Emotion Will Crash the Stock Market

...and understanding emotion is key to how this speculator makes money

In March of 2020, the stock market crashed…in three weeks NASDAQ crashed by 25%- from 9500 to 7000)…BUT then soared

https://futures.tradingcharts.com/historical/NQ/2020/6/linewchart.html

It cashed because the US government decided that the advent of Covid required a massive regulatory lockdown of the people which would immediately lead to a severe recession. This spike in the emotion of uncertainty cashed the market. But it then soared because the government united (the Fed, the Trump Administration, the Bi Partisan Congress) to announce immediately start providing the entire population with ready cash every month- much of which ended up being used to buy stocks by investors whose emotion was a combination of relief and renewed greed- BTFD!

…versus now…..

In January of 2022, the stock market is starting a crash…in the last three weeks NASDAQ is down 13% from 16600 to 14400….

https://futures.tradingcharts.com/chart/NQ/32

Why do I predict that this crash will get MUCH worse? Because the confidence of investors that the Fed is in control and will save us is weakening- day by day- plus the belief in the government’s (Biden and/or Congress) ability to take other action which will turn things around is pretty much gone.

Major bear markets, where the market goes down at least 40% from peak to trough, take time. In today’s market the lessons of buying the dip BTFD are still believed by many investors. As I have previously written, the bearish implications of 7% inflation (CPI) combined with .10% short term interest rates (Fed Funds, T-Bills, Eurodollars), combined with other bearish Biden policies, combined with a still extremely overvalued stock market (check out in Barrons the price to book of the market compared to the long term average range of 1.5-2.0) is only beginning to dawn on most investors. The bulk of US stocks are controlled by a few thousand ‘professional’ investors working for institutions- mutual funds, hedge funds, insurance companies, pension funds, private equity firms, investment managers…etc- Stock market prices are set at the margin. And I predict every day, on the margin, a few of those investors will find their emotional state switching from complacent/confident to first nervous and then fearful and then one day- SAUVER QUI PEUT!

Inveterate speculators like me are short NASDAQ futures but I recommend the rest of you less risk perverse go to cash (at least 50%)

Big Bob the Stock Market (and Bond Market) Bear