It’s not even 2018, and there is already a slew of articles stating that the markets are going to crash in 2018. What is amusing is that these very same individuals have been making the same prediction for nigh on ten years. You would think that by now they would have had some sense knocked into them; especially since they have taken such a massive drubbing. No such luck, the same experts keep mouthing the same nonsense hoping desperately for a new outcome.
Has anything changed since the last time we penned an article on this subject?
Well, yes, things change on a daily basis, but the underlying trend is still up, and overall sentiment is far from Euphoric. On a technical basis, the markets are extremely overbought and begging for a reason to let out some steam. However, just because they are overbought does not mean they have to pull back. Take a look at the chart of NVDA.
The stock has been trading in the overbought ranges for an extended period, but it refused to pull back and instead continued to soar higher and higher. The moral here is that extremely overbought markets do not have to pullback; they can continue trending higher. If the Dow takes a similar path then it could easily trade to 25K before pulling back.
The stock has been trading in the overbought ranges for months on end. Note this is a weekly chart, each bar represents a week's worth of data. This is just one of many stocks that are all exhibiting the same pattern. Now it is easy to state that one should sit out and wait for a pullback. Many have been waiting for this proverbial pullback for two years and running. In such a market, one needs to adopt a two-pronged strategy:
Only invest in strong companies that are trading in the oversold ranges. Granted this is not an easy task but with a bit of effort you will find a decent list of candidates
Secondly, invest half the amount of money you would have invested a year ago. The markets are extremely overbought so erring to the side of caution would be prudent
Sentiment readings show that the masses are not bullish
In the last article we made the following comments:
Ask a madman how he is, and he might respond by telling you that “ the road needs to be fixed”. The answer has nothing to do with your question and on the surface has no pattern whatsoever, but if you turned around and looked at the road, maybe you would notice that it is in need of repairs. All you had to do was alter the angle of observance, and in doing so, you spotted something that most would have missed.
Well, nothing has changed since then. This Bull Market is unlike any other market and those that don’t understand the basic concepts of Mass psychology will continue to be left in the dust. Until the mass embraces this market with a passion, the market is unlikely to crash.
The Technical outlook
Without a doubt the markets are overbought, and we can see this when we take a look at a five-year chart of the Nasdaq. But as we saw in the case of NVDA, markets can remain irrational a lot longer than most players can remain solvent. One of the best ways to identify market turning points is to pay attention to the crowd; when the crowd is euphoric a top is close at hand and vice versa. Ideally, the Nasdaq lets out some steam and drops down to the 5500 ranges; such a strong move would scare the living daylights out of the masses and create a wonderful opportunity. However, for this to occur the following sequence would be needed
- The Nasdaq would need to close below 6500 on a weekly basis, and this would lead to a test of the 5900-6000 ranges.
- To trade lower, the Nasdaq would need to close below 5950 on a monthly basis.
At the Tactical Investor, we focus on two factors
Mass sentiment and our custom technical indicators, the most important of which is the trend indicator. If Crowd is not bullish and our indicators have pulled back to the oversold ranges, the intensity of the pullback would not matter.
So will the stock market crash in 2018? That outlook is highly unlikely, though a strong pullback can’t be ruled out and it would be something that we would wholeheartedly embrace. Until this bull market is embraced widely strong pullbacks should be viewed through a bullish lens.