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The circles in the chart show where there is a gap (a space) between the 4 wk average (red dotted line) and the week’s high. That is often a sign of an oversold stock and the declining stock will often rise to kiss its 4 wk average before continuing its decline. The opposite is true for a rising stock. Look at the gap near the top in November.  All of the major indexes have a weekly high below their declining 4 wk averages. So, I am waiting for the averages to rise a little by the end of the week so I can continue unloading mutual funds in my retirement accounts. The 30 week average (red solid line) is close to curving down. This is the critical signal that has enabled me to exit stocks before major declines. Normally tops take longer to form and there will be several rallies back to the 10 or 30 week averages. But this time there may be too many people waiting for a bounce to exit. (Thank you to my stock buddy, Judy, for teaching me about the 4wk average indicator of an extended stock.)

In case we forgot:  “The Smoot-Hawley Tariff Act, enacted in 1930, worsened the Great Depression by raising tariffs on imports, prompting retaliatory tariffs from other countries, and significantly reducing global trade, which further crippled already struggling economies.”

In May 1970 (I think), I read in the Wall Street Journal “Heard on the Street” column that the author was sure that the current steep market decline had further to go. That day was the bottom!  So many pundits are searching for the market’s  bottom. I think that when they all give up and surrender to the decline, it will be the bottom. In addition, T2108 is at 24%  and usually market bottoms occur when that indicator is below 10%. Why not be in cash and wait for the dust to settle? There will be plenty of time to get on board with a real future up-trend.

Remember the tulip mania in the 1600s when people started trading tulip bulbs and bidding them up to absurd levels? The famous book on popular financial delusions and the madness of crowds helped Bernard Baruch to exit the market in 1929. When we see our neighbors telling us at parties that they have made $$$ from buying stocks, our competitive psychology builds and we push stocks higher and higher to absurd levels. Stocks need positive psychology for people to have the courage to hold on to them, thus allowing them to rise. In a bad market the psychology turns negative and people take their profits quickly. It will take a while for the positive psychology to build again so that traders can make large gains from steadily rising stocks. As happened to the Nifty 50 in the 70s, the psychology of the Mag 7 has broken. People are beginning to realize that they have just been trading tulip bulbs.

No one knows how long this decline will last. But based on my more than 50 years of market experience, I think we may be just at the beginning of a major decline. This weekly modified Guppy chart shows how shallow the current decline has been compared with the one in 2022. And the decline in 2022 was small compared with the one in 2008. So time for me to buckle up my seat belt. Stay tuned. I will announce here if I am wrong.

With the Wall Street Journal talking about a possible depression and the ominous technical picture I see, it is best for me to be on the sidelines in cash. I have gone to cash in my trading accounts and reduced my exposure to equities in my university retirement accounts and will sell the rest when we get a good bounce. I have lived through many weak markets the past 60 years and suspect that the current decline has just begun. As several great traders have opined, all stocks are bad unless they are going up. Stocks are only worth what someone will pay for them. Value is a myth. When the psychology turns and the masses become scared, they sell and all stocks decline. I prefer to sell early and not get caught up in the panic selling near the bottom. One indicator that has helped me to detect a bottom is when T2108, now at 26%, declines to below 10%. Too many people have made money the past two years and have no idea what a major decline can do to one’s portfolio. It took 25 yers for the market (the Dow) to exceed the 1929 top. So, yes, the market always comes back. No one knows what the market will do and I can change immediately if my indicators tell me to. The key to trading success is to control risk and step aside when the trend is down.  Stay tuned….