Is this just a correction of the strong bull market from November, or is the bull market over? After reading some of the headlines, you'd suspect the latter.as pointed out by market watch last week:
“For the first time since early November 2023, less than 30% of stocks are trading above their 50-day moving average, a clear indication of the extent of the current down market.85 in late March. %, a significant decline from 92% in early January, highlighting a dramatic reversal in market dynamics.
The 50-day moving average is often viewed as a barometer of a stock's short-term health. A concerted break below this level suggests that a broad swath of the market is facing downward pressure. The change comes amid rising geopolitical tensions in the Middle East and renewed concerns about inflation, which prompted traders to take a more cautious stance in April. ”
Of course there are many, “reason” Due to the recent drop in stock prices. Geopolitical stress between Israel and Iran and stronger-than-expected inflation data that caused the Fed to pause interest rate cuts led to an influx of sellers into the market. But as I said before, none of this is shocking. “:”
“Notably, since 2009 and accelerating since 2012, the rate of change in share buybacks has far exceeded asset price increases. As we will discuss, this may be just a coincidence. “The upcoming outage period may be more important to the rally than many think.'' – March 19, 2024
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Furthermore, the “blackout” in corporate stock buybacks coincided with aggressive bullish sentiment among investors. In the same article:
“Investor sentiment is once again very bullish. Historically, when retail investor sentiment is very bullish coupled with low volatility, it usually corresponds to a short-term peak in the market. To do.”
Returning to this graph for a moment, given that corporate stock buybacks have accounted for nearly 100% of net stock purchases over the past 20 years, the combination of the blackout period and aggressive bullish sentiment has contributed to the It was a recipe for falling prices.
If you don't believe this graph, here's the net flow calculation.
- Pensions and mutual funds = (-$2.7 trillion)
- Households and foreign investors = +$2.4 trillion
- Corporate (stock buybacks) = $5.5 trillion
- Total net value = $5.2 trillion = or 100% of all shares purchased
This is very important to understand for the rest of the year. We will now determine whether this is just a correction within a bullish trend or a more significant correction.
Buyers live lower
in “,” we discussed the importance of understanding that “market price” Determined by supply and demand between buyers and sellers. In other words:
“As mentioned above, the stock market has always been a function of buyers and sellers, each negotiating to make a deal. For any seller, the question for the buyer is always, “What's the price?”
In the current bull market, very few people want to sell, so buyers have to keep bidding up the price to entice sellers to trade. As long as this is the case and the enthusiasm exceeds logic, buyers will continue to pay higher prices to obtain the positions they want to hold.
This is the very definition of the “Great Fool” theory.
But for some reason, at some point this dynamic changes. Buyers become even rarer because they refuse to pay higher prices. Once sellers notice the change, they will rush to sell to a dwindling number of buyers. Eventually, sellers will begin to “panic sell” as buyers evaporate and prices fall. ”
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In other words, “Sellers live higher up. Buyers live lower down.“
Know where your buyers and sellers are “live” The following graph shows where the highest volume occurred.
This current correction is increasingly oversold (bottom panel), which suggests a likely rebound towards the previous support of the 50-DMA. For comparison, let's look at last year's market correction.
As mentioned above, the bull market that began in July reached its peak in late that month. The oversold situation recovered as the market corrected, allowing investors to reduce risk and hedge their portfolios. The market will present that opportunity to investors soon.
Then, like today, many investors began to believe it was more than just a correction. However, the reality isThe buyer lived lower down. ” Buyers stepped in as prices approached October lows, coinciding with a resumption of corporate stock buybacks.
sentiment is rapidly reversing
As I mentioned earlier, you need to revisit the emotion chart above. Investor's more frothy bullish sentiment is rapidly reversing on many fronts. The graph below is the same as above, dividing the composite net bullish sentiment index of retail and professional investors by the volatility index ().
If this is just a market correction, the index will tend to bottom between zero (0) and negative (20). The current reading is 4.15, down from 25.99 just two weeks ago, a significant reversal in bullish sentiment.
Notably, professional investors' allocation to stocks recently peaked at 103.88%, but has fallen to just 62.98% exposure in just two weeks. (Professional investors are famous for buying market peaks.)
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Also, the number of bullish stocks “Buy signal” It dropped from 80.2 to 48.2.
Additionally, the number of stocks trading above the 50-DMA has fallen from over 80% to 37%, and money flows are below historical market lows. Notably, with only a 5.5% correction from the recent peak (as of last Friday), much of the work of eliminating the previous overbought condition has been completed.
Given the significant reversal in sentiment and short-term oversold conditions, I strongly suspect the market will reflexively rebound in the near future. However, as many bullish investors took profits, “was locked up” During a downturn, any rally is likely to be met with further selling.
However, despite the current situation,panic” Media headlines suggest that this is likely just a correction within an ongoing bull market. This is especially true given that corporate share buybacks will resume in May, providing important support for the market heading into the summer.
That being said, even if this fix is completed, it is unlikely to be the last of the year.Market history suggests something else could happen “Wild ups and downs” It's shaping up to be what many predict will be a somewhat contentious election.
But that's an article we'll write once we get there.
