Economics
Stock Market Crash 2023: Navigating the Turbulence Ahead
Stock Market Crash 2023: Navigating the Risks and Opportunities July 10, 2023 The MOAB (mother of all buys) signal has reached a score of 99, which is…
Stock Market Crash 2023: Navigating the Risks and Opportunities
July 10, 2023
The MOAB (mother of all buys) signal has reached a score of 99, which is an unusual development as it is the first time in decades that this has occurred. Once it hits 93, the next move is a failure or a full confirmation. This development could be viewed as advance warning of a head fake, creating the outlook for a breakdown when the market breaks out.
This suggests a fast decline in the stock market, which could range from moderate to severe, but the markets will likely quickly recover from this decline. Therefore, it’s essential to focus on the opportunities that may arise rather than the severity of the upcoming correction.
Over the past three weeks, the S&P 500 has shown minimal activity, with a net gain of less than 10 points as of Sunday. The markets are not breaking out or breaking down, but since the bias since the bottom was set roughly in July of last year is bullish, it signals that the breakout will ultimately be towards the upside.
However, sentiment has been stuck in a massive trading range, with bullish sentiment trading below its historical average for nearly 18 months, an unprecedented long-term development. Viewed from a different angle, this could be taken as a broad uncertainty gauge. Despite the strong rally, bullish sentiment has not been trading well above 45 for weeks. Hence, this must be viewed as a very long-term bullish development, which supports the long-term view that this bull market will last much longer than most expect, potentially exceeding the bull market that started after the 2009 crash.
Strategic Deception: Navigating the Stock Market Crash with Tactical Fakes
When markets are trading in a wide range after experiencing a strong rally, especially when bearish sentiment did not spike (60 or higher), the markets tend to pull back sharply before mounting an even stronger rally. However, this time there is something different. The bears expect a strong pullback, and the bulls expect a strong rally.
The best strategy would be to head fake them both by making it look like the markets will break out to new highs, then drop sharply to create the impression of a sell-off, but the sell-off never gathers traction. It is a medium sell-off, so both groups are caught off guard. The road map projected the path the markets might take until March 2024, placing support and resistance lines. The support lines are well above last year’s lows, and the resistance is placed well above what most would expect (as high as 4700 for the SPX).
Applying this to the current situation suggests that the best course of action for the SPX will be to trade to new highs for 2023, which entails a break past 4200, say a move to the 4250 to 4300 range, then a reversal (which appears to be sharp) and drop to the 3600 to 3900 range, with a possible overshoot (low probability outcome) to the 3450 range. Then a sharp upward reversal, followed by another pullback (not very sharp) where the SPX puts in another higher low and then starts to grind its way up to the 4400 to 4700 range. Tactical Investor May 2023
One of the strongest bullish signals will be if, during the above action, regardless of whether the pullback is strong, medium, or mild, the number of individuals in the neutral camp soars. It will be a monstrously bullish signal if the numbers in the neutral camp move to the 48 to 55 range; the higher, the better.
Stock Market Crash 2023: Conclusion
Based on the data provided, here is my conclusion on the potential for a stock market crash in 2023:
The MOAB signal reaching an unusually high score of 99 suggests that a significant market move is imminent. However, it is unclear if this will result in a breakdown or breakout. The data points to a possible sharp but short-lived decline followed by a recovery.
The current market conditions of low volatility and trading in a range indicate that a breakout, likely to the upside, is more probable. However, the persistently high bearish sentiment levels could indicate underlying uncertainty that sets the stage for a correction.
If a pullback does occur, the data suggests it would be moderate to severe in size but short-lived. The market would then likely recover and resume its upward trend, potentially reaching new highs in 2023. The key would be to take advantage of opportunities during the correction rather than focus on its severity.
The scenario of a brief move to new highs, followed by a reversal and pullback that fails to gather momentum, could “head fake” both bulls and bears. This could set the stage for an extended bull market run with higher highs in 2024.
A significant increase in neutral sentiment during any pullback would be a strong bullish signal, indicating that the correction is temporary and the uptrend will resume.
One should remember that the following correction should be viewed through a bullish lens.
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Random Reflections on Predictions of a major crash.
While some experts warn of an impending stock market crash in 2023, others argue the concerns are overblown. Here are some key considerations on both sides of the debate:
Those warnings of a crash in 2023 point to the following:
High stock valuations – Some metrics like price-to-earnings ratios are historically elevated, suggesting the market is overvalued and due for a correction.
Rising interest rates – The Federal Reserve’s rate hikes could pressure highly valued growth stocks and increase borrowing costs.
Recession risks – The economy is showing signs of slowing, and a recession in 2023 could trigger a market sell-off.
Geopolitical tensions – Events like the Russia-Ukraine war and U.S.-China tensions add uncertainty that could shake investor confidence.
However, those dismissing crash predictions argue:
Previous predictions have been wrong – Many “crashes” predicted in the past have failed to materialize or been less severe than expected.
The economy is still growing – While slowing, the U.S. economy is not currently in a recession by most definitions.
Corporate earnings remain strong – As long as profits continue to grow, stocks can still move higher, valuations aside.
The Fed can adjust policy – The Fed has tools to respond to economic weakness and support the market if needed.
Investor sentiment is not extreme – No obvious “bubble” signs like excessive margin debt or IPO frenzy exist.
In summary, while some risk factors exist, many warnings of an imminent crash in 2023 seem overblown. Much depends on Federal Reserve policy, the trajectory of earnings growth and whether a recession materializes. As with any market prediction, investors should weigh the facts carefully and maintain a long-term perspective.
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