For those who have followed my stock market analysis over the years, you may remember that, many years ago, I set a long-term low target for it at 5,350, with the potential to rally as high as 6,000SPX. In fact, many of you may also remember my expectation of a 30% correction, published in late 2019 and early 2020, long before anyone had even heard the word Covid.
In fact, I even publicly suggested a short trade in EEM (because it had the best low-risk, high-probability setup on the index charts I tracked at the time) in February 2020. And then when the SPX fell to our long-term target in the region of 2,200SPX, I outlined my expectations that the market would bottom out and begin a rally that would take us beyond 4,000SPX.
What astute investors have learned over the years is that when most of the market is certain that one thing is going to happen, the exact opposite is likely to happen. I think these two quotes from the legendary Jessie Livermore illustrate it best:
“The stock market is never obvious: it is designed to fool most people most of the time.”
“When everyone thinks the same, you don’t think much.”
You see, markets are pretty simple when we break it down to their driving core. When people become too bearish and sentiment reaches a negative extreme, then everyone who wanted to sell has sold, and the market has only one direction left. The same thing happens when the market becomes too bullish. And that’s basically what Mr. Livermore’s second quote says. When everyone thinks the same thing, it means that the market is probably approaching an extreme, which occurs just before a market turn.
After all, markets are governed by human nature, and many recent studies based on market psychology come to the same conclusion. In an article entitled “Major Financial Crises”, published in 1997 in Physica A., a publication of the European Physical Society, the authors, in their conclusions, present a good summary of the general phenomenon of herding in financial markets:
“Stock markets are fascinating structures with analogies to arguably the most complex dynamic system in the natural sciences, namely the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and consciously incorporate (through their action) all the information contained in market prices, we propose that the market as a whole can exhibit “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of “emergence of intelligent behavior on a macroscopic scale that individuals on microscopic scales have no idea about. This process has been discussed in biology, for example in animal populations such as ant colonies or in relation to the emergence of consciousness.”
We saw it in late 2019 and early 2020 when the market peaked at one extreme of bullish sentiment, we saw it at the end of the Covid Crisis when the market peaked at one extreme of bearish sentiment, we saw it again in October 2022 when We estimate the bottom at 3,500SPX at another end of market sentiment, and I believe we are now approaching another inflection point as we approach my long-term low target for SPX in the 5,350SPX region.
What is also quite interesting is that many of the long-term bears have given up their bearish views. One of Wall Street’s most recognizable bears has been Morgan Stanley’s (NYSE:) Mike Wilson, who has been a bear since 2020, and perhaps even before. In fact, in February of this year, he was removed from Morgan Stanley’s Global Investment Committee, likely due to his bearish outlook during a rabid bull run.
However, he has backed off his bearish views lately, and has even turned bullish for 2024 and 2025. Therefore, when the die-hard bears start to turn somewhat bullish, one has to keep an eye out for a possible top of the market, as It probably means that the widespread overly bullish sentiment has even affected them.
Now, I know that many still believe that the market has much further upside for a variety of fundamental reasons. And they could be right. However, consider that we hear these same fundamental reasonings at major market highs and lows, as people can always find reasons why the market will stay linearly within its current trend. As Ben Franklin once astutely noted:
“It is very convenient to be a reasonable creature, as it enables one to find or invent a reason for everything one has in mind to do.”
But when I see people claim that stocks like Nvidia (NASDAQ:) can triple or even 10x from now on, well, I think we’re getting close to a point where it’s time to ring the bell, since the Bullish sentiment is becoming quite effervescent. In fact, just as I was once very bullish on Nvidia when we saw a 5-month consolidation in early 2023 in the 450 region and I signaled to my subscribers that I was going very long its stock, I now see signs of that we may be approaching a major top in that market bell action as well.
Therefore, in the short term, I consider last Friday’s lows to be relatively important. If we break below those lows and develop a 5-wave structure from highs, then it is an early sign that a major high could have been made. Obviously, I am quite cautious about the stock market in general and have reduced my positions in stocks, while I have recently increased my positions in Treasuries. However, I will not become openly bearish until the 5-level descending wave breaks below last Friday’s lows.
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