Markets Crashing: Is It Time To Panic?

By: Sol Palha | Tue, Sep 15, 2015
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"Come to the edge," He said. They said, "We are afraid." "Come to the edge," He said. They came. He pushed them... and they flew. ~ Guillaume Apollinaire

The answer to this plain question should always be a resounding no: it never pays to give into panic. The smartest option is to derail this emotion before it gains any traction. Once fear takes over, the end is nigh.

When the markets were disintegrating approximately two weeks ago and if you were one of the lucky few that opted against joining the bandwagon of panic, you should have had a feeling of déjà vu; sort of like the movie Groundhog Day. The same-old twaddle that was broadcasted before was once again intoxicating the masses; like cockroaches, these naysayers emerge from the woodwork and hum the same-old hymn "the world is going to end" and or financial disaster is around the corner. In each instance, you will find that the same rubbish is spun in a different way; this is recycling at its best. What they so conveniently omit is how each and every single one of these so-called end of the world events proved to be nothing but a mouth-watering opportunity for the astute investor. Now we are not stating that caution should be thrown against the wind. What we are simply stating is that if you become one with the fear, then this useless emotion will take over and blind you from seeing any opportunity, even if it slaps you hard on the face. Never become one with fear; understand that when it comes to trading fear is on par with toilet paper.

Let's take a sombre look at what is actually going on, and why these events are unfolding.

It's more than obvious that the market was in a corrective phase or crashing if one joins the naysayer's camp; the more appropriate term would be letting out steam that was long overdue. The last week of August, was the worst week for equity markets since 2011. One could also point out that the markets have not experienced a significant pullback since 2011.

So what changed over the span of 1-2 weeks to warrant such negativity? Very little actually


So what's on the horizon?

Any expert who claims to know precisely what will occur should be ignored. Even a broken clock is correct twice a day. Hence, if an expert makes a large enough number for pronouncements, one of them is bound to come to pass. It does not mean that individuals cannot determine the direction of the markets. As we have stated many times before, there is a vast chasm that separates spotting market bottoming and topping action, with trying to identify the exact top or bottom.

Investor confidence has taken a beating. Under these conditions, many investors will either sit on the sidelines or take some money out of the markets. This is good for it will drive stocks to even more attractive levels. The masses are well-known for their ability to buy and sell at precisely the wrong time.


Some bullish or reassuring factors to consider

  1. Traders are not overtly bullish.
  2. Stocks are selling for roughly 17 times their trailing earnings. While not cheap, these valuations are by no means excessive. The long-term average is roughly 16.5 times earnings.
  3. Unemployment is down, and U.S. Manufacturing levels are rising.
  4. Corporations are flush with money.
  5. Banks are in much better shape than they were in during the financial crisis a few years ago.
  6. Insiders are not dumping shares; they are actually stepping in and buying them. .


The Technical Outlook

Our proprietary strength indicator has turned negative on the markets and this indicates that the lows will be tested again. The trend based on our Trend indicator has also turned neutral and V readings (our proprietary tool that measures market volatility) has soared to an all-time new high. Hence, we expect extreme moves to be the norm for the next few months. It would not surprise us if the Dow experiences a 1500-2000 point move over the span of one week.

The Dow is having a remarkably hard time of trading above 17000, former support turned into resistance. After the selloff in August, a lot of technical indicators moved into the extremely oversold ranges. Thus, the corresponding rally should have been much stronger. Additionally our own indicators are not validating the current move up, which strongly hints that the lows will have to be tested again. If the Dow closes below 15500 on a weekly basis, then we expect the Dow to make a quick move down to the 14500-14700 ranges; if this were to occur, we could term it a screaming buy event.


Conclusion

Some additional factors to keep in mind:

It is interesting to note that the naysayers like clockwork start their chanting and howling specifically after the markets have started to correct; their screams are rather muted when the market is trending upwards. If you look at history, their record is rather dismal, as every so-called disaster and or end of the world scenario, these naysayers pandered about turned to be exactly the opposite of what they predicted. Instead, each of these so-called disaster scenarios proved to be nothing but splendid buying opportunities in disguise. Disasters will come and go. Depending on the lens you use to view such a situation, it can either represent a splendid opportunity or a monumental tragedy. History is replete with examples quite clearly illustrating that financial disasters usually make for splendid opportunities.

We are not advocating that you run out and lunge into the markets; we have been stating for quite some time that the markets needed to let out some steam. Note, that the markets have not experienced significant correction since 2011. It would be folly to assume that the markets will trend in one direction without letting out a burst of steam. The markets have already shed roughly 15% from high to low. Given the heights they have run to since 2011, a 20% move would still be acceptable and nothing to fear. At this point, prudence is warranted, but a massive sell-off should be viewed as a buying opportunity, in contrast to a colossal tragedy. Our general suggestion would be to buy when panic sets in, and blood is flowing freely in the streets. Be wary when the masses are joyous and delighted when they are not.

I envy paranoids; they actually feel people are paying attention to them. ~ Susan Sontag

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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