Stocks are going up
The commonly accepted definition of a bull market is when the price rises by 20% from its low point.
And this past week the S&P 500 shot up to 4,170 points marking a 20% gain from its low back in October 2022.
So the bear market is officially over and we are technically in a new bear market now. 🙂
But this doesn’t mean everything is fine and we’re going back up to all time highs next.
The market has to face a few hurdles first.
Extreme Greed Warning
The first thing to be aware of is that stocks are in a precarious situation right now according to CNN’s Fear & Greed index.
I tweeted this out on Wednesday when I noticed the index reached as high as 80, signalling extreme greed.
This typically means a correction is imminent.
The stock market has done well year to date.
But now's the time to be careful and think about trimming some winning positions. pic.twitter.com/Xy9YTLL2xc
— Liquid 🚀 Freedom 35 Blog 🕊 (@Liquid_f35) February 3, 2023
The second headwind facing the market is seasonality. Certain time periods of the year will perform better than others. 🙂
Here’s a chart going back nearly 100 years showing the varying average returns by month.
Notice how February on average actually had a slight loss.
Markets will be facing this historical downside bias this month, so be careful.
The last piece of the puzzle is that the smart money doesn’t believe in this most recent rally.
Dumb money is retail investors and smaller traders (red line in the graph below.)
Usually when this rises above 0.7 and reverses it corresponds to a correction in the stock market.
Meanwhile the smart money or large institutional investors (blue line,) have been sitting mostly on the sidelines.
So just because the bear market is over, it doesn’t mean we won’t go right back into one again soon.
In my latest video from uploaded today I explain why the market may be reacting irrationally to recent events, and what to watch out for next week. 🙂
Random Useless Fact:
Police sirens are typically 110 to 120 decibels loud.