Where are the markets heading?

Should You be impressed with the recent market rally?

The first step in analyzing the markets is determining the present position and probable future trend of the market.

Looking at the above chart, it is pretty clear that the trend that has been in place for seven years is changing. In fact the S & P 500 peaked at 2130 in May of 2015. In June of last year I wrote about The End of the Bull Market and in August I started talking about some downside targets for the S & P 500 in a post entitled The Stock Market in Trouble.  The first target of 1760 was cut short by the recent rally, bottoming at a test of the 1810 area in the early part of February. The next target is roughly 1400 on the S & P 500 and that will create a lot of pain.

What does this recent rally mean? Is it market manipulation? All the central banks, throughout the world, have been manipulating the world financial markets. This has taken the form of zero interest rates to negative interest rates to encourage banks to lend money and prop up the world economies. Have you noticed that the same banks that created the mortgage crisis leading up to the 2008 market collapse are at it again with potentially bad loans in the oil markets? The banks have got to look to other means to raise revenues. What happens when a vast majority of mortgage loans have been refinanced at 4% or below within a zero interest rate environment? Who is going to be refinancing when rates eventually start to rise…..

We have a real estate market that is going through the roof in many locations throughout the word. Real estate is a major sector for the economy and any major problems in this area will have a ripple effect throughout the economy.

The central banks have also been buying stocks and futures for their own account helping to prop up markets. This is a relatively new exercise for the Fed although Greenspan provided tremendous liquidity for the markets on a number of occasions while he was in office. What is being done and has been done by the Fed is like Greenspan on steroids!

 

 

 

It is important to know where we are in the market cycle, since there is a psychology at work. It is also important to recognize that as investors we sometimes forget to grasp what is happening around us. We read about the potential problems that I have outlined yet that news seems to disappear. We have become a society of 30 second sound bites, and I guess they don’t make much of an impression.

Here is a realistic view of the emotional cycles that we face as investors:

OPTIMISM

It all starts with a positive outlook or something that leads us into buying a stock.

EXCITEMENT

The stock price starts moving our way and that feeling of excitement begins.  The market continues to act favorably and the feeling of confidence grows. This is a time when everybody is picking stocks successfully.

EUPHORIA AND GREED 

Our investments continue to appreciate in value and we start trading on any investment that strikes our fancy. This is the point of maximum financial risk but also maximum financial gain. The concept of risk aversion is often  ignored during these times. The news is generally good and everyone is talking about the market going higher.

ANXIETY

The markets start to show their first sign of weakness and threaten to take your profits away. However, I’m a long term investor and everything will sort itself out after this correction has run it’s course.

DENIAL 

The markets don’t make the expected return to new highs and continues to slide even further. We continue to hope for an improving trend to once again establish itself.

FEAR

Perhaps we are not as smart as we once thought. Instead of being confident in our trading we become confused. Should we buy more stock at a lower price to average down? We could have gotten out with a small profit just a few weeks ago.

PANIC

At this point all of our profits have been lost and we are showing large losses. This is very emotional time, we are completely lost. We are at the mercy of the stock market and have lost all control over our situation.

CAPITULATION

We have lost all hope and there is no doubt that further declines will follow. We sell out of all of our positions at any price. We just want to be out of the market at any cost. Who want to own stocks? The markets are not for us and should be avoided! However, this rare point marks the point of maximum financial opportunity. Some will have learned from their mistakes and will look for ways to avoid the greed and embrace fear.

HOPE

Perhaps things are improving. Maybe a new cycle is beginning. Time to start looking for new opportunities.

RELIEF 

The markets are turning positive again and for those who have held on to their investments can see some improvement. Perhaps we can make money this time around. The cycle is starting all over again…….

CONCLUSION

It is extremely useful to know the stage of the cycle that the market is in and rarely does your broker provide that kind of information.

There are many stories of individuals of ability, good traders and keen businessmen and women that overplayed their hand. Many times they knew when to come in, but they don’t know when to get out. The perfect investor needs to know when to come in, when to stay out and most importantly know when to get out once he is in.

 

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