The financial media focuses on the broad market indexes like the S&P 500, which are comprised of big established companies that make money, pay dividends and buy back their stock at a measured pace. From this viewpoint, the bear market does not look so bad as the drop from the recent all-time high is only about 14%.
The following is a chart of the S&P500. It shows the S&P500 in a downtrend, but the selloff is methodical and contained. The price peaked at the turn of the year and has been working its way lower ever since. The price of the index initially broke the 50-week moving average to the downside in February and decisively did so in April. Those who are tactical momentum traders may have used this indicator as a signal to move to cash or at least reduce bullish exposure. Notice the S&P500 has yet to break the 200-week moving average. As a result, the long-term buy and holders are still hanging in. In time, however, we think the S&*P500 will brake below the 200-week moving average.
With the S&P500 down just 14%, most people in the financial media have described this as a run-of-the-mill correction. As a result, we see them continue to focus on buying the dip in their favorite stocks. We have been tempted to do so and have offered a couple of bullish ideas that may work, but we think this is fighting the more significant trend. We do this as many of our readers like to have a mix of longs and shorts for balance. Many options traders try to run a portfolio that is uncorrelation to the overall market’s returns. They focus on individual company risks.
We spend a great deal of time sifting through individual stocks, looking for opportunities. We are sure there are situations where the baby has been tossed out with the bath water. But the finding is very slim picking. At the same time, we have discovered hundreds of stocks that have bees seriously trashed. The following are some examples.
There are hundreds more charts like these. This phenomenon is significant because it tells us the pain the average investor is suffering at the moment. Losses of 50 to 80% are difficult to take. Toss in the high price inflation underway, and we are sure to see a recession shortly if one has not started already.
The average mainstream economist still thinks the economy is growing at close to 3% in real terms. The Atlanta Fed scrapes the internet continuously for data to estimate in real-time. Its analysis suggests that the growth rate is closer to 1%.
According to Siblis Research, the market capitalization of US equities was 53.4 trillion on 12/31/2021. As of 3/31/2022, it is $48.3 trillion. The prior peak was $40.7 trillion on 12/31/2020. If and when that level is broken, economic life will change, and this recession will probably feel like 2008 to 2010. It will be scary.
Since emotions are starting to dominate daily price action, we suggest investors trade small, diversify, risk only what they can afford to lose without changing their lifestyle, and use options to limit risk
