DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Markets Have Feelings
But not in the way you think. Securities markets themselves have no feelings - they are completely cold and anodyne and care not whether your hopes and dreams lie in their moving up, down or sideways. But they most certainly cause feelings amongst market participants and those feelings cause the same participants to act.
You can learn something about the short term future of markets by how your own emotional system is responding.
Let’s assume that you are long the market, let’s say the S&P500. When a meteorite hits, like the Covid crash in February 2020, it’s a gut punch that causes a rapid spike in stress. But this type of stress is easily tolerated, since before long here comes a reversal fuelled by (at that time) Q1 options expiry and then a wall of Federal money. This stress is the kind we deal with in everyday life. Short, sharp, and soon over. Medical types will say this kind of stress is probably beneficial for the system. Securities analysts call this a Wave 2 down.
Know what kind of stress is difficult to deal with? Wave 4s. All of 2022 was a larger-degree Wave 4 down from Wave 3 high struck at the end of 2021 until the low in October and the retest in December. Designed to slowly shred your confidence that markets will ever go up again. There are rallies, yes, but they are sold off right when you think the bottom is in and up is the new down. Until there reaches a point when you think - even though you know better - that the End Is Yea Nigh and your holdings shall never see green again. Along comes a rally. You look at the chart and say, OK, this time it’s going to hold. Then it sells off once more.
Wave 4 stress is not beneficial. It is a slow crescendo of damage to the gut lining and psychological balance that throw most off track. As designed. For at the end of a Wave 4 is when you see folks declaring that they are “taking time out from markets”; people sell sensible long term holdings to protect value (when they had no need to do so) and don’t buy new things at the lows because they have by now been psychologically conditioned by the market that nothing will ever go up again.
The selloff since the July 2023 highs has been a smaller-degree Wave 4 down, which is why it feels inexorable and inevitable that it will continue. If you zoom out? It’s nothing more than a typical pullback on a larger-degree chart. But zoom in, live it real time, and you know that even professional money managers who should know better are selling things that they shouldn’t.
In our larger-degree charts covering the S&P500, the Nasdaq-100, the Dow Jones and the Russell 2000, the dump since July can be seen, but it isn’t stressful and nor does it point to anything other than a continued upward move, if one is sufficiently distanced.
Short term? Well, equity futures are up a little in early New York hours trading today. So is the 10-year yield, so whether equities get dumped come the open remains to be seen.
Let's Get To It
Paying members, scroll right down for our latest take on markets. As always we look at the 10-year yield, the S&P500, Nasdaq-100, Dow Jones and the Russell 2000. We add Bitcoin and Ether futures pricing for good measure.