InSight

Market InSights:

When does a Bear look like a Bull? (Pt. 1)

Four things to avoid and four things to embrace when the Bear turns into a Bull.

 

A Bear Rally is a short, swift, updraft in stocks that can end as quickly as it began. Here are the four signals to avoid.

Markets will routinely go through bouts of extreme buying during a bear market. There are several fundamental and technical reasons why markets “rally” at these times amid broader weakness in the market. The market this time has just come off its 4th bear market rally of the 2022 selloff.

Boulder Colorado Investment Management
All Four Bear Rallies

These “false” turnarounds can be frustrating to the casual observer. A feeling that the market is random and chaotic can lead people to become frustrated during these moments of euphoria, only to be quickly rebuffed by another violent selloff.

At some point, these turnarounds stay intact and the Bear market rally is seen for what it is, the beginning of the next bull.

Here are some of the important topics to keep in mind to determine if we are looking at a new Bull, or another Bear.

Markets are Money with Emotion – Bear Rally (4)

If markets were perfectly logical they would be rather dull. If smart people reached the same conclusion regarding the future value of dollars (inflation), corporate revenue (earnings), and cost of capital (debt) then the auction that is the market would see a very narrow band of trading. But, it’s not, there is a maelstrom of emotion that accompanies markets and this market is no exception.

Boulder Colorado Investment Advisor
Bear Market Rally Four

The rally from the June lows, to the most recent selloff, started at the Fed meeting in June and ended in mid-August (Bear Rally 4). The “Dovish Pivot” was the culprit – the belief that a small part of Jerome Powell’s update in June was dovish, and the “feeling” that the rate hiking cycle would come to an end sooner. This was both a fundamental shift in markets and an emotional one. One that we at InSight, didn’t share. We either didn’t hear this new dovishness, or we didn’t believe in it. 

This Bear rally was an abrupt reversal of the trend based on emotion, which you might assume is not a reliable and lasting reason for markets to change course, and you would be right. These good times were quickly brought to an end with more commentary from fed chairs and economists in August and were fully doused by Powell’s speech on September, 21st.

Trading markets on emotions is hard, and for that, we look for momentum to confirm our emotions and use the MACD reading to understand when emotional buying has turned into momentum buying. We try not to fight the momentum in markets.

The “Narrow” rally – Bear Rally (2)

When markets turn around, it happens quickly, and no one wants to “miss out” on the bottom. This causes abrupt buying at symbolic (not fundamental) levels or in single stocks or sectors. Some stocks serve as a bellwether for markets, Trains, Chips, and Logistics companies can tell us when the market is healthy and the supply chain orderly. But when one group of stocks march higher alone, it is likely a false rally and they will routinely be brought back with the border market.

The US Technology Index registered a bear market on March 14 when it closed down 19.8% from its peak on Nov. 22. The index then zipped higher, gaining 17.3% as of March 29 before resuming its downward trend. The index lost 27% between its March 29 close and its June 16 low.

boulder financial planning experts expert portfolio management
Bear Market Rally Two

There was a “buy the dip rally” in a Bull Market for well over a decade. So, traders and investors have been conditioned to buy up markets trading on lows. Markets registering short-term (1 and 3 month lows) have been quickly reversed since the financial crisis.

The great financial crisis ushered in an era of seemingly unlimited accommodation from the Fed and every dip was met with more and more liquidity from investors and the government. Operating in unison, the market drawdowns were short, and bull rallies were profitable.

The Bear Rally (2) of this cycle was met with no such injection from the Fed and the rally petered out when traders ran out of money. This reversal was confirmed as the market headed lower from Bear End (2) into Bear Start (3). A lack of dry powder meant there was less capacity to continue buying up the market. 

There was no confirmation in the rest of the market, and it was proof that while technology is the most important sector in the SP500, it alone cannot fix weaknesses in other market sectors.

Oversold conditions cause “snapbacks” – Bear Rally (1)

Beware of Oversold conditions that cause bear-market rallies. This is also known as a bear trap, a sucker’s rally, or a “dead cat bounce.” Frequently bottoms are found when conditions on the Relative Strength Index (RSI) reads “oversold” so traders and investors misinterpret these as bottoms, especially early in a bear market. The Bear Rally (1) is a good example of this:

Boulder Colorado Investment Management
Bear Market Rally One

A phenomenon in bear market rallies is the snapback or dead-back bounce. When stock prices deteriorate so quickly, the oversold conditions are met, and the traders look to profit off the short-lived really to come. Oversold conditions are routinely bought up quickly – but they are quickly reversed when the longer trend catches up with the short-term trend. Oversold, or overbought conditions are usually reached when a chart favors the bias of a daily trend over a weekly trend. 

Rallies based on “oversold” conditions very rarely last longer than a couple of weeks. 6-15 trading days at the most, before the more powerful long-term trend, exerts its pressure over the short term.

More related articles:

Healthcare
Articles
Peter Locke

Focusing on the Health in Healthcare Cost

Healthcare Cost hasn’t gotten any cheaper so what are we doing to help clients reduce its expense? InSight was founded on the belief that there is more to financial happiness than being wealthy. People that want to enjoy their lives after their employment years or even during need to be healthy and it starts with how you’re treating your body now. Growing up I was the proud son of a Personal Trainer, my mother. So for me, living a healthy life was always the focus.  But throughout my career of working with individuals and their families, I got to work with some where health wasn’t a big focus and it was in those interactions I learned the importance of health and wellness.   There is a stark contrast between those that exercise daily, eat well and take care of their mental wellness to those who don’t.  Although being in Boulder, CO makes it easy for most of us it doesn’t mean we all can’t improve.  When clients choose to focus on their wellness the results are incredible.  First and foremost, they go to the doctor typically just to get their annual checkups which saves them money, time and over all Healthcare Cost. They get to spend more time with their friends, spouses, kids and grandkids leading to stronger relationships which results in a longer life expectancy.  When they reach the age of 75 they’re thriving instead of deteriorating. They’re playing golf, tennis, hiking, biking, rafting, and exploring this incredibly beautiful state without worrying about if they can do it because it seems difficult.  My grand-father in law is 89 years old and gets up and down from the ground after playing with his great grandkids with pure finesse. Everyday he is exercising for a couple of hours, whether it’s jiu jitsu, walking, or riding his bike he is always moving.  He also focuses on what he puts in his body for every meal as he knows what you put in has an immediate effect on what you get out of it. I worked with a client for about 7 years that played tennis every single day and yet every time he came into the office he had a tootsie roll or ten because that gave him joy.  He wasn’t living a life full of restrictions and rules but a life of joy and gratitude. At InSight, it’s our primary objective to help our clients and their families live a fulfilling life.  We do this by focusing on the two areas that give clients the most difficulty, finance and health.  We want our clients as we like to say, to be Fiscally Fit. When we do this clients reframe their mindset to what is truly important.  They break away from the distractions like shiny objects and erosive behaviors and begin focusing on the more fundamental aspect of happiness.   One of the best series of questions I’ve read about comes from George Kinder and goes like this: I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours. This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it? This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done?  [Did I miss anything]? It is here where my co-founder and I have devoted our attention to help support our clients through different events in order to build a stronger community.  From events like cooking classes in order to create healthy eating and drinking habits that are sustainable and fun, group fitness classes or events, trail maintenance with friends and family, yoga and meditation, walks, golfing, planting and gardening, and whatever else we want to do. Healthcare Cost are manageable in our daily lives.  Click on our community events section of our website to join us for our next event! We can’t wait to have you there. 

Read More »
risk management boulder colorado financial planners
Articles
Kevin Taylor

Mastering Risk Management: Cyber-Security – A Comprehensive Guide

In today’s digital world, cyber-security is a critical aspect of risk management. Protecting yourself online is essential to safeguard your personal information, finances, and digital assets. In this blog post, we will provide a comprehensive guide to mastering risk management in cyber-security. We will explore best practices for protecting yourself online, managing passwords, avoiding scams, and creating a robust cyber-security ecosystem. Protecting Yourself Online: Use Strong and Unique Passwords: Create strong, complex passwords for all your online accounts. Avoid reusing passwords across different platforms, and consider using a password manager to securely store and manage your passwords. Enable Two-Factor Authentication (2FA): Enable 2FA wherever possible, as it adds an extra layer of security to your online accounts. This typically involves using a secondary authentication method, such as a text message code or a biometric scan. Keep Software Up to Date: Regularly update your operating system, web browsers, and applications to ensure you have the latest security patches and bug fixes. Outdated software can leave vulnerabilities that hackers can exploit. Avoiding Scams and Phishing Attacks: Be Skeptical of Unsolicited Emails: Exercise caution when receiving emails from unknown senders or emails that seem suspicious. Avoid clicking on links or downloading attachments from untrusted sources. Verify Website Security: Before entering sensitive information on a website, ensure it has a secure connection. Look for “https” and a padlock symbol in the browser’s address bar. Educate Yourself on Phishing Techniques: Stay informed about common phishing techniques used by scammers to trick individuals into revealing their personal information. Be wary of unexpected requests for sensitive data or urgent action. Creating a Strong Cybersecurity Ecosystem: Install Antivirus and Firewall Protection: Utilize reliable antivirus software and keep it up to date. Additionally, enable a firewall to create a barrier between your computer and potential threats. Regularly Back Up Your Data: Back up your important files and data regularly to an external hard drive, cloud storage, or a combination of both. In the event of a cyber-attack or data loss, having secure backups ensures you can recover your information. Educate Yourself and Practice Cybersecurity Hygiene: Stay informed about the latest cyber threats and best practices for online security. Practice good cyber hygiene, such as avoiding unsecured Wi-Fi networks, being cautious with public computers, and limiting the information you share on social media. Secure Your Home Network: Set Up a Strong Password for Your Wi-Fi: Change the default password for your home Wi-Fi router to a unique and robust password. This helps prevent unauthorized access to your network. Use Network Encryption: Enable WPA2 or WPA3 encryption on your Wi-Fi router to encrypt the data transmitted over your network. This adds an extra layer of protection against potential eavesdropping. Keep Router Firmware Updated: Regularly check for firmware updates for your router and apply them promptly. These updates often include security patches that address vulnerabilities. Mastering risk management in cyber-security is crucial for protecting yourself online. By following these best practices, you can minimize the risk of falling victim to scams, protect your sensitive information, and create a strong cyber-security ecosystem. Remember to stay informed about the latest threats, regularly update your software, and practice good cyber hygiene. Taking proactive measures to enhance your cyber-security posture will significantly reduce the potential risks associated with the digital landscape.  

Read More »
Discounted Cash Flow, Investing Calculators
Articles
Kevin Taylor

Uncharted Waters: The S&P 500’s Heavy Reliance on the MEGA-MEGA cap.

As of this month, the S&P 500 index finds itself in an unprecedented position. A staggering 20% of its total weight is concentrated in just three companies: Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA). We are calling this the MEGA-MEGA Cap – the biggest of the big by investment dollars. The concentration in these few names is the highest in history, with these tech behemoths leading the charge. While this setup brings certain advantages, it also introduces a host of risks that investors and market analysts must carefully consider. The Upsides: Innovation and Strong Performance Market Leadership and Innovation: Microsoft, Apple, and Nvidia are not just large companies; they are at the cutting edge of technological innovation. From advancements in artificial intelligence to pioneering efforts in cloud computing and semiconductor technologies, these firms are driving progress in key areas that are shaping the future. Their leadership roles often result in substantial revenue growth and profitability, which, in turn, boosts their stock prices and, by extension, the overall index (Nasdaq). Strong Financial Performance: These companies have consistently delivered strong financial results. Their robust balance sheets and impressive earnings growth have been significant contributors to the S&P 500’s upward trajectory. For instance, the tech sector, led by these giants, showed a remarkable earnings growth of 21.5% on 6.4% higher revenues in the recent quarter. This strong performance not only benefits individual investors but also enhances the attractiveness of index funds and ETFs that track the S&P 500. The Risks: Volatility and Sector-Specific Vulnerabilities Market Volatility: The flip side of this heavy concentration is increased volatility. The performance of the S&P 500 is now more closely tied to the fortunes of just three companies. Should any of these firms face significant setbacks—be it from regulatory challenges, market saturation, or unexpected earnings misses—the impact on the entire index could be substantial. This kind of risk is particularly pronounced in a market environment where investor sentiment can quickly shift based on the latest news. Sector-Specific Risks: The concentration in tech stocks means the S&P 500 is more vulnerable to sector-specific risks. Issues such as rapid technological changes, cybersecurity threats, and geopolitical tensions affecting global supply chains can disproportionately impact these companies. Unlike a more diversified index, the current S&P 500’s tech-heavy composition could lead to larger declines during tech-sector downturns. Implications for Benchmarks and Investment Strategies The S&P 500, traditionally viewed as a comprehensive barometer of the U.S. stock market, has become less reliable due to its heavy reliance on a few tech giants—Microsoft, Apple, and Nvidia. This concentration means that the index’s performance is disproportionately influenced by these firms, which masks the broader market’s health. While these tech behemoths continue to show robust growth and stability, many other companies within the index may be struggling.  As a result, the S&P 500’s strong performance can give a misleading impression of overall market strength, obscuring weaknesses in smaller, less influential sectors. This skewed representation raises concerns about the S&P 500’s effectiveness as a true mirror of the U.S. market’s overall health​ (IBD). Increased Benchmark Risk: As benchmarks like the S&P 500 become more weighted towards a few mega-cap tech stocks, they inherently carry more risk. This increased risk means that the index is more susceptible to larger fluctuations based on the performance of these companies. While their recent performance has driven the benchmarks upward, any negative developments could have a pronounced downward effect. Influence on Performance: The outsized influence of these companies means that the S&P 500’s performance is not as broad-based as it might seem. Investors tracking the index through passive investment vehicles must recognize that their returns are heavily dependent on the success of just a few firms. This realization might prompt some to diversify their portfolios further or to consider actively managed funds that can mitigate concentration risk. Strategic Adjustments: For investors, the current landscape necessitates a reassessment of investment strategies. While the potential for gains remains high, so too does the potential for losses. Diversifying investments to reduce dependency on a few stocks and exploring alternative indices or sectors might be prudent strategies in this environment. The S&P 500’s current concentration in Microsoft, Apple, and Nvidia marks a new chapter in market history. While these tech giants offer significant growth potential and market leadership, they also introduce unprecedented levels of risk. Investors and market participants must navigate these uncharted waters with a keen understanding of the potential for both amplified returns and increased volatility. As always, balancing potential rewards with risk management will be crucial in this evolving market landscape.

Read More »

Pin It on Pinterest