William O'Neil once remarked that most bear markets have three waves down, and from my analysis it appears that the 2021-2022 bear market is now entering Act III of what has been a long, drawn out downtrend.
In July, I noted that sentiment had gotten extremely bearish and were at levels that usually coincide with bear market bottoms. However, we had not seen elevated levels on the VIX or Put / Call ratio which usually precede a reliable bottom and indicate panic has taken over the market.
Interest in inflation peaked in late July. Usually when everyone is focused on a particular issue and it becomes blatantly obvious, it is often getting very late. This is because the market prices in all the fears and concerns rather efficiently while the majority are slow to catch up.
News continues to be ultra-bearish. We have reached a point where almost no one is bullish. While that is a good sign from a contrarian point of view, it is by no means a stand alone indicator and at best merely a signal to be prepared for a change of character.
The action of individual stocks continues to be terrible. The vast majority of my trades over this year have been stopped out. Take TH for example. The stock has insane fundamentals and the chart was setting up extremely well, and yet it just didn't have the "umph" needed to really take off. Rather that getting frustrated by this, or personifying the loss, I take it merely as a sign that funds are not fully committed yet to growth stocks. The key to surviving in these type of environments, as Paul Tudor Jones reminds us, is to trade smaller and smaller when you are losing and to only get aggressive when the market is hot.
When we look at the market cycle chart, it appears we are most likely near the bottom portion of the cycle-I'd see we are somewhere just past fear. Put another way, if this were a baseball game, I'd say we are approaching the 7th or 8th inning of the bear market. Almost to the end, but by no means out of the woods. If you watch baseball, you know the last few innings can be quite dramatic and pressure-packed. That's where I think we are now. Seasonally, we are entering what is usually a volatile time and it wouldn't surprise me to see panic and ultimately capitulation hit the market in the coming weeks or months. If that does occur, you want to make sure you are watching safely from the sidelines, just like you would if you were at a baseball game or at an exciting and dramatic play entering its' third act.
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