A Big Inflection Point Is Here... And It Isn't What You Think

Editor's note: For this Weekend Edition, we're taking a break from our usual fare to explain why a repeat of 2008 isn't as likely as folks think. In this essay, adapted from the October 24, 2022 Weekly Market Outlook, Ten Stock Trader editor Greg Diamond says that the 2022 decline isn't following the pattern of the great financial crisis... and he shares a bold claim for what's next.

I find social media incredibly annoying...

I'm not on Facebook, LinkedIn, or Instagram. I don't use TikTok, either. And although I remember when social media exploded and became a mainstay in our lives... I didn't follow the crowd.

I find it sad that so many people feel the need to share every waking thought with the world... including what they had for breakfast.

Like it or not, though, social media is here to stay. So occasionally, I do spend some time on Twitter...

Aside from a few posts here and there, I only hop on the platform to try to get a feel for the general market sentiment. (A few years ago, I tried to use it to gather actual data on sentiment, but it didn't take.)

Most of the time, I don't learn much. But this past October, I was able to get a great sense of the overall market sentiment. (Finally!) Looking through various posts and threads, you could feel what was happening.

In short, fear was everywhere...

I can't tell you how many experts, analysts, and general stock market followers on Twitter were calling for a 2008-style crash, a "Black Monday," or some version of a complete breakdown in our financial system.

As I told my Ten Stock Trader subscribers on October 17, 2022, it had all the makings of a low.

Along with a strong technical understanding of the market, we need this type of fear right now. That's what will move the market in the other direction (in this case, higher).

Remember, the collective behaviors and emotions of investors are expressed in charts as price action. And by incorporating time into the equation, we improve our probability of making successful trades.

As I always say, there's no Holy Grail in the markets. But at big inflection points in price and time – like we're seeing right now – the prevailing outlook is almost always wrong... especially when everyone is calling for a crash.

So in this essay, I want to review why the 2022 fall wasn't like the one we saw in 2008...

Let's go back to the middle of the Great Recession. We don't need to cover every detail. We know most of it very well by now.

What happened back then was based on greed and bad bank loans...

Lehman Brothers went under, as did Bear Stearns. The main cause of the crisis came down to the financial sector and the lack of confidence in credit – the ability and willingness to lend.

When credit freezes and banks stop lending (or go out of business) – both of which happened in 2008 (and in 1929) – things go downhill quickly...

I say it all the time: Watch what bank-related stocks are doing. If banks are going under or are in trouble now like they were in 2008, wouldn't we see a lot of pain?

Well, big banks released phenomenal earnings reports toward the tail-end of 2022...

JPMorgan Chase (JPM) – the biggest U.S. bank – reported its highest quarterly net interest income ever in the third quarter. It also beat fourth-quarter 2022 expectations, indicating a positive outlook.

Here's another gem to consider...

According to CEO Jamie Dimon, JPMorgan is sitting on $1.2 trillion in cash.

I couldn't believe this headline when I saw it. Does that sound like a bank in trouble?

I worked with big Wall Street banks firsthand for years, and I'm not a fan of them. But like it or not, big banks are the closest entities to the money. It all starts with them, and then it spreads to the rest of the world.

Consider this... The entire market cap of the semiconductor sector is estimated at around $600 billion. And we certainly know that industry had a rough time in 2022. Meanwhile, JPMorgan could lend half of its cash reserves to every semiconductor company on the planet and still have a $600 billion surplus.

This scenario is clearly an exaggeration, but you get my point... With trillions of dollars at their disposal, banks have a lot of money on the sidelines to lend and invest.

These banks have both the ability and the willingness to lend. Remember, banks make money when they lend... That's their primary business model.

We simply don't have a credit issue on our hands like we did in 2008.

So again, this isn't the same 2008 bear market. In fact, it's not even close...

Yes, inflation, the Russia-Ukraine war, and supply-chain constraints are all big problems. But they're not catalyzing a financial crisis that would devastate the entire economy.

As I told my subscribers back in October, the market may have already priced in all these fears. In other words, the decline is over... The market is looking beyond the fear and is focusing on what will be, not what was.

So with the price action, the extreme bearish sentiment (and outright fear), along with a well-performing banking sector, the current climate clearly differs from the 2008 market environment.

Now, let me go ahead and answer the question many of you probably have...

Is the bear market in stocks over?

Yes, it's over.

I've been watching two signals that support this... Specifically, I'm bullish as long as the October 13, 2022 low in the Financial Select Sector SPDR Fund (XLF) holds – showing continued strength in bank stocks – and as long as manufacturing giant Caterpillar (CAT) holds its low.

Why CAT? Well, it bottomed out on September 27 – a few weeks before the broader market fell. It's a leading stock. In fact, CAT helped me identify the top in late 2021/early 2022. If I'm correct now, it will help me identify the bottom...

And I do believe the market has bottomed out.

Notice that I haven't mentioned the major indexes. One or more of them may hit a new low this year. But it doesn't matter...

If CAT and XLF hold their lows while one or more of the indexes make a new low, that sets up a bullish technical signal that doesn't come around often. And in that case, I will continue to be bullish.

It might be scary for some to make such a bold claim, but scared trading doesn't make money. And from what I can tell, many investors fear buying stocks right now.

I'm trading the other side of this fear.

Good trading,

Greg Diamond, CMT

Editor's note: Greg says stocks could form a major bottom in 2023. This inflection point will offer generational moneymaking potential... and a chance to get back into the market at historic lows. But there's a catch: It won't be a smooth ride up. And many investors will make critical mistakes if they don't understand what's unfolding now. If you missed Greg's free presentation with the full story, don't worry... You can catch the replay right here.