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Glass Bead Capital Management (Glass Bead) warned our readers and investors on January 23rd that the market was vulnerable to a correction and that it would be wise to take profits. We had deduced that the probability was fairly high that the market would provide a much better entry point over the next 60-90 days https://bullsnbears.com/2020/01/23/too-much-greed-moving-to-the-sidelines/

Our proprietary indicators were flashing caution signs and we knew that it wouldn’t take much to break the market uptrend. Once the news of the corona virus hit, the market began a violent meltdown as a massive imbalance of supply hit overwhelming buyers. The end result: a 15% drop in the SP500 by the end of February 2020 and five months of gains completely wiped out.

Another reason for issuing the warning was that the level of greed and complacency which had been built up during the October 2019 to January 2020 bull market run. A relentless upward move with very little pullback is great to ride up. However, when selling hits the market, the downside can be quick and violent. To be fair, we were a bit early in our call and February still provided some nice opportunities on the long side but we knew that we would have to have one foot out the door as the market was in a state of vulnerability.

What is next? We believe that the decline that occurred during the last week of February has created a tradeable short-term trading rally. This assumes that our warning was heeded and cash was raised back in late-January.

Glass Bead purchased S&P 500 and NASDAQ ETFs for our clients on Friday February 28th at prices near the October 2019 lows

We are not calling a bottom for 2020 based on Friday’s lows.  This correction will likely need a few months before we can give the all clear once again.  The psychological factors which prompted us to sell are now at polar opposites as fear and panic grips the market.  We believe that when markets panic it usually is a good time to swim against the tide and begin buying. 

We anticipate global coordinated central bank easing as central banks cut interest rates in order to provide liquidity into the markets.  This move likely creates a floor and provides investors much-needed confidence.  We believe SP500 at 2850 is a good place where the selling likely subsides.  We would anticipate continued volatility in the coming weeks and months as news flow will be negative.  There will be big rallies followed by big selloffs but ultimately 2850 SP500 should prove to be the bottom boundary of this correction. 

The bottom line: This is NOT the end of the bull market and we continue to expect that new highs will be achieved sometime later in the spring as coordinated central bank easing a resilient economy and technology leadership will keep this bull run alive.  One word of caution:  passive investing or buy and hold likely will not be a great strategy in the years to come.  As we just witnessed in a matter of one week, an entire five months of gains were wiped out.  Having a systematic approach which seeks to take advantage of good markets but has a risk management strategy which protects one’s portfolio from bad times is an approach we feel makes more sense.  At some point this bull market WILL end.  It is inevitable just as darkness follows light and winter follows fall and summer.  When that day arrives, we will have a great reset and stocks will drop 30%-40% or more.  Are you using a strategy which prepares you for such an outcome?

Market turmoil always exposes the weaknesses in the structure of the market and one’s portfolio.  Opportunity can cut both ways. Active management strategies can both protect capital and create opportunities to take advantage of fear.  If you would like to discuss further please contacts us at:

info@glassbeadcm.com

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