The 1-Minute Market Report – December 21, 2018

The above is one of my favorite Yogi Berra quotes of all time. Not only is it funny, it's also deceptively wise. In fact, I'll even go so far as to say it's very Zen.

My interpretation of Yogi's quote is that every once in a while life surprises you with an unexpected opportunity to change the path you have been on and take a leap of faith that the new path might be the right path for you. 

It takes courage, determination, self-confidence, and an open mind to take the path less traveled, but that's where the opportunity is. Choosing to take the fork in the road can be uncomfortable, because you are giving up a path that is familiar and taking a chance on one that is full of both opportunity and risk.

Today we find ourselves at a fork in the road regarding the stock market. The old path has been painful and scary. If we choose to continue down the old path, we should probably expect more of the same. But what if we choose to take the fork in the road?

The new path represents going against the grain and doing some strategic buying. That means increasing risk exposure. There are many opportunities out there today to buy great companies at cheap prices because the big money managers are throwing them overboard. 

I've seen this up close and personal as head trader for a major institution. When we get into a market like this, portfolio managers flock to the trading desk, desperate for answers to the big question - is this market going to continue dropping, or is it near the bottom?

Think about the position these portfolio managers are in right now. At the start of 2018 they were putting up stellar numbers as the market charged ever higher. Then came the first correction in January-February. The consensus view was that it was no big deal. Corrections are a normal part of the market. 

Then we had a second leg down in April. This made some portfolio managers question the durability of the bull market. But they stayed on the main path and didn't bail out.

Then we had the third, and latest correction that began in September-October. This is the one we are stuck in right now. The troubling part, at least in my view, is that the market tried three times to rally off the -10% mark but failed. It is now in uncharted territory - down -17%, with no clear support in sight. It's a fork in the road, and I say let's take it.

I see what traders call a "trade-able rally" coming. I'm not saying that this correction is over, but I'm starting to see signs of panic out there, and when that happens it means opportunity. I've always believed that in the stock market, the real money is made when the market recovers from a serious decline. Those who are bold enough to take the fork in the road are almost always rewarded with bountiful profits.

Of course, you will need cash if you want to take the fork. Those who have remained fully invested so far will not be able to make a play here. But I've been telling clients and subscribers to raise cash for the last 12 months or more, so we are ready to go.

For specific details about how to play this coming oversold bounce, consult your financial adviser or sign up for my monthly newsletter where I publish lists of stocks and ETFs that are ripe for the picking.

Let's go through the numbers to find out how bad things are right now. As I said last week, I am not an outright bear at this point, but I'm gradually and methodically moving my clients into a more defensive posture with their asset allocations.

Chart 2. Distance from Key Markers

Drawdowns are what cause anxiety and lead to mistakes. I have two charts for drawdowns today. The first is the track of drawdowns for the past 12 months, and the second goes all the way back to 1964 to put the current drawdown into perspective.

Notice that the current drawdown in the upper chart looks very scary, but when we look at the long term view of drawdowns, it's not so scary after all. A drawdown of 15% is not a trivial matter, but it's far from the worst cases in the historical record.

Things seem to be going from bad to worse  in the market. I believe that we will see more rallies over the next few weeks and months, and some of them will probably be quite strong. But I'm less and less convinced that we will make a new high before we finally succumb to the next bear market. 

I could be wrong, of course, but I follow my models and they are showing increasing risk and diminishing prospects for a new high.

For a full analysis of the probability of a bear market or a new recession, see my Monthly Intelligence Report. 

As always, if you like what you see, or have suggestions for improving this recap, leave a comment below, or email me at info@zeninvestor.org