One the of recent market articles I have come across quoted 5 market experts with all profound and convincing reasons proposing to investors that if you have been frightened or wounded by recent correction, it means you would better stay out of the market. These experts see that more correction will come very soon. Some articles would even say that the worse correction (like 20% or 40%) is around the corner. Reading those articles would really melt your investment spirit, your knees will be shaking, your heart stops pumping. You would surely feel like you just want to close all your investment and lock yourself up in your parent’s closet. It is because fresh wound really stick. I believe these articles are just a way to gain readership profile.
Market Recovered to Historical Peak
Little that you know off, most markets have already been making full recovery, getting near their peaks before the recent fall in just shortly one month’s time. Some have even way passed their historical heights and creating new records again like the Nasdaq in recent few trading days. (see Chart A)
However, these gloom and doom Sayers are still publishing their gloomy market outlook.
I used to be a victim of articles like these when I began my investment journey, especially after a major market trauma like recent correction. But now, I have learned to have reverse thinking. When most investors are fearful, I should go in to invest even more. But when investors are greedy, I should get out of the market. This is the most useful advice given by legendary investor, Warren Buffet. When it comes to investment, 90% fails to make profit. The remainders make up the minority among all investors. For those who go with the crowd mentality surely are the ones heading towards investment failure.
I have analyzed what have happened during recent correction. In the past one year, all US markets have been slowly building up to the inevitable fall.
In Chart B, we can observe there were at least 4 phases in price movement within a year before market crash for S&P 500 market chart. Phase A and B have been a good and steady climb to the north. This move has slowly attracted speculative maniac to join in the wagon and created a steeper climb in phase C. Interestingly, the steepest climb in Phase D was obviously an unusual market frenzy activities. At that time, there was no major market good news to propel its upward momentum, nor even any market warning from those gloom and doom Sayers. I have already sensed something wrong and began to advise my group (online graduates) to lower their equity exposures.
Black Swan Appearing
On February 3rd, 2018, Saturday morning, when I turned on my monitor screen and discovered a major market drop of 63 points long reddish color candle happened last night with S& P 500 Mini Futures market. I thought this could be none other than the black swan visited us. It is also very interesting that there was no major market news analyzing the fall on that weekend. The only reason I found out was the fear of rising bond yield which was not anything near to justify what has happened.
By looking back now, if you take a look at the bottom of the fall, the drop stopped at the level where Phase C began. It gave us a very clear picture now that, the drop was meant to wipe out all those frenzy maniacs who followed the crowd to push up market prices irrationally. When all those crazy frenzies were wiped out, the drop stopped and recovery began. All other interpretation of why market drop were meaningless to me now. Dow Jones Industrial Average posed an even crystal clear picture in Chart C.
The drop has entirely wiped out those crazy fellows who were looking for quick money through market gambling.
Therefore, what does recent market correction mean to you? It doesn’t mean more correction is coming, nor the worst correction is still ahead of us, neither black swan is imminent. As to me, it is precisely a market correction. The previous move of the market was wrong, it needed a correction to make it back on the right path. It is purely a market correction for the good future. That’s why I would probably say, Stanley Morgan previous prediction that the current bull market can run up to 2020 was correct. At that time, I was laughing in my heart when I read it. But now, I would say maybe he was right. The bull market we are now riding could become the longest Bull Run in the history of human economy (now it is still the second longest).
Signs of Market Fall
By now, there are still articles publishing and promoting fear of big market bear or imminent black swan appearing. I find these articles have their good purpose, they can keep those gamblers out of the market. If you are market gamblers, you should be fearful and stay out. If you are real investors looking for long term investment profit, you should come in while others are still shivering in fear.
By the way, by definition, black swan event is defined as any event that is not possible to predict. If you read those articles warning you of the coming of the black swan, you will be rest assured that it is not coming at all. Having said that, looking at what has recently happened, though you may not be able to predict, there were signs to show that it is coming. You just have to be watchful yourself. Just like what I wrote about the Phase D ~ the steepest climb and the lack of surrounding news, everything kept to its comfort and complacent, profits were everywhere, etc … were signs of the coming of the black swan. (Does this sound like the biblical warning of the Second Coming of Christ? Ha ha …)
If you ask me whether I am fearful that market will fall out again, I would say, why not? Yes I am still very fearful. But that’s the reason I am investing too. I am not saying I am smarter than anybody. It is just that I have learned from bad experiences in the past. By staying away from the market out of fear like the public majority really made me lose out opportunity for investment profit. I shall write more on this issue on the coming articles next week or so. You will surely find it absolutely encouraging and inspiring.
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See you again in next writing.
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