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Buckle Up Buttercup…
Fasten your seatbelts – things could get bumpy. Trump has amplified the seeds of worry stating he was willing to work through a “bit of disruption” – as it will lead to longer-term gains. And whilst a recession was not on anyone’s bingo card last month – those probabilities are increasing.
Worst Week of the Year… Uncertainty Weighs
Approx 2 months ago – it felt like markets were starting to hedge their bets. How could I tell? Whilst the market was trading near record highs (around 6100) – momentum was fading. I commented on both the weekly MACD and RSI falling – whilst prices remained high. Technicians call this “negative divergence”. Quite often it suggests prices are at greater risk of easing. Since then they’ve dropped ~6%. The week ending March 7th was the worst week for the year and the third straight week of losses… more to come? I think so…
How to Know When Markets are Panicky
Are markets panicking? That depends on who you ask. A short-term trader might see the ~6% move lower as significant. On the other hand, those who invest for longer-term (such as myself) see a ~6% move down as nothing at all. From mine, panic isn’t here yet. However, there is a measure which can help us identify when markets are overly fearful. And generally – they are great buying opportunities. But we are not there yet.
How Far Will Multiple Expansion Take Us?
Earnings per share growth has averaged 8.3% pa from 2015 through today. However, capital appreciation in stocks (exclduing dividends) has seen a CAGR of 11.0% over the same 10-year period. This divergence is widening which indicates multiple expansion. From mine, investors should be braced for mean reversion.