How To Tell Which Way The Market Will Move

I learned long ago that all you need to know in the markets is whether the market is going up or down. While this seems really very obvious it doesn’t seem to be a question asked as often as it should be.

If a market is going down in the long term, why would you be in it? It is was going up, why wouldn’t you be invested?

The blind faith take is that markets can only rise in the long term and so an investor buys and holds and leaves it at that. It suits a lot of people’s “book” to say this, and there is much truth to it, but at the margin it is not true.

For a start, a lot of companies go out of business one way or another, and it is only the big winners that carry the long term. Unless you are buying trackers, the balance of winners and losers can do some ugly things to your investments, mainly concentrating your profits into a very small group of stocks which then proceed to dominate your performance and wealth in a very whipsaw manner.

However, the biggest risk to buy and hold is illustrated below:

Or:

So hoping and praying the long term direction is up is not necessarily the answer.

So how can you know the market direction?

Here is my simple heuristic.

A bull market is different from a bear. They are mirror images:

A bull market has sharp corrections and long gentle rallies. A bear market has long gentle trending falls with sharp rallies.

This means in a bull you can “buy the dip” but in a bear your losses come from the constant ‘drip drip drip’ of falls, not the plummets that grab headlines.

Why this is useful is this:

When a market is drifting off and suddenly you get a sharp rally, you should be very careful not to be suckered in. Likewise, in a bull market a sharp correction shouldn’t sucker you out of a stock or tracker.

More importantly still you can determine the difference between bull and bear by the direction of the sharp moves and the drift. If you’re brave you can even divine a change from one to the other from those actions.

Right now we have just experienced a sharp rally in what is an obvious bear market. While many will get FOMO (fear of missing out) and jump in, if you follow the above logic you are expecting the consistent falls to begin.

It won’t be until the bear trend is broken and the market takes a new calm direction that the market will have entered a different long term path.

As far as today’s setup goes, it remains in the bear market trend. You have to be a huge optimist to see a big rally ahead and not much of a pessimist to see a big fall in the works. However, as all you need to know is which way the market is going, you can lean on the shape of the trend to know if it’s up, down or even sideways.

I remain very bearish.