In this weekend's 302nd edition of Turning Points we review the adjustments necessary to remain profitable in the current market environment. We look at the key levels that the market is currently testing as well as the outlook for the week ahead.
As we move deeper into bear market territory there are a number of adjustments that are necessary.
We made the first adjustment on the first day of September, dumping our portfolio of long positions prior to what turned out to be the worst September for the markets since 2002.
Since then we have been profitable in trading short-term swings from the long and short side, a practice that I don't see us changing anytime soon given the current market environment.
The adjustments that are necessary don't simply stop at trading. There are adjustments that need to be made to the analysis I present, assuming the markets remain in the same condition they are in at present.
What transpires during bear markets as they continue to push forward is an invalidation of every single truth that investors hold near and dear to their hearts. This goes for both fundamental and technical data.
Fundamental data always lags, making it impossible to pinpoint market bottoms during a bear market utilizing any economic reports, earnings, macro factors or otherwise. There is no magic level for yields, the CPI or even Fed action to spot an absolute bottom during a bear market.
Given that so many investors are clinging onto the “once the Fed resumes QE, markets will soar” thesis, we can assume that once they do resume QE, whether next month or next year, the markets will react in a much different manner than they did in March 2020 onward.
The fact of the matter is that faith in central banking as an economically viable practice with consistent outcomes is being heavily tarnished in the current environment. I can imagine a scenario with the next round of inevitable QE where the Fed will underestimate the amount necessary to create an impact, as investors have become desensitized to large numbers with respect to QE. It will take them weeks or months to right the ship.
There is no magic bullet with fundamental data or the Fed at this juncture of the downtrend.
Technicals are a bit more complicated. There are pockets of technical data that can prove invaluable when it comes to getting the general vicinity of an important bottom right.
However, a majority of the technical data investors will cling onto, should this bear market progress further downward, doesn't only become useless but harmful to investors as false signals are produced in rapid succession over many weeks and months.
For example, we have already seen the damage contrarian sentiment calls have done to bulls who cling to the data despite what the market was telling them after the rally from the June lows failed during August.
In a bear market, bearish sentiment data only reinforces the downtrend. It becomes a vicious cycle of negativity, until what are considered extreme ranges of psychology and sentiment, blow out into range expansions that nobody thought was possible.
The same thing goes for oversold indicators. Everything from RSI to MACD and all the other popular indicators that investors utilize during normal markets will absolutely blow up your account during a bear market.
Positive divergences, breadth readings and so on all become no better than a flipping a coin during these types of conditions. Steep downtrends take down everything, including what are considered relevant forms of analysis during most any other market condition.
It truly becomes a financial black hole, where only destruction rules.
The only thing that works with some semblance of reliability is utilizing multi-decade angles and price points that have memory in the market, paired with how the market reacts to these price points, judging by range and volume contractions/expansions to determine if a bottom of relevance has been achieved.
I'm going to go through a handful of charts this weekend that show very little in terms of a reaction that is anywhere near productive in the markets after such a terrible September.
By the looks of things, October will not be any better. That's how it looks for now, at least.
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