the way in which down the appropriate facet of the golf green from tee to inexperienced and I selected to play my shot WAAAY left. I did not need to danger the water (being lengthy out there).

Now let’s quick ahead to the place we’re as we speak. The S&P 500 has fallen 25%. Financial situations have worsened. Inflation stays an issue. Rates of interest are rising quickly. The Fed is hawkish. What’s to love, proper? Effectively, I would say the reward to danger has shifted significantly and that most of the points/dangers current in December 2021 are GONE. Plenty of unhealthy information is priced in. Is it sufficient? I am undecided – we’ll discover out collectively as we have now one other tee shot over water approaching.

However I imagine that being in money or being brief proper now could be the equal of taking the danger to drive the ball over the water. Historical past tells us that drops of 25% within the S&P 500 needs to be purchased, not bought. Might it worsen from right here? Completely. The market can do something it desires. Simply remember that we have had 14 bear markets since 1950 and three have morphed into “secular”, or long-term, bear markets which have misplaced 50% or extra. The opposite 11 have been of the “cyclical”, or short-term, selection. Of those 11, we have seen an AVERAGE of a 42% achieve over the one-year interval from its final backside. You DO NOT need to miss that rally, because it’s probably the most highly effective rally throughout a secular bull market.

In the latest cyclical bear market in March 2020, through the COVID-19 pandemic, the S&P 500 jumped 78% within the yr following its March 23, 2020 backside. I do not imagine we’ll see that kind of one-year return, however I completely imagine a 40% rally off the underside is probably going. If we jumped 40% from the place we sit as we speak, the S&P 500 could be at an all-time simply above 5000 in October 2023. Is it doable? Completely.

So, primarily based on historical past, let us take a look at the S&P 500 and the place we could be heading:

So which method are we heading? Actually, I do not know. Nevertheless, primarily based on all of my historic analysis and the present technical and sentiment alerts I am seeing — specifically, the elevated fairness solely put name ratio, constructive divergences in every single place, bullish rotation since June, and so on. — I’m of the opinion that being bearish proper now could be the equal of making an attempt to drive the ball over the water and the “protected” play to the left facet of the golf green is to be lengthy.

It at all times comes right down to how a lot danger you are prepared to take to attain your return targets. The percentages favored the bears in December and so they favor the bulls now.

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Completely satisfied buying and selling!

Tom