I have noticed a lot of discussion from analysts and market commentators about an imminent correction.
It does appear the US stock market is in a period of what often is referred to as stage 3 of a bull market, which is the final stage before a correction. I agree with this scenario but one needs to look at when this bull market started, to attempt to assess how long it might have to go. Keep in mind bull markets tend to run a lot longer than what many people think.
For example I remember the tech stock rally in the late 1990’s, many analysts were calling the end in 1997, 98, and 99 but it wasn’t until 2000 it eventually fell. So does that mean we have until 2020 until the markets correct with any significance? Quite possibly.
Recently I read an analysts opinion that this bull market was 9 years old, therefore a correction was overdue. This statement was based on the assumption that bull markets run for around 7 or 8 years and the bull market started at the bottom of the GFC in 2009. I don’t think that statement has much merit, as it is widely recognised that bull markets start after a period of consolidation and “disbelief” which is what was happening in the markets until around late 2012. So add 8 years to that number and we get 2020, another 2 years of buoyant stock prices.
When I examine the charts that’s what I see. Buoyant stock price action, strong volumes, and strong buying support when markets dip.
For example looking at the 10 year chart below of the US SP500, does that look like an overheated run away market?
Charts can be very deceiving depending on how they are presented. Any good presenter knows the value of presenting a particular chart to get their point across. Good technical analysts know we often read a chart depending on how we are feeling. If you fear a market fall you will see an overheated chart, if you don’t have fear, then you won’t see a threatening chart.
It’s so difficult to make a correct analysis because of our inherent psychological bias, but let’s try and analyse the chart above. You may notice it’s in a logarithmic scale, the purpose being to average the percentage annual increases, which helps to remove the visual skewing of price action contained in other charts you may look at.
In my opinion the bull market did not really assert itself until around late 2012 or early 2013, after rising around 230% in 4 years from the GFC low in 2009. I regard that 4 year period as the recovery, consolidation and disbelief stage rebuilding markets go through. From 2013 to 2018, the next 5 years, its risen around 75%, hardly the overheated blow off that signals a stage 3 correction.
To me, and of course I could be wrong, the market does not look like one that has run out of steam, in fact it may just be building up a head of steam to rally to new significant highs. If that happens then I may join the army of naysayers, but until then I take the Zen attitude of “don’t know”.
There is no doubt markets are high and trending strongly. The problem investors and traders face is we “don’t know” what will happen, all we have is probability and my analysis says it’s still probably safe to be in this market. The safest way to trade any market is to have a system and stick to it.
I will talk a little more about the Zen of “don’t know” in my next newsletter, which I promise won’t be as long away as what the last one was. I can’t emphasise enough how much Zen has helped my trading, and life, I hope to expand a little on that in my newsletters for the rest of the year.
Until then, good luck with your trading and try to stop worrying about outcomes, as we don’t know what will, or will not, happen.