If you’ve been following me for any length of time you know I’ve been a major bull when it comes to the stock markets. The last two years were some of the best years to be a bull in one of the greatest bull markets of all time and I don’t say that lightly.
A little over a month ago we got our first correction of 12% in over two years on the SPX. Everyday the SPX would be up four or five points on the open, nothing major, and then move slowly higher in a non-threatening way which made it fairly easy to stay on trend. Impulse moves like that are the easiest part to trade as the corrections when they came, were very small of only 3% to 5%.
That all changed a little over a month ago when it was time for the stock markets to correct that two-year impulse leg up. When it’s time to correct the markets don’t need an excuse they just do it and it usually comes out of nowhere. The initial leg down is usually the hardest followed by counter-trend moves that eventually build out some type of pattern.
Tonight I would like to show you some of the long-term charts which is the best proxy to define if the stock markets are in a bull or bear market. One of the most important decisions an investor can make is to determine if the market they choose to play is in a bull or bear market. Trading long in a bull market can be forgiving if your entry point is off. Eventually, the price action will catch up to the bull and you’ll be forgiven for your bad entry point. On the other hand, if you go long in a bear market you’ll be constantly fighting the dominate downtrend like a salmon swimming upstream. It’s always much easier to go with the dominate trend, long during bull markets and short during bear markets. It sounds simple but I can assure you it is not.
For instance, the bull market that started in the PM complex back in 2000 was a good example of trading inline with the uptrend. One could have done some shorting, but it would have been a much tougher game to play. After the bull market topped out in 2011 those folks that traded to go long the PM complex have been fighting a tough battle. There can be some small victories, but the big prize comes when you can get in sync with the major trend whether it’s up or down. As many are finding out major trends can last for many years and is unforgiving when you try to trade against it.