How Low Can It Go?

12 March 2020 #MAGAAnalysis #KeepCalmBuyStocks We begin today's discussion with a question about the stock market. How low can it go? In following this trail, we'll be working through some powerful concepts. You might want some calming tea, or stimulating coffee. Ready?

2) Our first set of terms label the two great schools of market analysis: Fundamental and Technical. Vastly over simplifying, fundamental analysis is all about what's really going on, causing prices to go up or down. Technical analysis - my favorite - is just about the prices.

3) Don't get me wrong, I adore fundamental analysis, too! And, in fact, in our work today, it will be on the fundamentals that we'll focus most. But let's focus on technicals first for a little bit. You're being told we're now in a bear market. Thing is, we don't know that yet.

4) Coming pun, fully intended, bull and bear markets are actually - fundamentally - technical terms. I'll explain. A bull market is defined so: Bull = Higher Highs AND Higher Lows. Work on that with me. Focus on prices, only. Not why, but what. Higher highs AND higher lows.

5) Visualize it. See a chart. See the prices noted. See the higher highs progressively. See the higher lows progressively. In all this, we have a technical trend. It doesn't matter why the highs and lows are both higher, they just are. Charting them we see a rising trading range.

6) In order to understand the term 'trading range' we need, now to introduce two other terms: support and resistance. In a bull market our highs continuously rise above previous resistance ceilings. So, we have to think about that. What, exactly, is resistance?

7) Resistance simply means stockholders feel that the price of their stock is either so high that they should take profits, OR, that the price is at a point where they have to get out, losses no matter, as they fear the fall will continue and wipe out their position.

8) On a chart, prices hit their highs and then fall lower. Highs represent resistance. In a bull market resistance is on a continuous rise. Higher highs successively. Resistance is the price at which sellers are larger in number than buyers. It really is simply supply and demand.

9) Let's look at a bear market now, and you won't be surprised: Bear = Lower Lows AND Lower Highs Now we have to look at the definition of support.

10) Support means the price has lowered to the point where buyers see this value of the stock as a bargain. To really understand this, we must turn, once again, to fundamental analysis.

11) Pretend with me, for a moment, that a company was ONLY worth what it owns, right now. The financial term for that is its Balance Sheet. It owns its assets. Its debt, or liabilities must be subtracted. And there you have it, the value of the operation, in dollars.

12) In a perfect world, the share price of a company's stocks would equal its dollar worth. Alas, there is no perfect world. Thus, share prices are always being bought and sold at a Premium OR a Discount. This is, I remind you, NOT a technical, but rather a fundamental analysis.

13) Looking back at support, but from a fundamental perspective, buyers in the market analyze the "actual" worth of the firm, its balance sheet, and then look at the price of its shares, and calculate that buying should occur at a discount, or not occur at a premium.

14) To define bull and bear markets by their fundamentals, in a bull market, the highs are still bargains. In a bear market, the lows are NOT buying signals, they are STILL premiums and are thus, NOT buying signals. We'll look at this again, now... 15) We now need the two terms: Sell or Hold, Buy or Don't Buy. In a bull market, lows are buy signals. In a bear market, highs are sell signals. I know, that's a hell of a lot of terms. Stock analysis is not an easy art. But it is a glorious one.

16) Let's close out that part of today's work with a return to the definition of a trading range. Given a positive trend, a bull market, the trading range is between both rising highs and rising lows. These are so easy to chart on a graph.

17) In a bear market, lowering lows AND lower highs present the exact equivalent trading range, simply going down as opposed to up. Again, so easy to chart on a graph. In a bear, any rise indicates selling, any low indicates relieved sellers selling to bargain hunting buyers.

18) Let's go again with our definitions. More Sellers = Resistance More Buyers = Support Trading Range, Up or Down, demonstrates the relationship between buyers and sellers. Buyers create support. Sellers create resistance.

19) Let's review. What was our basic question? It was how low can the market go? The first answer is... THE MARKET CANNOT DROP TO ZERO If it ever did, it would be the end of the stock market, completely. The New York Stock Exchange would die. That's not going to happen.

20) The far more realistic answer is, the market can fall all the way down until it finds so great a bargain price that buyers come in, create a new support level, and the prices begin to rise due to more buying than selling.

21) And again, from a fundamentals perspective, how does that work? What is the relationship between stock prices and the fundamental values underlying the stocks? That's the relationship between price bargains and premiums. Meaning, it is all about perception.

22) This is where it gets interesting! There are six, and ONLY six types of motivations concerning stock price valuations, all built on the perception of value, bargain or premium. That is so cool, isn't it? Here they are: 1) Gain 2) Loss 3) Greed 4) Fear 5) Avarice 6) Panic

23) Who remembers Gordon Gekko, and his famous quip, greed is good? Everyone instinctively knew he was wrong, and he was. The reason he was wrong is that he did NOT have the simple, six-part analysis above. Gain is good. Greed is not good.

24) Greed is when you want something too much. Greed is stupid, not good. Whereas the desire for gain is what drives us all, and 100% rightly, in all we do. No one does anything without a desire for gain. Here we have two additional terms to consider: altruism vs selfishness.

25) Altruism is good. It is desire for gain, for someone other than one's self. Selfishness is bad, it is a desire for one's own gain, at the cost of loss to others. This is where our philosophy has fallen short. What is it when desire for one's own gain is a good thing?

26) A few terms come to mind. Passion. Ambition. Motivation. Biologically, hunger and thirst. One may spiritually hunger and thirst for that which is good. I don't quite know how we did, but we lost that. To hunger and thirst for righteousness. That is our calling.

27) It is good to wish to avoid loss. We might term that wise fear. We've covered 1 & 2. The desire for gain is a good thing. The desire to prevent loss is a good thing. Numbers 3 & 4, greed and fear are both dumb. In the stock market, greed leads to tops, fear to bottoms.

28) There is nothing wrong with either tops or bottoms. They are just a trading range, and have no moral implications on their own. Bottoms mean we buy more, tops mean we sell more. There is no morality about that. It just is. There is morality about greed and fear.

29) But let's focus for one more moment on how this works in actuality. Greed means you'll buy when you shouldn't. Fear means you'll sell when you shouldn't. They're both 100% stupid, but at the same time, 100% normal. We all suffer from them. All of us to a person.

30) Numbers 5 & 6 take us to a different place altogether. Avarice and Panic are more than dumb, more than wrong, they are idiotic, idiocy exploded. It is a famed statement that you must not buy when your taxi driver gives you buying advice. To do so is foolish avarice.

31) And now we once again bring in FDR and his wonderful statement, the only thing to fear is fear itself. That has to be one of the greatest maxims any president has ever expressed. And, when it is true, we've obviously entered the realm of panic.

32) Panic occurs when fear has become utterly stupid. Panic is when fear overwhelms us to the point where we cannot have an intelligent thought in our heads. Fear can be either wise or foolish. Panic is always wrong. Period. #NeverPanic

33) There was a term, in days of yore, called a philosophical mind. It was a term of praise. We have lost that phrase. You never hear anyone use it anymore. Our greed, avarice, and lack of serious attention have wiped it out. We want everything right now, in simple terms.

34) We are no longer willing to do the serious thought work that a philosophical mind hungers and thirsts for. We want easy answers, ready assessments easily understood. We are intellectually and spiritually lazy, greedy, and avaricious.

35) And that is how we allow prices and actual value to fluctuate as far from reality, fundamental reality as they do, perpetually. Greed and fear drive the prices, not the fabulous desire for honest gain, and the natural hoe for the prevention of loss.

36) At the beginning of today's conversation, I mentioned that we're NOT in a bear market quite yet. Here's the technical reason why we aren't. We do NOT have confirmation. You need to understand that term. To confirm a bear market we cannot merely drop in prices.

37) Confirmation means we see the new trend of BOTH lower lows AND lower highs. Yes, we're in correction territory no question. Yes, we may soon be in a confirmed bear market. But a drop, no matter how precipitous, does NOT define a bear market.

38) It doesn't matter how low you fall. You must wait until that fall is confirmed by a rise that can't reach back up again, before selling kicks in, resistance holds, and your new high is lower than the past one, triggering a fall to a lower level than before.

39) So, we MAY have seen the top, and the end, of our current bull market, that fact is NOT yet established. Which brings me to my final point for today. What does the normal investor wise do in a bear market, should it be confirmed?

40) In a bear market, the wise investor does the exact same thing he or she does in a bull: buy and hold. Do NOT buy for technical reasons. Think things through for their fundamentals. Will this stock rise, eventually? If so, buy and hold. So therefore... #KeepCalmBuyStocks