Beware the Bearish Bots

The market is ugly from a technical perspective - that means the bots are coming. The markets took a bath yesterday, erasing the Monday’s gains and th Were you forwarded this email? [Sign-up to Rude Awakening here.]( [Unsubscribe]( [The Rude Awakening] Beware the Bearish Bots - The markets took a bath yesterday, erasing the Monday’s gains and then some. - The Dow was down over 800 points (-2.38%); the Nazzie was down over 500 (-3.95%). - We’ve got a “Skynet” problem: the bots will take it from here. Recommended Link [The “Mother Of All Gold Bull Markets” Is Here]( Gold is headed much higher. According to Kitco, we’re facing the “mother of all gold bull markets.” And America’s No. 1 Gold Expert reveals how it could soar from $2,000… to $5,000… to $10,000… maybe even to $15,000 and beyond. [Click Here To Learn How To Profit]( Sean Ring Editor, Rude Awakening Happy Hump Day from a cool, sunny Piedmont. Philosophers always concentrate on subjects they’re bad at. I know one who lies whenever his lips move and then proceeds to write about truth. It’s hilarious. Philosophers try to find the answers they’re looking for to correct their faults. But the same may hold true in other areas. For instance, I’m an enormous Sherlockian. Each time I read one of Doyle’s tales or watch Jeremy Brett play the great detective, I’m as pleased with the case outcomes as a five-year-old watching a magician pull a rabbit out of his hat. I realized that’s because I’m not an analyst in the pure sense of the word. Perhaps I love Sherlock because he’s excellent at deductive reasoning, and I’m not. How did I finally arrive at that conclusion? My good friends Mark McGrath and Hunter Hastings co-wrote a paper for the Austrian Economics Research Conference held by the Mises Institute this past year. You can listen to a great podcast they did together [here](. Anytime I read something and a “ding” goes off in my head, I love it. Mark and Hunter made my head go “ding” with the following passage about John Boyd, an American strategic theorist. Boyd developed a theory of learning and understanding rooted in making effective decisions and taking rapid action. Boyd describes two ways in which one can “develop and manipulate mental concepts (orientation) to represent observed reality.” Those two ways are deductive reasoning and inductive reasoning. Deductive reasoning is the analysis by which we break down a comprehensive whole into specific components. For instance, that’s what excellent analysts like JC Parets at [allstarcharts.com]( (technical analysis), Lev Borodovsky at [thedailyshot.com]( (fundamental analysis), and Andrew Pancholi at [The Market Timing Report]( (sentiment and cycle analysis) do. I read their work all the time, and it feeds the Rude. I admire them like I admire Sherlock because their analysis is complicated, or at least unnatural, for me. But Boyd talked about that all-important second part: inductive reasoning. Inductive reasoning is the synthesis of those broken down parts (from deductive reasoning) into something novel that didn’t previously exist. In essence, I’m taking the parts (say, stock market analysis) and constructing them into a new whole (my scribblings in the Rude every day). And since the outcomes in the stock market are always uncertain, inductive reasoning is especially important for taking analysis and making decisions with it. Anyway, sorry for the long introduction. But today, I want to show you what I’ve synthesized concerning market movements. The SPX is in Trouble, But Not as Much as the Nasdaq There are [73 Nasdaq companies in the S&P 500](. That’s plenty of overlap, so the indices tend to move together. Not perfectly, of course! But you’ll see how similar the charts are below. Let’s start with the SPX. On the below chart, I’ve lettered a few points from A to D: To save time, I’ll bullet point the story: - The SPX peak at the beginning of 2022. - After a roughly 12.5% drop, the SPX recovered, but not to the previous high. - After another 9% drop, the SPX recovered above B, giving investors reason to be bullish. - That optimism was short-lived, as the SPX has fallen nearly 10% since C. The index now sits below its 50-day moving average (the blue line), and the 50-day MA sits below the 200-day MA (the red line). Really not good. The Nasdaq Composite’s chart looks eerily similar to the SPX’s, but peaked earlier in November 2021. But from the November peak to today, it’s a nearly 23% drop. Conclusion: the tech market is uglier than a drunk carpenter’s thumb. Let me head back to the SPX. In this chart, we can see the SPX from 1990 to today. It’s a monthly chart with the 9-month moving average (roughly 200 days) overlaying the monthly candles. I noted that the was “plenty of time to get out before the bottom” during the dot-com crash of 2000-2002. How so? Because the SPX was trading below that 9-month MA line for months before it finally troughed. And though no one wants to admit it, there was a full six months of ugliness before the market bottomed out in March 2009. I’ve zoomed in on the chart here: My point is that now we’re trading below the 9-month MA again. There have been five times before when the index has been below the 9-month MA and recovered to make new highs. But the key is that the Fed was either cutting or reversed hiking into cutting to avoid a colossal stock market sell-off. Are we willing to bet Jay Powell takes off his Volcker mask to save the market a 6th time? I’m not, though Albert Edwards and Mohammed El-Erian disagree with me. Recommended Link [The Metaverse Story You’re NOT Hearing…]( [Click here for more...]( Everywhere you turn, people are raving about the Metaverse. Facebook’s now called Meta. Microsoft’s CEO says, “The Metaverse is here.” Apple’s all in too. But there’s a critical piece of the Metaverse story you’re NOT hearing about… [Click Here To Learn More]( The Buffett Indicator The Buffett Indicator measures the ratio of the stock market to GDP. We use the Wilshire 5000 index as a proxy for the stock market. The Wilshire 5000 is the index of all American stocks actively traded in the United States. As you can see from the chart, the ratio peaked at much lower levels before the 2000 and 2008 crashes. The Buffett Indicator Credit: [Longtermtrends.net]( This time, what bothers me is not the heightened index level, but that it’s turned around and is heading down. NYSE Percent of Stocks Above the 200-Day Moving Average This indicator is a JC Parets favorite, and I’ve shown it before. JC’s rule is this: don’t own stocks when the ratio is below 15. That’s the lighter line under the bright blue line. I eyeballed the bright blue line. I was looking for, “At what point is a fall below 15 inevitable?” Though it’s not perfect, only one time did the indicator fall below 25.88, recover, and not hit 15. That is, if we hit 26, we’re heading down. Hard. Right now, the index sits at an uncomfortably low 32. And fall isn’t inevitable, but it’s highly likely. BTFD is Indeed Painful This Year Two days ago, I wrote a piece titled “[BTFD is Suicidal For Your Portfolio]( Not only do I stand by it, but Lev Borodovsky over at The Daily Shot published this table from Bloomberg: Source: [The Daily Shot]( If you wanted quantitative proof BTFD isn’t a good strategy right now, here it is. Wrap Up Here’s my synthesis: there’s just too much going wrong. And that’s where my fear comes in: the bots know all. Most trading is done by algorithm or electronically. It’s not brokers or investors hitting the buy and sell buttons. The bots have their orders and may execute them in a way their coder - usually a hedge fund manager - didn’t intend them to. And that leads to “gap risk.” The simple way to think of gap risk is that everyone is heading for the exits simultaneously. And the price falls out of bed accordingly. The chances of gap risk occurring on a large scale across asset classes increase daily. Be careful out there. Until tomorrow. All the best, Sean Ring Editor, Rude Awakening To sign up for the Wiggin Sessions, [click here.]( By clicking this link, you will receive a free subscription to Wiggin Sessions and offers from us and our affiliates that we think might interest you. You can unsubscribe at any time. [Privacy Policy](. [Whitelist Us]( | [Archive]( | [Privacy Policy]( | [Unsubscribe]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [unsubscribe](. Please read our [Privacy Statement.]( If you are you having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting us.]( © 2022 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Email Reference ID: 470SJNED01[.](