Market Update: Rally Ahead or Return of the Bear?

My view of the market right now reminds me of a question that people ask me often - why do I use a "hybrid" trading methodology?

In other words, I use both fundamental analysis (how much a company earns in profits, as one example) and technical analysis (the direction of a company's stock, for starters).

And my answer is always the same.

The stock market is sort of like the image below - a fog bank of information, expectation, and emotion.

We can make out some things within the fog, but much is obscured.

As investors, we're compelled to grope around in the midst of that fog and make important investing and trading decisions based on what we think we see or feel, as we stumble our way through the mists.

In my opinion, fundamental and technical analysis both offer us valuable clues to what might be inside that fog.

Market Rally Ahead?

A good example is the recent 6% market decline.

Personally, I think it's a warning shot. But steep corrections, bear markets and crashes don't just "happen"...they're a process. My belief is that the decline of the last few weeks is the start of that process.

But it's mid-August. Trading volumes are generally "light" at this time of the year. So, speaking just from general experience and instinct, it wouldn't be surprising to see another low-level rally take shape sometime in coming days and carry us back toward the prior highs.

It could be a matter of where we draw our trendlines and what market index we choose to look at.

For example, the Nasdaq Composite Index (which is 2,500 stocks, instead of the 100 biggest stocks in the Nasdaq QQQs) finished Friday right at a trendline that extends all the way back to the start of this year's rally.

But index charts all look a little different from each other.

So if we use a chart of the Nasdaq 100 futures contract - which trades nearly 24-hours a day - we could still see a handful more days of weakness before the index touches the same trendline, and a (presumed) counter-trend rally takes shape:

My main point?

I believe we're reaching the endgame of the 2023 rally, and that a steep correction or renewed bear market lies on the other side. In my opinion, we should all be pondering what stocks we want to sell (and which ones we still want to keep), and raising the level of cash in our trading accounts.

But stalking such a correction is always tough. I've seen it many times before where rallies take shape out of nowhere (much like the rallies that have kept this broader market uptrend intact for months now).

So don't be surprised if we see another such rally that confounds everyone yet again, at this traditionally slow time of the trading year.

Best of goodBUYs,

Jeff Yastine