It is another blood bath in the markets with everything down, including TLT (bonds) and gold. Safe havens falling with stocks is not a good sign as people are not comfortable owning anything, even the safe havens, and this to me is a very bearish sign.
Now, with that said, this is one day one of this type of price action and one day does not constitute a new trend or change the game, but if we start seeing more of this happen, we could be on the verge of the bear market we have all been expecting to show it ugly face.
The SP500 (SPY) is down 19.5% from the all-time high we saw just three weeks ago, and the general bias for most people is once the market is down 20% that is a new bear market. I can’t entirely agree with that general rule. Still, a lot of damage is happening to the charts. If price lingers down here or trades sideways for a few months I will see it as a new bear market consolidation before it heads lower, and we start what could be very deep market selloff and test 2100 on the SP500 index (SPY $210) for the next leg down looking forward several months.
20% Stock Corrections Are Not Bearish
Just because the markets have a deep correction of 20% does not mean its game over for stocks. Just take a look at the chart below on what happened the last time the market corrected 20%. As you can see, they were the biggest and best investor opportunities over the past 12 years. Today, my friend called and said they heard on the news that we are now officially in a bear market, and what should he do?
(Click to enlarge)
20% Corrections Can Turn Into A Bear Market
The SP500 fell 20% in 2001 and again from the 2007 high its lows, then bounce 10% – 14 over the next few months before rolling over to start its first bear market leg. I feel something similar will happen this time, which would put us a few months before the price should test these lows again and breakdown to give us optimal time to reposition our long term portfolio.
(Click to enlarge)
Once we do start a bear market, you will notice price moves very differently from what we have experienced over the past 12 years. How you trade now likely will be a struggle to make money. If you try to trade bonds, they are relatively tricky because of how they move during a bear market. Related: We're Officially In A Bear Market
The stock market can fall for a year, and bonds are still trading at or below the price they were when the bear market started. This different price action is what happened in 2001-2002, and again in 2008.
Bonds Go Ballistic
Bonds also take on the price action similar to how the VIX trades with violent price spikes only to fade back down again quickly, and this generally happens near the end of a bear market, or extreme selloff like we are in now. Heck bonds (TLT) jumped 30% just in the past few weeks, we caught it, but most traders missed this move. You need to understanding market sentiment and how to trade bear market type price action because that is how the market is moving this week, and trading/chart patterns become more sentiment-driven than logical trading setups and trades become counterintuitive.
I also traded GDXJ for a 9.5% gain and closed that position at open for the high tick with my followers, and we didn’t follow my proven trading rules for price targets, trailing stops, and reading the market sentiment we could be down over 30% today which I know many traders are simply because they lack control of their trading (no defined rules, fall in love with positions). I’ll be doing a detailed gold and gold miners article so stay tuned!
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Concluding Thoughts
I share this analysis, not to scare you, but let you know where we stand. The stock market is treading on thin ice, and if/when it breaks down, a new bear market will have started. Remember, we are still in a bull market, but the coronavirus is stopping businesses, which means earnings will be poor, and that is why stocks are falling. Investors know stocks are worth less money if they make less money; it is that simple.
The type of market condition I think we have entered could be here for a while, a year or three, and it’s going to be a traders market, which means you must have a trading strategy, plan your trades, and trade your plan. It’s amazing how simple a few trading rules are written down on paper can save you thousands of dollars a year from locking in gains, or cutting losses. I have this mini trading strategy mastery course if you want to take control of your trades and override your emotional issues. It’s easy to hold winners until they turn into losers, taking to large of a position, or maybe you have masted the art of buying high and selling low repeatedly? Yikes! It happens to most traders, and it can easily be overcome with a logical game plan I cover in the crash course, pun intended ???? Related: China's $570 Billion Stimulus Is A Boon For Copper
Someone yesterday I spoke with said that in the USA alone already had 10,000 people die just from common influenza, yet here we are freaking out over 17 dead in the USA. Sure, its bad news, but the common sicknesses for older citizens makes coronavirus seems a little blown out of proportion. There are conspiracy theories out there and this could be bioweapon which is scary and I am no expert in this field but my sources are not concerned with the Conornavirus. I want to think a cure gets found soon, and if so, the markets will rebound with a vengeance, and we can relax.
In short, if you have lost money with your trading account this year, holding some big losing trades that were big winners just a couple of weeks ago, I think it’s worth joining my trading newsletter so you can stay on top of the markets. I take the loud, emotional, and complex market and deliver simple common sense commentary and a couple of winning trades each month.
My trading is nothing extreme or crazy exciting because I’m not an adrenaline trading junky. I only want to grow my entire portfolio 2-4% a month with a couple of conservative ETF trades and make a 22%-48% return on my capital without the stress of being caught up in this type of market and feeling like I always need to be in a trade.
By Chris Vermeulen
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