Stock Market ‘No-BS’ Reality Check

If you consider yourself an investing novice, PLEASE STICK WITH ME! I promise to – and I’m very passionate about “making the complex, simple.” So, before you click away and close this window, try reading each caption while looking at each picture, and I’m certain you’ll understand the majority of what I’m about to teach you!

Now, aside from my more detailed, analytical screencasts that I record for those who want to have a finger on the pulse of the market each quarter (which you can find by clicking here), I haven’t put together an article with a written update on the state of the market/economy in a while.

So, when I started to see news come out announcing that we’re now “in a recession,” I thought it was time to share some of my objective, evidence-based observations so that you could cut through the BS and spend your time on other, much better things, such as time with your family, exercise, hobbies, and so on…

This is going to be “rapid fire” on purpose, and my goal is to keep things short & simple, so here we go…

To get started, are we in a recession?

Well, unofficially, yes. Technically, to be in a recession, we need two quarters of consecutive, back-to-back, negative GDP (Gross Domestic Product – i.e., total U.S. Production exports/growth).

…and before I get into the important summary below, let me first share a crucial detail that you need to understand: The average recession since 1900 lasts, on average, 15 months.

Okay, so the first quarter came in negative, and just last week, the first estimate for 2nd quarter GDP was released at -0.9%. I emphasize “estimate” because we won’t actually know what the final number is until it’s revised in three months.

You catching on?

Right… in other words, we won’t know if we’re actually in a recession, until it’s more than halfway over with!

Wanna’ know another fun fact?

The stock market’s movement (up and down) is a leading indicator for the economy. This means that the stock market goes down BEFORE there’s a recession, and it goes up BEFORE The recession is over with.

So, if you haven’t figured it out on your own at this point, understand that, when the financial news networks start spewing filth about “the coming recession,” just know that their cups are very much half-empty with said filth, and they’re not telling the whole story. #TVratings

You like pictures? Me too! Let’s share a few…

Here’s a chart that I borrowed from my friend, Michael Batnick. When the line curls down, it means that the economy is heading into, or already in a recession.

Now Here’s another one (on the left, below) that compares the same indicators above to historical averages and trends. Then, on the right, you can see the trend in unemployment vs. other recessionary periods. Did you know that there are currently nearly two jobs for every single unemployed person?

One of the other things I hear a lot from people who ask about the economy and recessions is the topic of interest rates.

I’ve been asked many questions about mortgage rates, housing prices, and whether the recent growth is sustainable.

Are we going to see the kind of growth, going forward, that we’ve experienced in the past two years? Probably not – but man, are we spoiled or what?

Here’s some perspective to lay your eyes upon, below. This is a picture I snagged from my good friend and Canadian analyst, David Cox. It shows the enormous difference between the growth of housing prices here in the U.S. as compared to what they’ve experienced up in David’s hood. Maybe we need to chill out a little?

Let’s change gears and talk about what you really want to hear about… making money!

What’s the stock market up to these days?

Let’s skip where we’ve been – we already know that things have been rough for quite a long time at this juncture. Let’s focus more on the GOOD NEWS, and the higher probabilities that we might be faced with sunshine and blue skies in the not-so-distant future.

Here’s a chart I borrowed from a friend on Twitter in Austin Harrison. The NYSE composite is a basket of all the stocks traded on the New York Stock Exchange. It seems to me that we might be witnessing a textbook double-bottom pattern that corresponds beautifully with where it logically would make sense to do so (at the 2020 COVID highs).

Staying with the same theme as the picture above, here’s a chart of Apple, which also has a very nice, defined “line-in-the-sand” above which, things look pretty good! I’d say this looks like an uptrend, as long as we’re above that horizontal, dashed line, and especially if we’re above the blue line, which is the average movement of Apple over the last 50 days (i.e., the 50-day moving average).

My good friend Andrew Thrasher sent me this “chart of charts” over the weekend (below), which clearly shows how certain sectors within the stock market, such as Consumer Staples, Industrials, and Financials are showing signs of bottoming… again, at locations where it would logically make sense (prior “ceilings” of overhead resistance). A big one I’m watching is Small Company Stocks (lower right), which are the lifeblood of healthy, strong markets. If Small Caps bottom and start to perform well, the market will likely do well, right along with them.

There’s no doubt, fear is in the air. In fact, fear in the market has gotten to a point where some contrarian buy signals are starting to light up. “Small Traders” are considered to be less savvy than “Commercial Traders.” The next thing you need to know is that when people buy “Put Options” they’re betting on the market going down, and when they buy “Call Options,” they’re betting on it going up. Never mind any of the other details, as they’re honestly not that important.

Now that you know that put options are bearish and calls are bullish, below is a chart that shows times in the past when the level of buying in put options vs. call options has reached extremes. Notice how it’s climbing above a level only surpassed by the 2002 and 2009 market bottoms.

Since we’re on the topic of “Small Traders” vs. “Commercial Traders,” understand that another (maybe not-so-nice) name given to these two types of investors are also considered “The Dumb Money” and “The Smart Money.” Obviously, the smart money corresponds with the more savvy, commercial traders, while the dumb money refers to the small, speculative traders.

Now, notice (below) that, going all the way back to 2000, the smart money is buying up more U.S. stock index futures than ever before. This is NOT a bad thing!

The next thing I want to show you is a picture that describes the “spread” between the smart money and dumb money. When smart money is very confident, and dumb money is very pessimistic, this indicator in the lower pane rises. Notice how today, this has reached levels not seen since again, 2011 (after the U.S. Treasury downgrade) and before that, the 2002 market bottom. Also notice the total return for the stock market 1, 3, 6, and 12 months later, below.

People are so fearful on Wall Street, that we’re seeing downgrades in earnings estimates on companies within the stock market. As you can see in the picture below, the times when we’ve reached current levels have (again) corresponded with market bottoms, which suggests we’re probably closer to the end of this market crash than we are to the beginning.

The picture below corresponds with the chart above… but let’s not get too involved in the nerdy details here. The bottom line when you skim the chart and numbers below is this: When analysts have become this pessimistic in the past (or worse), the total return of the stock market 3, 6, and 12-months later was positive 100% of the time, with an average return of 11.2%, 16.1%, and 26.7% respectively. Would you say this is a bad thing?!

Below is a picture that tell us the net percentage of consumers who believe stocks are going to rise in value. The most recent number is below -20%. Notice the stock market bottoms in the upper-pane that correspond with extreme low readings in this number.

…and if it’s too difficult to draw lines with your eyes, let’s just observe all the times this number has fallen below -20% going back to 1987. Of those four instances, the stock market was only lower in 2008-09, but we were also in the midst of mortgage defaults with global financial firms going bankrupt. Is that what’s happening in the U.S. today?

Remember (from way above) that the 50-day moving average is “The average movement of an investment over the last 50 days.” Basically, it’s a way to smooth out the trend of an investment vs. looking at its day-to-day movement.

Alright, with this concept in mind, what you’re looking at in the picture below is the stock market in the upper-pane, and a special kind of momentum in the bottom pane that signals when the market turns its afterburners on. Notice the last two times we’ve seen this indicator go from one extreme to the other as fast. It occurred after the market bottomed in 2019 and after the COVID bottom in 2020.

The below picture and numbers correspond with the chart above. What it tells us is that, every time the stock market has experienced one of these “thrusts,” going all the way back to 1950, the stock market has been up 100% of the time, 1-year later, with an average return of 24.2%.

Just a couple more here…

First, on the right, you can see the current stock market and how it was just able to rise above the smoother curved line, which is its own 100-day moving average (again, this is the average movement of the stock market – in this case – over the last 100 days).

When you compare that to 2010 and 2018 on the left, it gives you an idea of what might take place in the market going forward, if today’s market behaves like it did on those times.

Of course, as Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.” Things won’t play out just like they did in 2010 or 2018 (or even 2007-09 or 2000-02). This market will have its own twist on an ultimate outcome.

Up-trends are simply defined by higher-highs and higher-lows. Down-trends are defined by lower-highs and lower-lows.

What we’ve been seeing in the market – either in large company stocks, small company stocks, or both – is a series of downtrends over the course of the last 18 months.

However, what I’m starting to see is a stock market that looks like it’s trying to form a bottom, and when combined with ALL the positive evidence I’ve shared with you, above, I have to reiterate that I think we’re closer to the end of this drop in market prices than we are to the beginning.

So, while I do think the next 6-8 weeks could be choppy, and that the market could pull-back in price and/or “consolidate” sideways before heading higher, if it can reclaim, hold, and launch off of the June highs (red, horizontal dashed line), this will be more confirmation that even more good news could be sitting on our doorstep in the near future.

Speaking of good news, here’s some for you… while I’ve never been a fan of it myself, it turns out Taco Bell is bringing back the Mexican Pizza!

In all seriousness, I hope that this helped add some honest perspective to what’s going on in the market (and the economy right now), and that you can rest assured that we’ve got your back…

Go spend time with your spouse, kids, parents, enjoy the summer weather, fire pits at night, pick up a good book, watch a movie or intriguing documentary, and instead of worrying about this stuff, let us stress about it for you.

Till next time…

Adam