Emergency Newsletter: Mayhem Returns

Investors,

Markets are in mayhem today, in reaction to Powell’s press conference.

The S&P 500 closed the day down -2.98%, while the Nasdaq-100 fell -3.61%.

Bitcoin is currently down -4.7%, retesting $100k for the first time in 5 days.

The CBOE Market Volatility Index (the VIX) is up +75% today.

Yes, seventy five percent.

It’s the largest single day gain for the VIX since August 5th, 2024, when it spiked +65% on fears surrounding the unwind of the Yen carry trade.

In the chart below, you’ll see the VIX in the top panel and the S&P 500 in the bottom.

You’ll notice that stocks perfectly bottomed the last time we had a similar VIX move.

Today was also the largest daily decline for the S&P 500 during an FOMC policy decision day since mid-March 2020.

If my memory serves me correctly, I seem to recall that it was a good time for long-term investors (and even short-term investors) to buy stocks in mid-March 2020.

So what did Powell say to cause so much drama?

He basically said that the economy is too resilient & dynamic and that the labor market doesn’t require as aggressive rate cuts as the Fed had initially anticipated a few months ago, so the Fed might not need to ease monetary policy as much.

To be clear, the FOMC’s dot plot (which isn’t a formal commitment, promise, or firm expectation on what the Fed will do) still shows that FOMC members think it will be appropriate to cut interest rates two times in 2025.

So, at least as of right now, the Fed is still expecting to cut interest rates in 2025.

The Fed believes that their current policy rate is “above neutral” and that the lag effects of monetary policy and the tightening of 2022, 2023, and 2024 will continue to put a downward pressure on inflation.

That’s still good news for the market, even if it wasn’t as good as we had previously expected. Think about it, the Atlanta Fed came out literally today with an update on their estimate for Q4 real GDP growth, revising their target higher to +3.2% growth!

Fundamentally, nothing has really changed.

My belief is that the Federal Reserve will continue to remain in an easing cycle amidst a backdrop of disinflation and a resilient & dynamic economy/consumer/labor market.

These have been the key components of the “bull market recipe” for 24+ months.

So is the bull market cancelled?

Are asset prices going to crater from here?

I’m staking my reputation on my answer and saying “no”, but I fully accept that more short-term downside in the market can (and likely will) occur.

In fact, I’ll be looking to allocate more capital into stocks and BTC.

Not all at once, but patiently & tactically.

Thankfully, premium members of Cubic Analytics get notified about every single portfolio decision that I make, including all of my weekly buys (and the rare sells).

Fundamentally, we must accept that bull markets have two defining characteristics:

• The development of higher highs

• The development of higher lows

This is what makes an uptrend, and I often refer to this as “stair-step behavior”.

Why?

Because uptrends, typically, look something like this:

And when we look at the S&P 500 over the past two years, what do we see?

Higher highs & higher lows.

So given the fact that we’ve been making higher highs for 2 straight months, we’ve seemingly entered the second phase of the uptrend cycle that requires us to produce yet another higher low.

Where will that low occur?

Literally no one knows.

I won’t pretend to know, though I have a few theories which I’ll be sharing soon.

What I do know is that the market is doing what the market typically does during bull markets and uptrends: cycling between the two different phases of higher highs and higher lows.

So, if we rightfully believe that the trend is our friend and that the conditions to support this bull market haven’t changed, then the best investors in the world are simply going to wait for one thing…

They’re going to look for stocks to stop going down.

One of my favorite technicians often says something along the lines of “in order for stocks to go up, they need to stop going down”.

It’s dumb-shit obvious, but it’s a gem hidden in plain sight.

If we want to allocate capital in a corrective phrase during a bull market environment, we should simply wait for stocks to stop going down, form a higher low, and then add more exposure on the assumption that the next step is to produce a higher high.

Since none of us know where stocks are going to bottom, let’s not spend a significant amount of time trying to predict the bottom and just simply wait for the bottom!

In other words, patience is key.

Maybe the bottom happens tomorrow.

Maybe the bottom happens next Wednesday.

Maybe the bottom happens during the first week of 2025.

Maybe the bottom happens even further down the road than that.

Remember, the drawdown that started in late-July 2023 lasted for exactly 3 months and the S&P 500 fell a grand total of -10.9% during that period.

But an investor who bought in the middle of that drawdown, once the index had fallen -5%, is currently up +35.2% on their investment in less than 16 months.

And what about Bitcoin?

Remember the grueling corrective phase that we just witnessed from March through September of this year, or the sideways chop in April through September 2023?

Each period had multiple -20% corrections, lasting for roughly 6 months in total.

But look at where we are today!

Bitcoin is up +138.3% YTD after gaining +153.7% in 2023!

If we’re going to be investors, even with a slightly active tilt, we must accept the fact that the market is going to have ebbs & flows and that we need to respect the process of developing higher highs and higher lows.

The last thing that I want to be, especially during a bull market, is my own worst enemy who excessively manages my exposure and sells when sentiment becomes extremely negative.

So instead, I’ll keep doing exactly what I’ve been doing during this bull market.

I’m going to ride the wave.
I’m going to let the market dance.
I’m going to stay in long positions.
I’m going to watch for a higher low.

It’s also important to say what I won’t do…

I won’t panic sell positions.
I won’t revenge trade to recoup losses.
I won’t start jumping at my own shadow.

I can’t tell you what you should do, how you should do it, or when you should do it.

At the end of the day, we all need to be able to look ourselves in the mirror and be comfortable with the decisions that we make.

Uncertainty is a constant component of the market.

Risk is always present in the market.

By definition, that means we’re going to be wrong often.

So each of us needs to be comfortable with the consequences that we face in the event that we are eventually proven to be in the wrong.

I’m comfortable right now and I was also the guy who was comfortable buying stocks in March 2020, the 2nd half of 2022, and throughout the ongoing bull market for the past 24 months.

As always, I’ll be providing updated market thoughts for premium members in our weekly investor call, which is tomorrow (Thursday) at 10:00am ET.

I’ll also be sharing new (and free) analysis on Saturday, with another exclusive premium report dropping on Sunday.

You can also find me on X here where I’ll be sharing real-time thoughts.

Best,

Caleb Franzen,
Founder of Cubic Analytics

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DISCLAIMER:

This report expresses the views of the author as of the date it was published, and are subject to change without notice. The author believes that the information, data, and charts contained within this report are accurate, but cannot guarantee the accuracy of such information.

The investment thesis, security analysis, risk appetite, and time frames expressed above are strictly those of the author and are not intended to be interpreted as financial advice. As such, market views covered in this publication are not to be considered investment advice and should be regarded as information only. The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security.

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The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security. All investments carry risks and past performance is not necessarily indicative of future results/returns.

Each investor is responsible to understand the investment risks of the market & individual securities, which is subjective and will also vary in terms of magnitude and duration.