Market Overview [38] - Capitulation is nowhere near in sight.
Dear readers,
Welcome back to the Market Overview, where we provide technical and sentimental analysis about financial markets. On top of that, we deliver crucial market information that can influence financial markets to be always a step ahead of major market movements.
Today we wanted to do something different then usual, in this newsletter we are explaining market bubbles and where we are in that cycle. We included multiple charts full of information to help you make the best investment decisions as possible.
This newsletter is free because we want to show our free followers what we provide in our paid Overviews.
Let’s get started.
Bubbles Explained
This chart shows how market bubbles form, a bubble in the financial world is a euphoria phase where an asset is not linked anymore to its fundamentals. Eventually the asset moves up exponentially because investors doesn’t want to mis out on the trade. This will create boom and burst cycles, where the burst happens if the amount of new traders are diminishing or investors who entered early are selling their positions.
Bubbles can form in a single stock, indices, commodities or the complete housing market like the financial crisis in 2008. Why are we telling this? Because we believe that the S&P 500 index (and other indexes) is currently in the burst phase of its euphoria bubble that was created after the 2020 Covid-19 recession.
We believe that we are currently in the fear zone and we are nowhere close to a bottom. We are explaining in the next chart why we are still in the fear zone and not in the capitulation zone.
Where are we now?
In the chart above we have included the VIX in the S&P 500 chart. If you do not understand the VIX yet we have an explanation on the subject below.
To answer the question that we are still not in the capitulation zone is because of the relatively low VIX reading. Capitulation means that investors can’t stand anymore losses on their trade and are giving up, when that happens investors are selling everything (or get liquidated) at the same time, this initiates a huge sell-off and a big volume spike what moves the VIX up. This is also the best time to start buying.
Golden Crosses
Like the dot.com bubble and the financial crisis the bull-run really ended with a death cross on the 50 and 200 Moving Average (MA).
If the (yellow) 50MA goes above the (purple) 200MA a new bull-run can start because there is a change occurring in the long-term trend. The same applies if the 50MA crosses below the 200MA, then we speak of a death cross and the uptrend is over.
We expect that the 50MA goes below the 200MA at the start of 2023, starting a long-term bearish trend.
VIX Explained
The VIX is a real-time volatility index, created by the Chicago Board Options Exchange (CBOE). It was the first benchmark to quantify market expectations of volatility. But the index is forward looking, which means that it only shows the implied volatility of the S&P 500 for the next 30 days.
Since the existence of the VIX it has largely moved between 10 and 30. A VIX position between 0 and 12 is considered extremely low. The lowest level ever was reached in November 2017 with a reading of 9.14.
Between approximately 12 and 20 is considered normal. Above that, we often see a increase in volatility, but no real panic yet. With a normal correction the VIX will rise above 20 but usually not above 30. At a position of 30 and above investors are starting to panic and we often see sharp falls where indices are falling 5% or more. For example, during the crisis of 2008, the index reached 80.26 and during the corona crash of 2020 even higher where the S&P 500 fell around 10%.
So where are we on the bubble cycle?
The S&P 500 is in the period of fear, if the economy goes into a recession and when companies are making big losses or even worse, go bankrupt (some crypto companies are already going bankrupt). We then expect capitulation to take place.
S&P 500 - Double Bottoms
So where do we expect the S&P 500 to go in the next year(s)? We believe that the index will eventually return to the mean (blue dotted line), this would create a double bottom like the other major crashes in history. When those lower lows were formed, a new big bull-run started.
We do not know when it will happen, but we expect that the real impact of hiking interest rates, high oil prices, the war in Ukraine and food/material shortages will hit in 2023.
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