A Complacent Market Is A Dangerous Market
pleased, especially with oneself or one's merits, advantages, situation, etc., often without awareness of some potential danger or defect;
When I look at the current market environment, the word that keeps coming to my mind is complacent. I talk to a lot of traders and have noticed quite a dichotomy over the past month. The more serious, professional traders I speak to are holding large amounts of cash and are very concerned about the market. The casual traders I speak to don’t seem to be concerned at all. In fact, they don't even bring up the market when I speak to them. They are up to business as usual.
While there is an air of complacency around the market currently, beneath the surface there has been a plethora of signs that trouble may be looming ahead. The early leaders of the 2020 bull market have been in their own bear market with stocks such as PTON, ZM, DOCU, TDOC, all off over 50% from their highs. Former leaders UPST and NET have also fallen drastically over the past month. Tesla and NVDA are now both below their 50-day moving averages. Remember, in a deep correction, all the favorites get taken out.
New leadership has been slow to emerge in the growth space, with the majority of breakouts coming from energy related stocks. In addition, the overall market has also been starting to crack as we started to see distribution hit the market in December and again in early January.
The internals of the Nasdaq have been just terrible as can be clearly seen through the advance-decline line.
The Russell 2000 looks the worst of the major moving averages. It might turn over in the coming weeks and may also be forming a head and shoulders pattern. IWO looks even worse and looks like it is about to enter a Stage 4 decline with its' 50-day moving average now below its' 200-day moving average. FFTY likewise looks to be in dire straits.
When looking at all of this, you would think their would be some fear in the market. However, the VIX is showing a complete absence of any sort of fear. In fact, the CNN Fear Greed Index is actually registering greed! This shows the absolute disconnect between the average investor and the damage being done to growth stocks beneath the surface.
Since April 2020, the average trader has been conditioned to blindly buy the dips. This is a strategy that works amazingly until it stops working. Then, it has devastating consequences. From a fundamental perspective, the FED has enormous power and rising interest rates can be kryptonite to growth stock traders, particularly if done too aggressively.
I’m normally a raging bull who loves to trade. However, this clearly is not a time to be aggressive. Let me be clear: the sun will rise tomorrow, and there will be strong uptrends again. That I can guarantee you. It's just not now. For me, cash is the greatest positions available at this point. That along with a little patience and discipline can really go a long way. And one last thing: be prepared for volatility. Remember, the largest up days usually come during deep corrections or severe bear markets. We could very well be in for a volatile market over the coming weeks. It's not necessary to panic, but just don’t be complacent.
Risk right. Sit tight.
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