Up Up And Away: The Market Just Keeps Going

The stock market is the gift that just keeps on giving.

No matter what happens, it just keeps going up. We are seeing record highs and, as the media will tell us, the Fed has our back. The money printing is going to continue, meaning equities are just going to keep rolling.

After all, the bear roared last year for a spell, dropping more than 20%. This means we are in a new bull. Right?

Wrong.

While it is true the market did drop more than 20%, it quickly bounced back. Bear markets are as much about psychology as numbers. The sentiment of a bear is extremely different than what we saw last year.

When he bear truly roars, things get bloody and stay that way. Bear markets do not end until the majority of investors throw in the towel and will "never tough equities again". This is what happened after the dotcom crash. It also took place in 2009.

Last March-April, it did not happen.

Corrections feed into the exuberance we are now witnessing. The buy the dip crowd is fed even more meat to chew on. Stock go on sale, they buy, upward trajectory re-established.

Source

Buying the dip is the best strategy in the world...until it isn't. When the dip turns into something worse, that is when things get ugly.

Bear markets catch the majority of people off guard. They are forewarned by the conversation that takes place.

At the top of this list is this time is different.

We hear this at every market top. In the dotcom era, it was difference because of the "new" economy. In 2008-2009 it was different because Greenspan and Bernanke "having our backs". Now, it is the printing press will keep things going forever.

The reality is that it is not any different because human psychology does not change.

People are buying on margin like it is going out of style. Why? They are so confident in the market that they are willing to leverage up to enhance their returns. There is no reason to worry about the downside.

Margin buying is an excessive push to the upside. Elevated levels, though, make the downside that much more fierce. Few consider the fact that margin calls tend to happen all at once. Even if you do not want to liquidate out, your broker will do it for you. And they will keep doing it until the accounts get into a cash positive position.

This is one aspect that sets off the feeding frenzy. Couple that with a bit of algorithm trading and it is off to the races.

Another thing that people forget, the ride down is a lot quicker than the climb up. Bears are always more powerful than bulls. When the bottom drops out, gravity takes over.

Elliot Wave traders discuss how B Waves are the most dangerous. They lull people into thinking things are back to normal. After a pullback, the upward ascent starts again. Most take this to mean the bull is back in business. We all know, the trend if your friend.

What if, however, the trend is actually in the opposite direction. Directional changes are often tough to see as they occur. Often the dead cat bounce (another name for a B Wave) sucks everyone back in.

Sadly, that third wave is a doozy. It hits hard, quick, and takes no prisoners. People start to fill their britches as the fear takes over. Of course, the financial media is all scrambling around trying to tell us exactly why this is happening. Clueless boobs.

In the end, it always happens. Situations like this occur because people get lulled into a false sense of security. They believe this time is different, hence money allocation/risk management principles going out the window.

Excessive margin purchasing is a clear sign of this.

Therefore, the market will crash. That much is guaranteed. With so much funny business going on with the Fed and governments around the world, the pain might be delayed for a bit. Nevertheless, it cannot be avoided.

The cleansing in markets is a vital component. There is a lot of trash still out there. It is eating up capital in a way that is unhealthy for the market. This makes it sick. While it can stand this for a while, eventually the market can't keep it all down (or up in this case) and just has to puke.

Here is when we see the dynamics of the trend change in an instance.

For this reason, it is never a bad idea to lock in some profits and make sure there is a bit of cash available for the eventual pullback. It only takes one major bear market during a lifetime to make on very wealthy. Buying after the bear, before the onset of the bull, is the epitome of buying low.

Buying near or around market tops is not.

In the meantime, up, up and away.

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