The “Disbelief Phase” Is Coming to an End...

Investors are already pining for the good ol’ days of 2023 [Morning Reckoning] January 09, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The “Disbelief Phase” Is Coming to an End… Baltimore, Maryland January 09, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, Investors are already pining for the good ol’ days of 2023. Yes, we’re just five trading days into 2024. But it appears Mr. Market’s New Year’s resolution was to pulverize the bulls into a fine powder and leave just about everyone wondering how everything changed so quickly. December trading finished with the S&P 500 and Nasdaq Composite posting their ninth winning week in a row as stocks rode a wave of frantic buying off the October lows. But from the opening bell of the first trading day of 2024 (which frankly feels like a lifetime ago), the market started to get a bit tricky. The initial blow felt a lot worse due to the insane strength of the preceding two months. And if we take the time to zoom out, it’s clear that last week’s steady drop didn’t completely break the market. The S&P 500 registered a loss of just about 1.5%, which just so happens to be its first losing week since October. Meanwhile, the real damage was concentrated in the Nasdaq Composite. The tech-heavy index dropped 3.25%, leaving it just inches away from retesting its July 2023 pivot high. Of course, these facts matter little to traders who were just beginning to buy into the melt-up rally. Recency bias plays a much larger role in investing than most market participants want to admit. We get comfortable with the way things are — and we assume the current conditions will continue forever. Every time a formerly powerful trend abruptly reverses, investors inevitably ask the same question: Why? Were stocks down last week because investors were worried about the attacks on cargo ships in the red sea? Was the market weak because of how analysts were interpreting the latest jobs report or manufacturing data? Or, were investors simply concerned about inflation rearing its ugly head once again in 2024, stopping the Fed from beginning its rate-cut campaign in March? [The Final Crypto Bull Run]( [Click here to learn more]( This could be one of the most important weeks for Americans in years. James Altucher just revealed a discovery that he believes will be bigger than the internet, AI, or any technological breakthrough we’ve seen in the past few decades. He’s calling it The Final Crypto Bull Run , set to begin January 10th, and has identified six tiny cryptos that could soar 10X, 50X even 100X over the next 12 months. If you miss these plays, you’ll likely miss your last chance to ever get rich from crypto. [Click here to get his game plan for playing The Final Crypto Bull Run now .]( [LEARN MORE]( What Happens Next? To be clear, these are all viable concerns that could impact various market sectors, as well as the major averages. But these “why” questions are virtually impossible to accurately measure within market fluctuations. We could debate the various effects of certain news items until we suck every molecule of oxygen from the room. But none of our answers will get us closer to answering a much more important question: What happens next? Fortunately, we can come closer to answering this query (and improve our market timing!) by understanding market structure and how trends typically unfold. First and foremost: Markets rarely move in straight lines. And when they do, these sharp moves don’t end with quiet, sideways consolidations. Instead, you’ll tend to see sharp, sudden pullbacks that catch most investors off guard. That’s exactly what we’ve seen from the market so far this month! The Nasdaq Composite finished lower for five straight sessions. Not a buyer in sight! Every time it looked as if it might catch a bid, sellers stepped in during the late afternoon to drag the formerly red-hot tech names lower. We didn’t even sniff a decent bounce until yesterday. Yields and the dollar also rallied, putting additional pressure on risk assets. The bulletproof Magnificent 7 stocks took a hit. The market even chewed up some of the best under-the-radar snapback performers. Tech-growth names coming out of big bases failed and moved sharply lower. And after breaking out in late December, the small-cap Russell 2000 retreated back into its choppy range. The market’s best out performers from Q4 became deadweight overnight. A New Trading Environment? Despite everything that’s happened so far this month, too many traders are going to be stuck on the same melt-up frequency from late 2023, despite the fact that we’re dealing with dramatically different market conditions than we enjoyed just a couple weeks ago. If it isn’t already finished, the disbelief phase of the rally will end soon. When it does, we’re going to need to be a bit more tactical and cautious on the long side. A weeklong skid isn’t going to tell us much about the market. But how the market bounces from here will certainly dictate how we trade for the next four to six weeks. If we see the leaders such as the semiconductors, tech-growth base breakouts, and other hot names snap back to attention, we can brush this early January action off as some much-needed profit taking. On the other hand, we could see a weak bounce attempt that quickly runs out of steam as these market leaders approach those former highs. This is the kind of action that could lead to choppy trading and more downside heading into February. Anything is possible. But it’s important to work out these potential scenarios so we can work up our trading plans. Instead of eagerly trying to catch falling knives as the market sorts through this rough patch, we need to respect the potential change of environment. First, we shouldn’t blindly chase any stock that looks like it’s breaking out. In corrective markets, most breakouts will either retreat back into their former ranges or fail entirely. You don’t have to dig very deep to find the stocks that failed to hang onto breakout levels last week… Next, we need to watch for bigger rotations occurring in the market. If new stocks and sectors start to catch higher as former highfliers sag, we need to keep up! It’s a simple concept – yet many investors still have problems quickly shifting gears when their old trades quit working. Finally, it can’t hurt to begin searching for cheap puts to purchase if stocks post a re-energized move back to their highs. The market will eventually boil over, and it never hurts to have a little insurance for the next inevitable 5-10% pullback. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Famed A.I. Expert "Do This By January 9th"]( [Click here to learn more]( Genius investor James Altucher is predicting between now and January 9, a new generation of A.I. will create a brief "wealth window" in America. It could make crypto look like pocket change... [Click here for all the details ]( [LEARN MORE]( In Case You Missed It… The Houthi Butterfly Flaps Its Wings Sean Ring, Editor [Sean Ring] SEAN RING Dear Reader, Now that my parents are only half a mile away, long-forgotten memories have flooded back. Thanks to my mother’s unimpeachable cooking skills, I’m again enjoying all the trappings of my youth. One such happiness is eating simple pasta and tomato sauce. Sure, my mother’s lasagna is second to none, but that’s more of a holiday dish. (Indeed, I rolled home after Christmas dinner. It's too bad Pam and Micah had to push me uphill!) Another favorite is bow-tie pasta. But as I was helping Micah with his homework a few weeks ago, I learned that farfalle means “butterfly” and not “bow tie.” We always called farfalle pasta bow-ties. Was this a case of mistaken vocabulary? Not at all. In Emilia-Romagna, a region in Northern Italy near Il Piemonte, farfalle are known as strichetti, the local word for "bow ties.” It reminds me of an old Venetian joke. “What’s the most common foreign language spoken in Venice?” “Italian.” My ancestors must’ve taken the bow-tie name across the Atlantic in the old days. Speaking of butterflies, an unlikely one has been flapping its wings near the Suez Canal. And it may just cause a financial hurricane in the United States. The Butterfly Effect Houthi rebels are the new Somali pirates. Imagine a bunch of goatherders, who are pissed off at Israel over the Gaza bombing, stopping world trade. It’s improbable. Unlikely. Fatuous, even. And yet, here we are, talking about everything Joke Biden needs to bury if he (or his body double) wants to win in November. The Butterfly Effect is when a very small change in initial conditions that creates a significantly different outcome. In 1950, Alan Turing noted: "The displacement of a single electron by a billionth of a centimeter at one moment might make the difference between a man being killed by an avalanche a year later or escaping." There is no need to wonder what Turing would be thinking if a bunch of Houthis were sitting on the cliffs lining the Bab Al-Mandeb Strait, lighting off cheap drones and rockets at any Israeli or Israel-aligned ship. If you’re Russian or Chinese or anyone aligned with the Global South, pass “Go” and collect $200. From the December 22nd edition of the [Rude Awakening]( On our editorial call on Wednesday, ex-naval aviator and Paradigm’s venerable historian Byron King mentioned something I hadn’t considered. Byron said - and I’ll paraphrase - that the Houthis were using $100,000 drones to attack commercial shipping in the Red Sea, while the US Navy was using $1 - 4 million rockets to shoot those drones down. You don’t need a mathematics degree to see why experts think this unbalanced exchange of munitions will eventually pressure the Pentagon. Well, thanks to these Houthis, we’re heading back to the water routes of the 1860s! Why Americans Need to Care About This… And Think Carefully. You may not yet recognize the Bab Al-Mandeb Strait I mentioned earlier. That’s the waterway a ship needs to travel through to get to the Suez Canal. If the Strait is blocked due to rocket fire and the subsequent suspending of maritime insurance, then the Canal is inaccessible. And that means you’ve got to sail around Africa for goods to reach Europe and the West. Credit: [The Cradle]( The military angle is easy enough. From [The Cradle]( While the US military is successful at producing expensive, technologically complex weapons systems that provide excellent profits for the arms industry, such as the F-15 warplanes, it is not capable of producing enough of the weapons needed to actually fight and win real wars on the other side of the world, where supply chains become even more critical. But the economic warfare is even more dreadful. Impact on Shipping Costs Shortest Route The Suez Canal offers the most direct sea route between Asia and Europe, significantly reducing travel time and distance compared to the alternative Cape of Good Hope route (around the bottom of Africa). When the canal is inaccessible, ships are forced to take this longer route, increasing travel times by weeks and fuel costs exponentially. Fuel Costs Longer journeys translate directly into higher fuel consumption. This additional cost is invariably passed onto consumers, raising the prices of goods transported via these routes. Charter Rates The canal closure often leads to a shortage of available shipping capacity. Ships tied up in extended voyages reduce the supply of vessels available for other routes, driving up charter rates. This, in turn, inflates shipping costs, a burden that the consumer again bears. Congestion and Delays The aftermath of a canal closure typically involves significant congestion and logistical backlogs. This can lead to substantial delays, further disrupting shipping schedules and increasing operational costs. Breaking the Supply Chain Just-in-Time Inventory Modern business models, such as just-in-time inventory systems, rely heavily on timely and predictable delivery of goods. The closure of the Suez Canal disrupts these delicate systems, leading to widespread shortages and inefficiencies. Perishable Goods The delay in shipping routes particularly impacts the delivery of perishable goods. This leads to wastage and disrupts food supply chains, affecting markets and consumers globally. Manufacturing Delays Industries dependent on specific components, such as automotive and electronics, are significantly impacted by delays in the delivery of these parts. This halts production lines, leading to broader economic repercussions. Global Interconnectivity The closure of the canal highlights the deeply interconnected nature of global trade. A disruption in a single yet crucial location can have far-reaching effects, impacting various sectors and economies worldwide. Inflationary Pressures Increased Transportation Costs The surge in transportation costs due to longer shipping routes and heightened fuel consumption contributes to overall inflation, as these costs are typically transferred to the consumer. Supply Shortages Disruptions in supply chains can create shortages of various goods. According to the principles of supply and demand, reduced supply often leads to increased prices, contributing to inflation. Speculative Increases Anticipation and speculation about delays and shortages can trigger preemptive price increases. These speculative actions can exacerbate inflationary pressures even before actual shortages occur. Economic Recovery Post-Pandemic In a post-pandemic world, where economies are in various stages of recovery, the closure of a critical trade route like the Suez Canal compounds existing challenges, such as labor shortages and heightened consumer demand, further fueling inflation. Broader Economic Implications Global Trade Dynamics The Suez Canal's role in global trade dynamics is multifaceted. It's a conduit for goods and a barometer for global economic health. Its closure signals deeper issues in international trade relations and economic stability. Energy Markets The canal is also vital for the transport of oil and natural gas. Its closure can disrupt energy markets, leading to fluctuations in energy prices globally. This domino effect affects industries and consumers alike, as energy costs are a fundamental component of almost every economic activity. Long-Term Strategic Changes Repeated disruptions may prompt companies to reassess their supply chain strategies. This might include diversifying shipping routes, increasing inventory levels, or even reshoring some manufacturing operations. While these strategies can mitigate risks, they also come with increased costs and complexities. Environmental Impact Longer shipping routes increase costs and have a significant environmental impact. Wrap Up Whether you own a business or are just looking after your investments, it’s paramount that you keep abreast of this situation. Yes, a bunch of goatherders has just thrown a monkey wrench into the world's economic works. But this also represents an enormous opportunity to profit if you keep your head about you. Look at the energy and transportation sectors. Look at precious metals. Look at other tangible assets and commodities, like copper. While the Houthis are wreaking havoc on the West, you can protect your investments and profits before most people even know what’s happening. Good hunting! All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. 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