Summary
Highlights
The S&P 500 recently experienced a 2.5% drop and the NASDAQ a 3.5% drop after 33 days without a 1% decline. This raised concerns about whether it signals the start of an AI bubble burst or a typical market pullback. The video aims to provide practical scenarios and solutions for traders and investors.
The market pullback was partly triggered by recent news regarding trade tensions between the US and China. Former President Trump threatened a 100% tariff on China if they didn't release export controls on rare earth materials. Rare earths are crucial for various US industries, including military applications, and China dominates their production and processing. The market reacted negatively, though subsequent de-escalation attempts occurred.
When the market is 'frothy' and hasn't seen a mean reversion, it becomes more susceptible to major news headlines. While tariff headlines existed in June without a significant market impact, the current market conditions in October, following sustained growth without major pullbacks in August and September, made it more sensitive to the news.
The VIX, a measure of market volatility, finally popped by 32% in one day after coiling tightly. This confirms predictions of seasonal volatility between August and October. Analyzing trend lines on NASDAQ and S&P 500 shows that breaking these trends often leads to significant drops (e.g., 25% for NASDAQ in past instances). A continued red day on Monday (October 13th) could signal a pullback to at least the 100-day moving average for the S&P 500 and a correction for NASDAQ.
Proprietary research indicates that the S&P 500 has consistently hit its 100-day moving average between August and October every year since 2009, regardless of bull or bear market conditions. The current 100-day moving average is around 6,300, suggesting a potential 6.5% drop from the top, which would be a respectable pullback but not a correction.
There's an unfilled weekly gap on the S&P 500 between 5600 and 5800. While rare for the S&P 500 index itself, if this gap were to be filled, it would signify a 14-15% drop, still not a bear market. Historically, when the S&P 500 drops 2.5% after reaching an all-time high, the subsequent weeks tend to be volatile, with mix results, but usually resolve within a month to a year.
For leveraged traders, it's crucial to reduce position sizes and limit the number of similar positions, especially during volatile periods like August through October. Avoid short-duration plays and instead consider long-dated options or leaps if bullish on a stock.
Long-term investors with a significant time horizon should not be scared by short-term price fluctuations. Focus on accumulating stocks at lower prices. Missing even a few of the best market days can significantly impact long-term gains, highlighting the importance of staying invested. Prepare a list of companies to buy at specific price levels, using both technical and fundamental analysis.
For those with a short-term time horizon or nearing retirement, the risk-reward of trying to ride out the tail end of a bull market before a potential correction might not be worth it. It might be prudent to secure gains already made.
Traders should welcome volatility as it creates opportunities for shorting or longing indices at key levels, though precision and risk management are essential. The speaker anticipates that Q4 earnings, particularly from MAG7 companies, will likely be strong and could quell fears about an immediate AI bubble burst, even though he believes in an eventual reckoning for the AI bubble.
The market's direction hinges on Monday's price action. A continued red candle suggests further corrections, while a market rebound due to de-escalation could mean the current retracement is temporary. Investors are encouraged to consider their time horizon and plan their strategies accordingly, using this volatility to identify buying opportunities.