How To Tell Which Way The Market Will Move

I learned a long time ago that in the markets you just need to know if the market is going up or down. While this does seem very obvious, it doesn’t seem to be a question that gets asked as often as it should.

When a market goes down over the long term, why should you be there? It went up, why not invest?

The blind belief is that markets can only go up over the long term, and an investor buys and holds and leaves it at that. It fits many people’s “book” to say this and there is a lot of truth to it, but marginally it is not true.

First of all, many companies go out of business in one way or another, and only the big winners sustain in the long run. If you don’t buy trackers, the balance of winners and losers can do some ugly things to your investments, concentrating your gains mostly on a very small group of stocks, which then dominate your performance and wealth in very skewed ways.

However, the biggest buying and holding risk is presented below:

Or:

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

So how can you identify 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 smooth rallies. A bear market has long smooth declines with sharp rallies.

That means you can “buy the dip” in a bull, but in a bear, your losses come from the constant “drip, drip, drip” of falls, not the falls that make the headlines.

Why this is useful is this:

When a market is drifting and you suddenly experience a sharp rally, you should be very careful not to get sucked into it. Likewise, a sharp correction in a bull market shouldn’t pull you out of a stock or tracker.

More importantly, you can tell the difference between bull and bear by the direction of the sharp moves and drift. If you are brave, you can even glimpse a change from one to the other from these actions.

Right now, we’ve just witnessed a sharp rally in an apparent bear market. While many get FOMO (fear of missing out) and jump in, if you follow the logic above, expect the consistent falls will begin.

Only when the bear trend is broken and the market takes a new calm direction will the market have embarked on a different long-term path.

As for today’s setup, it remains in the bear market trend. You have to be a big optimist to see a big rally ahead and not a big pessimist to see a big drop in the works. However, since you only need to know which way the market is going, you can rely on the shape of the trend to know if it’s going up, down, or even sideways.

I remain very bearish.