Jim: Hello Adam and thanks for joining us. A lot has happened since we last spoke in the markets- an unforgiving earnings season, numbers, and the market uncertain?
Adam: Yes- the Dow Jones Industrial Average has fallen over 1200 points Since Dec 31!
Jim: It seems the market has been particularly tough or generous on earnings disappointments- cases in point AAPL and KORS?
Adam: Absolutely, this has been an extremely busy earnings season. Earlier today, we saw TWTR gap down a whopping 23%! Last month, Michael KORS, a very popular upscale retailer smashed estimates and gapped up to fresh record highs. Facebook (FB), the social media giant, just celebrated its 10th anniversary and gapped up to fresh all-time highs after blowing past estimates last week. These are considered large wide-and-loose moves which has the potential to be dangerous if you are on the wrong side of the gap. What does all this mean for you? On average, the market is down since earnings season began which means investors are not particularly excited with this season’s numbers. It is also important to note that this bull market is aging. Last year, the benchmark S&P 500 surged 30% and next month, the market is going to celebrate its 5th anniversary. Since the March 2009 bottom, the S&P 500 surged a very impressive 177%! Most, not all, bull markets typically last between 4-6 yrs. The last bull market lasted 5 years from 2002-2007
At this point, investors should keep that in the back of their mind as we enter the 5th year of this bull market.
Jim: So with all that in mind- the choppiness, the age of this bull- are we witnessing signs of a market top? Or another correction in an ongoing uptrend?
Adam: Until we see more damage, it appears to be another correction in an uptrend. Even with the Dow down over 1200 points in the past 4.5 weeks- it only fell 7.5% from its record high, which is normal. In fact, the S&P 500 only fell just over 5% from its record high which was hit only 3 weeks ago. So right now, even though the decline feels swift and violent, on a percentage basis it is still mild (under 10%). In fact, it has been yrs since we have seen a 10% correction in the S&P 500 which speaks to the strength of this bull market.
We had a great conversation earlier this week with one of our institutional clients regarding market tops & bottoms. Keep in mind, the most important and common trait all market tops and bottoms share is that they take time to develop. There is always a possibility that “this time is different,” or that we crash due to a major external shock but the chances of that happening are extremely rare. Rest assured, if this indeed turns into a major market top (like March 2000 or Oct 2007), you will be the first to know.
Jim: So a long and strong bull like this typically won’t go down in an overnight flash, but rather a drawn out affair. So what are you looking to happen now as a decider on what will happen next?
Adam: Yes- as you know, I have gone back and studied countless bull and bear markets and have learned that tops and bottoms do not have over night. In fact, they typically take a few months to occur and it becomes obvious (for investors who study markets) when a top or bottom occurs. In fact, recently, I have received a ton of questions about the 1987 crash and the 2014 market.
[2/6/14 9:54:59 AM] Adam Sarhan: Here is what I have found:
There are a lot of similarities and some difference between 1987 and today.
Similarities: 1987 vs 2014
- 1987:The Bull market began in August 1982 & Topped out 5 years later in Aug 1987
- 1987: Two months later, the market crashed in Oct 1987, 62 months (just over 5 yrs) after the bottom.
- 2014: The bull market began 5yrs ago in March 2009 & for now hit its high on Jan 15, 2014 (only 3 weeks ago).
- 2014: We are 59 months into this bull market.
- 1987: The S&P 500 was -16.3% below its August high on Fri, before the crash. Today SPX is only -5.4% below its high
- 1987: Crash occurred in Oct (almost 3 months after the Aug Top),
Right now we are only three weeks from 2014′s high.
- 2014: For now, The Fed & Other Central Banks are still printing money, albeit at a slower rate
- 2014: For now, most moving averages are flattening out and some are turning lower. In 1987, the moving averages had turned lower and the major averages were trading on or below their 200 dma lines. Right now, only the DJIA is below its 200 dma line.
There is no question, the market is definitely getting weaker and the ingredients are in place for a potential top to form. But right now- it is still early, the S&P 500 is only 5.4% below its record high, & most importantly, if we hit new highs all this will be a moot issue. We do know that this bull market is aging, the easy money for this bull market is probably behind us (barring some strong influx to the economy or the Fed increases QE), and will celebrate its 5th anniversary next month. As always, stay tuned.
Jim: And as a final note, let’s not forget that even when a bull market becomes a bear market, a great deal of money can be made on the downside by shorting- and a lot faster?
Adam: Absolutely! There are infinite opportunities in the market in BOTH bull and bear markets for the astute investor to capitalize on
Jim: Adam, as always thanks for your insight.
Adam: My pleasure…
Note from Editor: Adam is the CNBC-quoted hedge fund manager and trading genius whose recommendations were actually UP 55% in 2008 and continues to provide great profits for subscribers to his Midas Wave Alert service.