Current Stock Market Thesis

The BluPrint Stock Market Thesis is published for educational purposes only. Always consult a professional before making your investment decisions. Because our thesis does not change frequently, it would become repetitive if we published it in every issue of the Navigator Oracle™. Instead, it is always available for reference by tapping “Current Stock Market Thesis” under the “Categories” side menu to your right. Our daily, weekly, and monthly publications highlight relevant issues related to the forecast.

Updated April 10, 2022

Since the last update in early March, our thesis has not changed. If anything, the market continues to affirm our theory of the case. Nevertheless, we keep an open mind about other possibilities. Even if a bear market is imminent, and we believe it is already underway, past markets have melted up right before capitulating.

Old-timers often talk about the “choppy top of the bull.” The old saying recognizes that bull market tops are often choppy and confusing before the final rollover. Given that the same information is readily available to everyone simultaneously, the chop is another way that markets can frustrate and wear out both bulls and bears before the market finally rolls over.

As a side note, the Navigator Algorithm™ dashboard has a readout for “Kill Zone” when the algorithm detects chop. The algorithm will detect the chop signature before it is evident on your chart.

Of course, I was trying to have a little fun when designing the dashboard, but the fact that chop is a kill zone is also true. The 2000 market top in the Dow and S&P 500 was a frustrating chop zone for a year before the market rolled over. I was there and experienced it first hand.

I am trying to convey that it never pays to hang your hat on any particular scenario. Always stay flexible and keep an open mind. Whatever your thesis may be at the moment, always know where your current view would be proved wrong. Keep running if-then scenarios in your mind at all times. Read on, but with perspective and a flexible mind.

Background and Context

Our current thesis is that the U.S. stock market (we use the S&P 500 cash index as our proxy) has started a generational correction that will end at its long-term mean. The mean is roughly the halfpoint in its 100-year channel – currently 2500. The level is near the 2018 lows, but slightly above the Covid-19 crash low at 2100. Of course, the mean rises over time, so time and price are both elements of the downside target.

As of April 10, 2022, the S&P 500 cash index had peaked at 4818 on January 4, 2022. More importantly, the peak level was an intersection of a multi-timeframe channel tops, more than three standard deviations above the S&P 500’s long-term mean.

We believe that this is where the bear market began for our core market index. It started back in November 2021 for the NASDAQ 100 and even earlier for some of the other key indices. Our thesis would be negated if the index found acceptance at new all-time highs.

The stock market has tagged the 100-year top channel line only three times: 1929, 2000, and the recent January peak. We believe that declining from this location distinguishes the road ahead from the typical bull market – BTFD – correction complacency. Recency bias can be fatal as a bear market unfolds.

If the past is prologue, this will not be a buy-and-hold market. Rallies and declines will occur swiftly, and both traders and investors must apply appropriate tactics to produce consistent profits and protect capital. Long-term investors approaching retirement must be extra vigilant in protecting their investments from devastating losses on the runway ahead.

From a technical perspective, tagging the 100-year channel top is a “three-sigma” event, driven by unusually accommodative Fed policy leading to excess speculation. The last two touches culminated in bear markets with declines exceeding 50%. BluPrint’s working thesis calls for similar corrective processes in the coming weeks and months.

The S&P 500 index has weathered the storm remarkably well at this writing. However, the broader U.S. stock market has corrected significantly. Investors must remember that liquidity problems typically unfold as highly leveraged markets unwind.

Margin calls and other deleveraging events force investors to sell their more liquid, S&P 500 quality names to satisfy their obligations. Eventually, the best and most famous names in the bull run catch up to the collapse, if for no other reason than investors sell them to meet margin calls.

Potential Bear Market catalysts include high inflation, a related reversal in accommodative Fed policies, an inverted yield curve and risk of Fed policy errors (inducing a recession), and rising global tensions, including the Russia – Ukraine conflict. The entire world is experiencing secular upheaval, challenging the existing international order. The disruptions are characteristic of “Fourth Turnings, ” which we have previously discussed on these pages.

Projected Path and Targets

The stock market can travel along several different paths to correct its excesses. It can crash, zig-zag, move sideways, or combine all three. Crashes are low probability events – more often associated with unknown and unexpected circumstances.

The market is more likely to establish one or more trading ranges as it works its way to the mean. The mean can rise while the market moves sideways until the mean and price meet. The process can take a long time, even years.

Looking back over my 35 years of trading in this business, it becomes clear that markets often stall in the face of longer-term exogenous events or changes. Trading ranges reflect these periods of hesitancy and indecision.

If there is anything I could convey to new traders and investors, it would be to recondition your default market mindset to “sideways.” We tend to have a natural bias to look for the markets to trend higher or lower. Yet, markets spend much of their time rangebound in chop. Your bias should be that the market will go sideways until proven otherwise. Your job is to find the top and bottom of that range.

The Dow Jones Industrial Average chart above highlights the various corrective paths the index has taken across its long-term channel over the past 100 years. Of particular interest is the Dow Jones Industrial Average behavior from 1966 to 1984. That segment of the long-term chart is magnified below and documents the index’s regressive price behavior in the last U.S. inflationary spiral:

If I were to call the road ahead of us, it would look like the 1965 to 1984 period in the Dow chart above. The four-year cycle would loop up to 1000 and then back down to 500. That is a 50% trading range. “Buy and Hold” fell on deaf ears as an investment concept. Stocks and bonds were highly correlated (like now) in the up and down cycle. Even a balanced 60/40 stock/bond strategy performed poorly.

But, what was actually happening when you look at the longer-term chart above? The market was slowly moving sideways into the channel support line. When it reached the line, that was the end of the trading range. Of course, this is clear in 20/20 hindsight. When caught in the middle of an 18-year trading range, it would not be easy to see.

From our current nose-bleed levels, I would not be surprised to see a 20% – 30% trading range established until we move into the center of the 100-year channel. Hopefully, we don’t need to visit the bottom channel support line.

Conclusion

Whether investing or trading in the financial markets, context is critical. Indeed, nobody has a crystal ball. Variables and conditions change.

Because bear markets occur infrequently, professionals don’t get a lot of practice with them. If you need help managing your funds, finding a professional with some gray hair who has experienced a bear market would be wise. Don’t be afraid to ask tough questions. And unless you are very young, don’t allow anyone to convince you that you cannot time the market, so you need to stay put and be slaughtered.

Our Navigator Swing Trader™ strategy is well-suited to retirement accounts and will help you avoid significant downdrafts. At only $99 monthly, it will pay for itself in droves in the coming markets.

It is important to stay in touch with your professionals. We will continue to move forward based on the bear market thesis until the price action guides us in a different direction. That means we are willing to invest long or short in the market as we traverse the shorter-term waves ahead.

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