Keep Things in Perspective…

Over the past few weeks, many of you have been asking if it’s a good time to pull out of equities.

There is no question that the past five years have been an unbelievable run. Most of it has been fueled by unlimited liquidity, and the concern is that all good things must come to an end. But if you consider yourself a student of the markets, this is something we want to remind you of:

There are many indicators, signs and analytics we can examine that may hint at a potential correction. But we’re not trading indicators. We are trading the markets. The closing price on the tape is how we make our money.

That said, the indicator we should be focusing on is price action. You don’t have to be a quant to understand the five year trend of the S&P, or guess that the bears have had a rough time. Anyone that pulled out of the market in anticipation of a correction has missed significant gains. 

We’re certainly not above this. The temptation to take profits is overwhelming. Equally tempting is the urge to short the seemingly irrational all-time highs on everything from blue chips to semiconductors.

But every attempt we’ve ever made to trade against the market—ignoring what price was telling us and allowing emotion to guide our decisions—has failed.

So to filter out the noise and focus only on the reality of price action, we created proprietary indicators that alert us of changes in overall trend for the S&P 500: The 1-Month, and 6-Month [Market Sentiment] Indicators.

As you can see from this chart of the last year, the 6-month indicator never went bearish once. And each time the 1-month indicator went from bearish to bullish and the 6-month indicator went from neutral to bullish, it marked great entry signals for the equity markets.

The media likes to give air time to contrarian pundits who claim the Great Correction is coming. Someday, one of them will be right. But for now, price action is bullish for both the 1-month and 6-month indicators. Keep that in mind the next time a farm payroll number misses, or some other news makes the markets tumble. If the trend means anything, chances are excellent it’s a buying opportunity in disguise.

The media likes to give air time to contrarian pundits who claim the Great Correction is coming. Someday, one of them will be right. But for now, price action is bullish for both the 1-month and 6-month indicators. Keep that in mind the next time a farm payroll number misses, or some other news makes the markets tumble. If the trend means anything, chances are excellent it’s a buying opportunity in disguise.

The moral of this story? Keep things in perspective. 

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– Tony Zhang

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