Playing Musical Chairs: Has the Market Turned?

Patrick Daniel

Regular contributor Patrick Daniel looks at the S&P500 and asks whether the music has stopped.

“Well, you know this is a bull market!” he was told. A Wall Street veteran told him that the big money is not in individual fluctuations but in the main movement of the market. Jesse Livermore, the legendary trader of the early 20th century, had finally understood that instead of placing bets on the next few quotations, his game was to understand what was going to happen in a big way.

“Most people who speculate hound the brokerage offices,” Jesse Livermore later said, “The ticker is always on their minds. They are so engrossed with the minor ups and downs, they miss the big movements.”

When the S&P 500 almost erased all of its gains for the year last week, when bonds began to beat stocks for the year, it was time to ask that question: was bull market that had started in early 2009 coming to an end?

Actually that moment was in August when the S&P 500 surpassed its summer high. It’s often the case that when a market makes a high that cannot be sustained it sharply reverses its direction. After making an all-time high on September 18, 2014 at 2,011, the market turned. Over the next few weeks, the S&P fell by over 7%.

There have been about 47 recessions in the United States since 1790. That means that roughly every five years the US has been in a recession. What’s more if you look at the equity markets over the last five years, they have only known one direction. Unfortunately, trees don’t grow to the sky. With rising interest rates, and rising volatility, it makes sense for the markets to relax for a while.

On both sides of the camp, there are now arguments for and against the current bull market. The bears point to the end of quantitative easing and the many global conflicts that have been unfolding in 2014. The bulls point to positive consumer sentiment and strong jobless claims.

Everyone loves predictions. Tune into any financial channel, and you will know exactly where the S&P 500 will be next week or next month. If only it was that easy.

Others are always bulls or bears. But as Livermore said a man does not swear eternal allegiance to either the bull or the bear side. His concern lies with being right.

A turning point in the markets, as fast as it seems to unfold, still takes time. Market crashes like 1987 that happen in one day are rare. When the S&P 500 made an all-time high in July of 2007 at roughly 1552, it re-tested that high a month later in August. Many months passed before the market found its bottom in March 2009 at around 683 points.

Are we at such an inflection point today? That is for you to decide. Don’t focus on the small day-to-day fluctuations to find the answer. Instead observe the big movements.

Not everyone is aware of what is going on at the same time. Many people still hang onto the belief that the bull market is still in full swing even when the market is already turning. It is like that game of musical chairs. Everybody hears when the music stops playing, but not at the same time.