Wednesday, May 27, 2020

SPX Update, and Some Random Thoughts

Recently, I had an interesting discussion with an investor.  During this discussion, he asked my opinion of the intermediate future (4 years out and beyond).  I told him the same thing I've told my readers:  I suspect the Federal Reserve and the government have thrown enough money at the problem (and that we still have enough goodwill remaining) to keep the party going for a few more years.  But that after that, things could get very ugly.

He's a permabull, so he didn't much like that and mumbled a few things in reply, then concluded, defiantly, with, "But I CHOOSE to be hopeful."

And I thought:  Well, that really sums up the crux of the issue for traders as a whole, doesn't it?  Some traders "choose to be hopeful."  Others "choose to be bearish" (or, they might say, "realistic").  But in the end, the market doesn't give a damn what we "choose" to believe, on either end of that scale, or anywhere in between.  It's going to do what it's going to do.

So, for me, my philosophy begins and ends with: "I choose to try to be on the right side of the trade."

And I think a big part of being successful in that endeavor is being willing to push ourselves out of our natural comfort zones.  Some of us may be optimistic (or pessimistic) by nature -- but we simply must have the mental discipline to not allow our natural inclinations to hold too much sway over our vision.

I touched on this somewhat in a piece I published on March 23 (the bottom came later in that very session, as it turned out):

I think that part of what makes a successful speculator is the ability to find balance. The nature of the herd is to overreact in BOTH directions. The nature of the successful speculator must thus be the opposite: To seek reasons for caution when others are fearless and -- on the flip side -- to seek reasons for hope when others are hopeless. 


The majority of people react to their own thoughts as if they were "real," the way, say, a tree or a rock is real. They have a thought, and then they simply accept that thought as true. But thoughts are not real. And they are often not true. So, to be ahead of the herd, we must be our own harshest skeptics. We cannot afford to be overwhelmed with "the emotion of the moment" by taking even our own thoughts at face value, but must instead seek to chip away at our own ideas -- to find out if those ideas are solid, if they are merely possible, or if they are completely baseless. 

We turned bearish near the high -- then began looking for a broad market crash almost immediately thereafter, while most people were still thinking "short-lived correction." NOW, however, many people have begun thinking this will never end. And surely that means we should at least start looking for hope. 

Consider this case: What if a cure or vaccine is announced directly? If that occurs, then the economy will not only return to normal, but it will return to normal along with trillions of dollars in Fed money to fuel a blistering rally. 

So the economy will return to "normal," but on steroids.

Of course, as mentioned, that piece really couldn't have been any more timely (and in the very next update, I noted that all downside targets had finally been captured and that, for the first time since the crash began, it was at least possible for the bottom to be in -- and that we should not turn bearish again unless the long-term uptrend in SPX failed, which it never did).

But the point is, challenging our emotions and our natural inclinations is what's going to keep us from getting run over in BOTH directions.  When it comes to my personal life, I might "choose" to be hopeful about a given situation, and that's probably a good thing -- but when it comes to the market and the economy, I have no control over those, so "choosing" to be hopeful (or hopeless) seems to me to be complete folly.

I may or may not always be successful in the following endeavor, but I "choose" only to try to see things as they really are.  For better or for worse.

Which brings me to a related point:  I see us glorifying a certain mode of thinking in society that goes directly against the above concept.  Or, it may be more correct to call it a certain mode of feeling.  We're basically told to feel outrage and anger over various (ever changing) situations du jour, typically by the media and/or by politicians.  If we try to "be the voice of reason" and bring a balanced view to such situations, we are then told that we are "cold-hearted" or (worse) often assumed to be taking the "opposite side."

Let me give a hypothetical example of what I mean before continuing.  Let's say someone is accused of a crime and being essentially tried in the media.  More and more, we are expected by our peers to simply condemn that person, as if the actual trial had already been held.  If we say something along the lines of:  "Well, maybe we should wait to see the evidence," then we are often assumed to be taking the "side" of the accused, when in actuality, we're just not taking EITHER side.

And I bring that up, not for that specific example, but because I believe it's symptomatic of where society is today:  We are actively discouraged from even attempting an unbiased view of things.

Try it, for example, on Twitter.  Find any random accused person who's trending and attempt, not even to "defend" them, but to simply suggest that maybe we should withhold judgment until there's more evidence.  Watch how fast you get flamed and grouped-in with whatever hideous thing that person is accused of.  Watch the hate pour in.

Then try the opposite:  Jump on the bandwagon and bash the person with all the faux outrage you can muster.  And then watch the "likes" and retweets pour in.

And I bring up this example because, as I said, it is symptomatic of an underlying societal condition.  It tells us that society, as a broad-based whole, does not even value attempts at reason and impartiality.  What society as a whole values is raw emotionality in place of reason.  We know this because that's exactly the behavior it rewards.

And we get more of that which we reward.  While we get less of that which we punish (in this case, we are punishing reason itself).

So we're building an awful beast here.  And creating a generation that overvalues its own raw emotions while undervaluing both rational thought and objective reality.

And I think all of that ties in to my larger Supercycle.  We're rotting from the inside out.  It just takes time to become apparent.  But, in time, the outward world will increasingly mirror our inner world.

Of course, as I've discussed many times previously, I don't think we're there yet... but I wanted to share a few more of my observations as to some of the forces that are taking us there.  Because, when it comes, I do hope we can correctly diagnose how we got there and rebuild from a more stable foundation.

Anyway, I'm out of time, so let's get to the charts.

First up, the near term SPX chart, which has proven to be valuable:

Next up, the intermediate term SPX... here, we're at a bit of a crossroads.  The blue count is super-bullish pretty much directly.  The red count could see us top anywhere from current levels up toward 3130ish.

In conclusion, the market remains in an intermediate inflection zone, but the first thing bears would need to see is an impulsive decline.  Trade safe.

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