Sentiment Speaks: Stock Market Setting Up To Take A Hit

Sentiment is a funny thing. When the market is up, people assume it will simply continue in its current path unabated. And, when the market is down, people assume it will simply continue in its current path unabated. We also know that people rarely are able to identify the turning points in the market since they always seem to maintain a linear perspective on market direction, as I just outlined.

Of course, the proposition I noted above excludes all the perma-bears or perma-bulls who assume the market will always move in the direction of their steadfast bias.

Yet, as investors, it is your job to develop tools to understand the general market context, so you can tune out all the noise presented by the great majority of those outlined by the two paragraphs above. However, that is certainly not an easy task.

So, I wanted to take some time in the first part of this article this week to discuss some of the perceptions I am seeing of late.

Now, I know that you have been bombarded with articles dripping with bearishness for quite some time. It is to be expected with the market having dropped the way it did in 2022. In fact, even though I expected a downside in the early part of 2022, I clearly did not expect we would drop as deeply as we did when I began looking for a market decline in late 2021. Yet, we were able to adjust as soon as the market provided us with objective evidence to do so.

But, you see, the difference between our analysis and most others is that it is our goal to remain on the right side of the trade ALL the time. Our goal is always to be on the correct side of the market, and we remain as objective as humanly possible in order to provide such guidance.

However, most others approach the market with an inherent bias, usually based upon some fundamental perspective. When the market is running according to their bias, they are hailed as geniuses. Yet, when the market runs opposite to their inherent bias, they are seemingly wrong. Moreover, they often steadfastly maintain their wrong bias until the market again moves in their direction, at which time they are hailed as geniuses once again. But, when you take a closer look, they are indeed wrong all the time as their goal is not to see the market objectively. They simply are viewed as skillful when the market meets their bias. This is simply coincidence, as markets move in both directions. This is not the basis behind our methodology.

Of course, despite my working diligently to be correct as much as humanly possible, I simply cannot be right all the time. Yet, my being wrong about the depth of last year's pullback does not change the fact that, over the course of the last twelve years of my writing publicly, we have caught almost all the turns the market has had to offer on both the upside and the downside. So, I am no perma-bear, nor am I a perma-bull. As one of my 1000 money manager clients once noted, I am simply perma-profit.

Since we correctly called the low in the market back in October 2022 (even in the face of worse-than-expected inflation numbers which caused most to be continually looking lower), our expectation was that we would see a rally to at least the 4300SPX region off that low. Thus far, the market has come shy of our upside expectations by about 100 points. But, I do not think we are yet done.

In early March, I outlined to you my expectations for the market to test the 3810SPX region of support, which, if held, can set us up for another rally which can target 4300SPX, or even higher. As we now know, the market struck a low of 3809SPX, and began the rally in which we are currently involved.

Yet, down at those recent lows, most articles were again dripping with bearishness, with most investors expecting the continuation of that decline to levels below those struck in October 2022. The bearish expectation at the time was ubiquitous, and most simply expected the trend at the time to continue unabated.

However, due to the rally we have seen this past week, we are starting to see the opposite develop. Many investors are doing what they do best, and assuming the market is going to continue in its current path unabated. In fact, this was a comment I saw from a Seeking Alpha commenter this past week when someone asked whether it was more likely we see 4300 or 3600 next:

"4300 far more likely than 3600. I wouldn't be surprised if we never saw 3600s again."

Clearly, reading the sentiment of this poster is not the secret sauce to us catching turns in the market. We utilize Elliott Wave analysis for that. Yet, it is certainly a point of interest which tells me I am likely on the right track in identifying when bullish sentiment is getting a bit too heated.

So, at this time, I will tell you that I think the sentiment is getting a bit too heated. While there is some potential that the market can provide us a small pullback early in the coming week and even push a bit higher towards the 4140SPX region, I think we will see a bigger pullback before we break out over 4200SPX and begin the next phase of this market rally to 4300SPX or higher.

Smaller degree support for early in the coming week is in the 4030-46SPX region. And, if the next pullback holds that support, then we can see one more push higher before the next larger pullback takes shape. But, a breakdown of that support tells us a larger pullback is in progress, which will likely set the market up for the next move to 4300SPX and potentially even higher depending upon where that larger pullback holds support. But, I am not expecting us to break below the 3809SPX low we struck in mid-March. Such a break would be quite bearish indeed. But, I have to objectively know where I am wrong in my general expectations.

I am sorry I cannot provide more detail than that, but I do have to leave the details of my analysis and the charts to our members. But, I will tell you that they have not stressed anywhere near as much as most market participants, because the market has been turning at the general guidelines we have been providing for them:

"Just have to say... I took detailed notes on Avi's weekend report... OMG, talk about nailing it. I'm sitting here checking off waves and levels. We haven't finished yet but damn he gives me confidence in this market. And not just SPX, TLT and SI[silver] too... just wow... and thanks."

"Your ability to capture every twist and turn is truly remarkable."

This brings me to another topic I would like to address this week. I know many investors think the market only goes up over time. Well, to be honest, they would be right in that general assessment since society is generally on a path of growth and expansion. However, the question is how much time do you have to wait?

To show you an example of how many in the market think:

"I've just kept buying since 2008 and I'll keep doing so for the next few decades. I'm not so worried about my money to stress about market timing."

Well, the market has generally been going up since 2008. But, what happens if we will enter into a period of time that is similar to what Japan went through since it hit an all-time high at the end of 1989? Remember, it was only recently that it exceeded that high. Do you have 30 years in your investing timeline? If not, you must find an objective manner in which to view markets, so you are not caught flat-footed in the event a bear market does last 20 years.

As I have written in the past, I am expecting a bear market to take hold, which can last as long as two decades. Unfortunately, it will take me about eight or nine years into that pattern to be able to tell if we are going to be stuck in that bear market for the full two decades or not.

But, the point I am trying to make is we are likely heading into an environment that almost none of you have likely experienced in your lifetime. Yet many of you are viewing the market quite linearly, and expecting what you have seen within your limited lifetime, which has now enveloped you in a perspective driven by recency bias.

As I have said many times before, I am neither a perma-bear nor a perma-bull. Yet, I have been called both during different points in my analyst career simply because the specific commenter held a different perspective than I did. However, I truly fear the potential of what I am seeing over the coming decade or two. And, all I ask is that you maintain more of an open mind as we head into a period of extreme uncertainty over the coming decade. You owe it to yourself and your family to protect your hard-earned money.