Weighing the Evidence
Investors,
After a monumental rally for the Dow Jones, it feels as though we’re on the precipice of a bifurcated path:
The first path indicates that the market lows are behind us, in which the Dow & other stock market indexes continue to grind higher after 6+ weeks of historically strong momentum. In this path, it’s possible for the index to have a downside correction, but likely within the -4% to -10% range. This wouldn’t be pleasant, but I think that market participants would be happy if the market produces a higher low and creates some reversal confirmation to end the bear market. This scenario is the path of maximum joy.
The second path foreshadows more pain, in terms of price action and time. Bear markets are so grueling because of price and time factors, which continue to exhaust investors’ sentiment along with their decreasing wealth. With such a substantial rally since the mid-October lows, the creation of new YTD lows would be a painful process for investors who have regained their enthusiasm for a potential new bull market. Those who have FOMO’d into the market in the past few weeks might be too stiff to admit that their emotional investment decisions were poorly timed, and therefore be unwilling to sell their shares at a minor loss. Perhaps they sell only after the market declines -10% from here, leading to a cascade of selling pressure that only exacerbates the bear market continuation. This scenario is the path of maximum pain.
In the remainder of this report, I’ll explore each of these paths a bit further in order to explain the details that could catalyze each one and the evidence in favor of each one. I’ll also provide an updated view on the S&P 500’s under-the-hood metrics in order to analyze how market internals are evolving!