Q&A_ Is Dow Jones and global markets ready for a freefall_ 2?
Namaste!
I have been pessimistic about the bull market since Oct 2022 when Dow Jones fell into bear market for the first-time (i.e. closed below 20% levels from all time highs).
S&P500 has been closing below 20% bear market level in June 2022, Sep 2022 and Dec 2022 respectively. (Please read earlier article of the same name which I posted on 7 Nov 2022).
There are mainly 3 reasons I strongly think that market have a pending correction of more than 30% from all time highs.
1. Fastest bear market recovery since decades: You know, bull markets and bear markets have some unique behavior which they follow very often. Bulls move price very slowly upwards. but bears move prices very very fast on the downside. What do you think, about this quick recovery of the bear market (year 2020 recovery). This isn't a behavior of the bull.
Well this has happened mainly due to following reasons:-
A. Lowering interest rates near zero by the US Fed to stimulate the economy, again.
B. They deposited dollars directly into the pockets of it's citizens. Money had to go somewhere. So, it (money) went in "spending" (resulting in profits numbers for corporations), "investments" (real estate, various assets and stock markets), etc. "Spending" fueled demand in the economy, creating the inflation (which is highest since decades) in many countries.
C. They printed around 33% dollars by issuing government bonds to US Fed (a way of introducing more dollars into the economy).
D. Most of this money doesn’t exactly go into circulation within the public and remains electronic. The US government technically owns these assets(stocks, etc)/treasuries and they can always sell them back to the banks when the current prices match those of pre-March 2020. Hence, the money was created as a way of making a buffer that allows the economy to absorb losses while it recovers (source: mediumdotcom).
The US government will eventually sell stocks in it's portfolio and other assets to the banks, investors, which will lead to Dow Jones falling.
2. Breakout in the interest rate cycle of US Federal Reserve rates (refer "https://tradingeconomics.com/united-states/interest-rate"). Interest rate has been kept "close to zero" since the sub-prime loan mortgage crisis in the year 2008-09. If the dollar in the market is very easily accessible due to very low interest rates (like borrowing from banks to buy a car, home, spend on unnecessary things, etc), it stimulates the economy by increasing demand.
It's a good step for the growth of Economy, BUT it creates inflation (sometimes out of control, sooner or later), since everybody is demanding the limited goods or services by borrowing from the banks.
Central banks come here, and increase the interest rates. Now, since the interest rate is higher, people will have to cut the spending (mortgage loan payments, credit payments, etc) and immediately stop borrowing more.
The inflation is around 4 decades high in US, and couple of decades high in UK, India, Etc. To counter this, central banks will keep increasing interest rates to withdraw "easy dollars" from the market.
Concluding, US Fed interest rate above 5.5% may cause the next bear market.
3. Double-top pattern (in the making):-
The black horizontal line indicates a 20% (bear market) level. As you can see in the charts, it has created a bull flag pattern. Breakout above the pattern can take the index to 36450 or test the all time highs. The market need some levels (or history) to take the next decision. Market will form a double top pattern before falling. Every trader whether retail or institutional, is a human. So, we need some levels (based on history and facts) to guide us for the future step. That's why Double top or double bottom pattern works so nicely.
What can happen next? Well, the market can breakout of the bull flag (& symmetrical triangle) pattern to reach 36450 levels. The person (traders as well as investors) who were in a hindsight because of no visible top, will try to book profits/exit the market near that level.
Concluding, Dow Jones is in a medium term uptrend till that level.
Disclaimer: The above article is based on my understanding and experience in the markets. Please do your own analysis and/or consult your financial advisor before investing or trading. The sailing in the markets without knowledge and risk apatite could be hazardous for who don't know swimming or without life jackets.
I have been pessimistic about the bull market since Oct 2022 when Dow Jones fell into bear market for the first-time (i.e. closed below 20% levels from all time highs).
S&P500 has been closing below 20% bear market level in June 2022, Sep 2022 and Dec 2022 respectively. (Please read earlier article of the same name which I posted on 7 Nov 2022).
There are mainly 3 reasons I strongly think that market have a pending correction of more than 30% from all time highs.
1. Fastest bear market recovery since decades: You know, bull markets and bear markets have some unique behavior which they follow very often. Bulls move price very slowly upwards. but bears move prices very very fast on the downside. What do you think, about this quick recovery of the bear market (year 2020 recovery). This isn't a behavior of the bull.
Well this has happened mainly due to following reasons:-
A. Lowering interest rates near zero by the US Fed to stimulate the economy, again.
B. They deposited dollars directly into the pockets of it's citizens. Money had to go somewhere. So, it (money) went in "spending" (resulting in profits numbers for corporations), "investments" (real estate, various assets and stock markets), etc. "Spending" fueled demand in the economy, creating the inflation (which is highest since decades) in many countries.
C. They printed around 33% dollars by issuing government bonds to US Fed (a way of introducing more dollars into the economy).
D. Most of this money doesn’t exactly go into circulation within the public and remains electronic. The US government technically owns these assets(stocks, etc)/treasuries and they can always sell them back to the banks when the current prices match those of pre-March 2020. Hence, the money was created as a way of making a buffer that allows the economy to absorb losses while it recovers (source: mediumdotcom).
The US government will eventually sell stocks in it's portfolio and other assets to the banks, investors, which will lead to Dow Jones falling.
2. Breakout in the interest rate cycle of US Federal Reserve rates (refer "https://tradingeconomics.com/united-states/interest-rate"). Interest rate has been kept "close to zero" since the sub-prime loan mortgage crisis in the year 2008-09. If the dollar in the market is very easily accessible due to very low interest rates (like borrowing from banks to buy a car, home, spend on unnecessary things, etc), it stimulates the economy by increasing demand.
It's a good step for the growth of Economy, BUT it creates inflation (sometimes out of control, sooner or later), since everybody is demanding the limited goods or services by borrowing from the banks.
Central banks come here, and increase the interest rates. Now, since the interest rate is higher, people will have to cut the spending (mortgage loan payments, credit payments, etc) and immediately stop borrowing more.
The inflation is around 4 decades high in US, and couple of decades high in UK, India, Etc. To counter this, central banks will keep increasing interest rates to withdraw "easy dollars" from the market.
Concluding, US Fed interest rate above 5.5% may cause the next bear market.
3. Double-top pattern (in the making):-
The black horizontal line indicates a 20% (bear market) level. As you can see in the charts, it has created a bull flag pattern. Breakout above the pattern can take the index to 36450 or test the all time highs. The market need some levels (or history) to take the next decision. Market will form a double top pattern before falling. Every trader whether retail or institutional, is a human. So, we need some levels (based on history and facts) to guide us for the future step. That's why Double top or double bottom pattern works so nicely.
What can happen next? Well, the market can breakout of the bull flag (& symmetrical triangle) pattern to reach 36450 levels. The person (traders as well as investors) who were in a hindsight because of no visible top, will try to book profits/exit the market near that level.
Concluding, Dow Jones is in a medium term uptrend till that level.
Disclaimer: The above article is based on my understanding and experience in the markets. Please do your own analysis and/or consult your financial advisor before investing or trading. The sailing in the markets without knowledge and risk apatite could be hazardous for who don't know swimming or without life jackets.
Comment:
Sorry, Breakout above the pattern can take the index to test 36952.65 (all time high) (not 36450 levels). We can also refer the BTCUSD (14 Apr 2021) daily chart and can somewhat conclude that index (or any stock) touches and moves above highs so that the big players can exit very very big quantities without compromising on "impact cost".
Comment:
Nifty 50 showed a fake breakout on (28 Nov 2022 weekly candle). It may correct 15% from the all time highs.
Comment:
"Uday Kotak thinks central banks will hike rates for longer..." (source moneycontroldotcom). As I analysed, there is a "breakout" in the interest rate chart of US Federal Reserve. Inflation has reached 40 year high, doesn't it sound so alarming?
Comment:
For disclaimer: I have already started investing in the stocks which have been discounted > 50%. You see, I diversify well (more than 10 companies) and many of these discounted companies doesn't have more downside room to fall.
Comment:
Disclosure: I am short on Nifty50 via options for the next year.
Comment:
I expect anyone who is reading my writings to know that there is nothing "certain" in the markets. Neither the %gain on stock nor "out-performance" or "under-performance". There is a risk and opportunity cost involved in both, buying and selling. Selling at any price can often result in "opportunity loss" when the stock moves higher and higher. Human psychology is a culprit here. For e.g. I post any stock which seems undervalued or overvalued to me on tradingview. When anyone makes money on that, they wont appreciate me "a single word". But when they lose or it results in opportunity loss, they are bound to blame me. I don't criticize any person, because I know their psychology has defeated them. At last, there is nothing like "easy money" in the markets. The survival of the fittest holds absolutely true here.
Comment:
One other example of a culprit human psychology. I am short on Nifty50, so I started looking for reasons of market falling. I found that there is a pneumonia outbreak in China recently. It felt me happy because I was short on Nifty50 and it may result in falling market (correction). But, is it humane? Praying to god to make people die, just to make some money in the short position? It felt really bad after realizing this. May be that's why the god made bull markets more often and more lasting (time) than bear markets. Pessimism is short-lived whereas optimism lives longer. Optimism always wins in the long term. Take for instance a glass half-filled with water. You can't get or achieve anything seeing it half-empty. But, you surely achieve something seeing it "half-full".
Comment:
All time high levels are tested by DJI, SPX hasn't yet.
Comment:
I am not a financial expert and everything I am saying is based on my understanding and opinion. Take everything I am writing as a grain of salt. You must consider your financial advisor before taking any actions. DJI and Nifty50 have hit all time high, whereas S&P 500 did not yet. I did not make anything substantial in the year 2020 by buying at a discount. And I think many of the investors couldn't have as well. Anyways, lets calculate the returns of DJI, SPX & Nifty50 since Dec 2020 till Dec 2023. DJI +23.14%, SPX 26.98% & Nifty 50 +55.42%. Now subtract them with FD rates (India has 7% and I don't know about USA, lets take 3%). So, after deducting FD returns for 3 years, DJI +14.14%, SPX +17.98% & Nifty50 +34.42%. -10% correction is more often than -20% corrections. So, let's take -10% correction every 1-2 years and -20% correction every 2-4 years. My point here is, markets hitting all time high, it's very good, but you can not rule out corrections. If, by any chance we could buy at correction (say 19-30%), we would be standing at the same level as the guy who bought on 31 Dec 2020. But, it's a tough nut to crack for most people. Do you think money makes money in the market? Then, you're wrong. Patience makes money in the market. It's not a sell advice either. The point I want to make is, when we're patient enough, the market have a very big heart and it might give us another chance to buy. But, it demands one thing for sure, "patience".