“Never confuse activity and emotional noise with accomplishment….”

 

Good Morning,

Santa has left the building.

Ok, I am kidding (seriously) but I wanted to break the ice after that long line of trucks ran over the markets yesterday.  Trying to keep the mood light if possible.

Do keep this in mind as I will cover below:  The “reaction” to the Fed minutes is from a meeting three weeks ago – on which day the markets rallied for the same reasons.  This will be important to recall as we work through the normal “I better take my profits before the bear market starts” January 2022 issue.

I recall something my friend Kevin Nash said one time as he peered into the cameras while winning one of his WWE Championship belts.  Just after driving his opponent into the mat, he noted eloquently, “That’s going to leave a mark.”

It Already Has Really

Before I hit sentiment first for a second, I want to remind all of us what was noted as December was coming to a close.  “It is not at all abnormal – and indeed should be embraced – to see very sloppy action a few days into a New Year when one is witnessing the end of a pretty good year up.

I don’t know what it is in the human psyche which creates this “border” in our investing mind that calls “January” a restart with everything beginning again.  In reality, there is no end to the game…no stop, no restart – it all blends together.  I suppose it is the need for the mind to have a boundary for some sort of feeling of control.

I digress.

The goal is simple – stay focused, stay on your path, stay in your race, stay with your goals, stop listening to all the emotional input, try very hard to ignore as much as possible from the talking heads – and expect messy periods along the way.  Sadly – but truthfully, this has been the way markets have worked since I started in 1982.

Were there an easier way around the storms, be most assured we would gladly and forcefully be sharing it every single moment possible.

So, January has taken us back to the trade range (imaged for you below).  Yes, the same trade range we have covered often.  Markets took just enough time to put in the “Santa rally” (those sessions between the day after Christmas break and two days into the new year), and then – quickly took it away from all but the DOW 30 specifically.

In those rare occasions when you see a market suddenly rush to one side of the bathtub, history tends to point out that it was either a massive AI generated program trade shift over a few major days from a massive pension fund or something to that effect – or a deep wave of fear catching lower volumes and thinner market depth for a bigger impact.

Either way – ugly periods pass – and the economy is getting stronger every week – in almost every indicator.

I will try to cover as much as I can here – forgive me if it gets wordy.

Bears Reign

It has already begun.  Chatter of a Tech bear market was rife within the chat rooms and trade desks the moment red ink flowed.  A brief perusal of social media will confirm.  An internal check into your own emotions may do so as well – use that as your best contrary indicator.  Why?  Because when the real next bear market arrives – and it will – it will not be assumed, it will not be looked for around every corner, it will not be mentioned in each red ink headline and it will be triggered by something completely out of left field

 

Here is your latest from AAII:  excellent start to the year – selling, mini-panic, terrible “news” and only 32% of the audience bullish – meaning 68% are not bullish.  Add that to the $21 Trillion in the bank Dr. Ed noted for us as 2021 came to a close – and one can gain a sense of what’s coming – with patience.

The 8-week moving average of the sentiment reading is also falling – this is excellent as well, for the patient investor focused on the Demogronomics® forces unfolding around us

 

Please note the red band showing we are in the range of some of the lowest readings of the last 5 years.  Yesterday’s pounding will surely send it even lower on the next read update.  The green arrow is there for reference as the lower low – it was the pandemic shutdown of course.  Oddly enough, we are closing in on feeling that bad again – a week after hitting highs and then just coming back to the trade range (see below).

Last item on sentiment: short-term readings on Fear and Greed.  Sure this number can go lower – but it dropped over 20% in just 6 hours yesterday – suggesting a razor thin “confidence” level, when elevated.  This too is positive if we focus on what happens after these panic bouts over the long-term

 

The Big Picture

I have taken the liberty of adding the readings to the S&P 500 updated chart – with the same trade range we have covered until I am bored : )

Notice the 53 reading of 1 year ago from the Fear and Greed index was about 20% ago in the markets.  Last note that the S&P is becoming a Tech Index.  Over 50% of its movement is related to Tech weighting.  This is set to increase over time even as emotions flail around on days like yesterday – and maybe even a few more ahead.  Now, just 5 stocks make up roughly 20-23% of its daily movement.  Just keep that in mind ok?

Does this look logical to you..

 

 

Once again — yesterday’s action took us back to the trade range and price levels of November.  As stated for trade ranges over the last several months marked out for you, if you feel like we are walking in quicksand, it is because we are indeed trekking through the underbrush of the pathway.  Let’s continue to focus on “what’s next” after these events.

The NYSE is an even better “feel” for what is really unfolding outside of the internal Tech push

 

 

I’m sorry – but this is about as flat a nine month period as you can get.  Net net – the broad market closed yesterday less than 1% away from where it was back in those summer brief peaks at the upper edges of the trade range marked.

Last of course is what happens when you are the front-runner:  you take the arrows first.  Tech will drive people nuts with change over the coming years.  It will be a force most will not understand and will often succumb too when volatile.  Letting time go by is your risk – not price movement in the short-term.

I have provided a 2-year view of the NAS to show you how we step forward over time.  A burst forward – and then chop – a burst out of a trade range and then another trade range.  Emotional roller-coasters are a required part of the deal

 

BUT Internals Send the Better Signal

What is most fascinating is what was unfolding during this latest trip to the upper regions of the trade range breakout.  I will try not to get too confusing – or blather on too much.  The internal strength and breadth was significant.  Indeed at levels not often seen.

Here we go with the background – and then the image of the forward looking activity after previous incidents where we saw the same internals:

– Breadth, as measured by the 10-day (and cumulative) advance-decline lines, has seen enormous moves over the past couple of weeks resulting in 99th percentile readings for multiple sectors as well as the S&P 500.

– Rather than a sign of overheating, strong breadth readings have typically been followed by strong and consistently positive broad market returns for the long run.

How strong and for how long?  

Decades

 

The point?  We must recognize as long-term investors, that there will be continuous (and likely increasing) periods where we get these jolts.  It is the law of large numbers that will continue to be expressed in bouts of fear – often dynamically misunderstood in the near-term.  This is why we must keep our minds on the broader horizon ahead.

Last But Not Least

“Mike the bear market is coming because the Fed is going to raise rates 3-4 times.”

Sounds terrible.  Feels terrible.  Problem?  Not factual in history.  Rates increasing do not cause long-term damage to increasing values over time.  Recessions cause that – period.

First – a snapshot of “rate cycle increases for a very long time – and market results

 

 

And if you want something pretty interesting, here is more data supporting what we have been suggesting is the long-term range embedded in rapidly expanding margins – which we will see again in another couple weeks as Q4 earnings kicks off soon.  Seeing the masses selling into an earnings window is a good thing – setting the stage for “oh, that was not as bad as we feared.”

 

The chart above is for those who are concerned “politics” has anything to do with your money long-term.  I realize this is a sensitive topic – I am merely pointing out data and long-term viewpoints.  By mid-year of 2022, we will be entering a period which has historically seen solid results — with just TWO exceptions – over 80+ years.

Stay focused and patient – living through the storms is how wealth is built – even when it feels very ugly.

Expectations Bouncing Back Up

 

Notice that the projected growth rate of earnings for Q4 has already bounced back up to 19.8% versus the 19.0% it reached mid-December.  We will watch together how much Wall Street misses by as the season unfolds.

Expect chop and the angst wears off – and as significant energy due to margin expansion overall expands.

It’s that time of year – we suspected this was in the cards.  The stage of fear is being reset – and long-time clients and readers know how that works out for what’s next.

 

Until we see you again, may your journey be grand

and your legacy significant.