Are Stocks Set Up For A Crash Landing?

Summary

In this week’s video, we examine the ongoing strength of the secular bull market while acknowledging the risk of potential drawdowns. Despite retail investors struggling with underperformance, the broader market and key sectors like technology remain robust. Historical trends suggest that even amid market fluctuations, long-term growth prospects stay intact. We emphasize the importance of patience and a long-term strategy, avoiding overreaction to short-term movements. With a focus on maintaining a flexible, open-minded approach, the video reassures viewers that the secular trend remains solid, and that positioning for sustainable growth is the key to success.

Takeaways

• 😀 Secular bull markets exhibit strong, consistent trends, but they can experience significant disruptions, such as during the dot-com bubble or the 2007 financial crisis.
• 😀 The stock market doesn’t move upward every single day; even in strong bull markets, drawdowns of 50-90% can happen, making risk management crucial.
• 😀 Retail investors have underperformed in 2024, with an average gain of only 3.7%. Overtrading is a common mistake during bull markets, leading to poor performance.
• 😀 Patience is key in a secular bull market. Avoid excessive fear of pullbacks and maintain focus on long-term growth trends.
• 😀 Current market conditions (November 2024) are more similar to the strong trends seen in 1995, which led to significant gains over the next several years.
• 😀 Incremental adjustments to portfolio allocations should be made based on data, but overtrading can harm long-term returns.
• 😀 While some sectors, like small caps and financials, are showing signs of improvement, they still need more confirmation before increasing exposure.
• 😀 The bond market is not signaling immediate recession fears, which contrasts with the concerns seen in 2000, suggesting the current environment is more stable.
• 😀 Despite short-term volatility, the secular bull market remains intact, potentially lasting until 2035. Long-term positioning in market leaders is the preferred strategy.
• 😀 Staying with leaders in sectors like technology (XLK) provides stability, even in uncertain periods, avoiding the temptation to switch based on short-term fluctuations.
• 😀 Maintaining an open mind and resisting the temptation to overreact to short-term market movements ensures better alignment with long-term investment goals.

Q & A

What is the main takeaway from this week's analysis of the stock market?

The main takeaway is that while the stock market has been performing well, it’s important to stay focused on long-term trends and avoid overtrading. Even in strong bull markets, drawdowns are inevitable, and we must remain vigilant and patient to navigate potential corrections.

Why is it important not to overtrade in a secular bull market?

Overtrading in a secular bull market can lead to underperformance, as short-term fluctuations may tempt investors to make unnecessary moves. This often results in missing out on the long-term upward trend. Staying with the trend and making reasonable adjustments is the key to success.

What do the charts for small-cap stocks (IWM) relative to SPY suggest?

The charts for small-cap stocks (IWM) relative to SPY indicate that small-cap stocks are showing strength and are positioned well in comparison to large-cap stocks, despite some short-term fluctuations. This helps with position sizing and ensures that we don't overlook potential opportunities in the small-cap space.

How does the current market in 2024 compare to past market conditions like 1995?

The current market in 2024 resembles the market conditions of 1995, which saw strong trends and a significant upward trajectory in the years that followed. While we are not claiming the exact same outcomes, the trend in 2024 has similar characteristics, suggesting continued strength.

What are the risks associated with complacency in the stock market?

Complacency in the stock market can lead to underestimating the potential for major drawdowns during bear markets. Even in strong bull markets, large corrections or crashes can happen, and investors who are too passive may not be prepared to handle these fluctuations effectively.

What does the performance of technology stocks (XLK) indicate for the market?

The strong performance of technology stocks (XLK), which have outperformed the S&P 500, suggests that the tech sector is a key driver of the market's strength. The positive momentum in tech stocks supports the broader secular bull market and provides a good opportunity for investors focused on growth.

What role do relative charts play in investment decisions?

Relative charts help monitor the strength of different sectors and positions in relation to others. By comparing assets like small-caps, tech, and financials relative to the S&P 500, investors can adjust their portfolio allocations and track where the market’s strengths and weaknesses lie.

How should investors respond to counter-trend moves?

Counter-trend moves are normal and expected, but investors should not overreact to them. Instead, they should stay focused on the long-term trend and be prepared for short-term fluctuations without making drastic changes to their strategy.

Why is position sizing important in a secular bull market?

Position sizing is important in a secular bull market because it helps manage risk and ensures that the portfolio remains aligned with long-term trends. By carefully sizing positions based on the strength of sectors, investors can maximize returns while limiting exposure to unnecessary risk.

What does the analysis say about the outlook for small-cap stocks?

Small-cap stocks (IWM) have shown improvement, and if they can continue to make higher highs relative to SPY, they could present a strong investment opportunity. However, the charts suggest that some work still needs to be done before we can fully embrace small-caps as a long-term leader.