Time To Be Cautious

Valuations are stretched, earnings are poised to fall, inflation is still too high, interest rates are higher to be seen, and everyone and their grandmother are expecting a recession. (Now, to be honest, constantly changing the definition of ‘recession’ for political gain is one way to avoid a recession, but I digress).

We have all heard the mantra of the bears since we bottomed in October. If you have followed their narrative, the next shoe was going to drop week after week for the last 9 months. Meanwhile, the market is up 27% off those lows.

I saw a recent missive by one of Wall Street’s highly followed analysts which typified how most people approach the market and would like to share the insight. This analyst has utilized earnings to attempt to prognosticate the direction of the market. Yet, anyone following this analyst for the last number of years would know he has been painfully wrong for quite some time.

It would seem that the basis for his perspective is that earnings drive the market. Yet, he has admitted that, despite his accuracy regarding earnings calls, he does not understand why the market has not reacted in kind. However, rather than question his methodology, he would rather wait until the market finally moves in line with his analysis. And, I was simply floored when I read that.

Now, I have explained why trying to prognosticate the market based upon earnings is a fool’s errand. If you are interested, you can read it here:

Sentiment Speaks: How To Use Earnings To Increase Stock Market Returns

The crux of my perspective can be gleaned by these three paragraphs from the article:

“If earnings are only lining up with market direction part of the time, then it's clear that earnings are only a coincidental factor (rather than the driving factor) during other times when they are seemingly driving price. . . ”

“The truth is that earnings will be rising while the market is rising. And, during the heart of a bull market, the direction of earnings will clearly coincide with the direction of the stock market or the individual stock at issue. This is why they say that bull markets make everyone look like a genius. And, it's also why I claim that earnings are only a coincidental factor during market trends rather than a driving factor.

However, when the market and/or the stock is topping out or bottoming out, it will take some time before you see that in the earnings or the earnings estimates of the company. And, when you finally come to this realization about earnings, you will recognize that following earnings will likely lead you to always being caught looking the wrong way when it counts – at the major market turns. Until then, you will likely believe yourself to be a genius, until you get caught at the next highs or lows.”

This now brings me to my main point. Folks, if the basis behind your view of the market consistently points you in the wrong direction, why would you not question that underlying basis rather than continuing to rationalize why the market is wrong? And, this is why I was simply floored when the analyst noted above said that he would rather wait until the market abides by his analysis. One must recognize when they are wrong, rather than allowing losses to pile up while you believe you are still right. That is placing your ego before your money and will cause significant losses in your account.

Therefore, if your perspective is consistently making you scratch your head, then it behooves you to find something that will provide more accurate guidance. As one of my members wrote recently:

“I was a fundamental analysis primary guy, and since I found TMPW last year my returns have seen a drastic improvement.”

The problem is that most investors follow indicators that are merely coincidental to market moves, yet believe them to be leading. And, when they consistently fail to help them navigate major market turns, they simply shrug, try to rationalize why they were wrong, and then wait until the market moves back in line with their perspective no different than the analyst noted above.

As Isaac Asimov noted:

“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.”

You see, many of these indicators will again fall in line with the market during the major segment of the trend. But, most do not realize that they are not designed to identify the turns. Now, if that is what you desire, then that is fine. But, please do not fool yourself into believing that they drive or lead the market. And, certainly do not attempt to convince others of this clear fallacy.

As far as the market is concerned, while I am still looking for evidence that a market top has been struck, we have not yet seen such a signal. In fact, the high struck at 4458SPX really only looks like a 3-wave move into that high, which does not lead to a high-confident top being struck from my perspective.

So, I am going to keep my perspective rather simple for you. And, while I am unable to provide to you with the detail which I provide to the members of ElliottWaveTrader, I can give you a bigger picture view of the market right now.

As long as the market remains over 4264-4275SPX, I think we have potential to push to a high over 4458SPX before a top may be seen, with our next resistance being in the 4505SPX region. Ultimately, until the market breaks that support in an “impulsive” fashion (term of art meaning a 5-wave structure), I cannot assume that a major top has been struck. But, should we see such a breakdown, then it is an initial signal that the market can be setting up for a market crash last this year.

How one can use this information in their own positions is to continue to move your stops up as we continue to raise support as the market continues higher. And, until there is an indication that the market has begun a larger degree decline, there is no reason to turn aggressively short.

So, as I read more and more people being so confident in the big decline “imminently” beginning each week for the last nine months, they have missed a 27% rally, with many of them shorting during this rally. Yet, if you look back at my analysis over the last nine months, you will see that I have been confidently looking to 4300+ from the 3500SPX bottoming structure we caught back on October 13, 2022.

But now I see us at a point where the market has a decision it will make in the coming weeks as to whether we get a larger degree top struck in the near term, or if we are going to set up to rally to the 4800SPX region next. So, I have become quite cautious at this time until the market provides us its next indications.

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