Late January Market Update

This week for the first time since the November 16th’s all-time high (aka: BEV Zero) the Dow Jones closed more than 3% from a BEV Zero, closing the week down 3.87% from January 20th BEV Zero. It was bound to happen, especially after two and a half months. This is no reason to panic, but it is very noticeable in the Dow Jones BEV chart below.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 690\Chart #1   DJ BEV 2007 to 2021.gif

Want a reason to panic?  For the first time since November 9 the Dow Jones saw not one, but two of those dreaded Dow Jones 2% days, or days of extreme-market volatility; one on Wednesday (-2.05%) and on Friday (-2.03%).  These days of extreme volatility aren’t really noticeable in the BEV chart above, but standout in chart below looking at the daily bars for the Dow Jones.

So, with not one but two Dow Jones 2% days this week (both negative), should we panic?  I’m not suggesting my readers do anything drastic just yet, but there is a pattern major market declines for the Dow Jones like to follow. Bull markets are low volatility markets; you can see the bulls take the Dow Jones up in tiny baby steps. Then Mr. Bear arrives on the scene, with his days of extreme volatility, exactly like we see this week in the daily bars below.  

Big bull market tops begin pretty much end the same way, terminated with the arrival of Mr. Bear and his confounded 2% days. But then there are plenty of examples where the Dow Jones sees a bad week, or maybe two, as seen below, where the market then recovers.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 690\Chart #2   DJIA OHLC.gif

I haven’t kept it a secret I don’t like this market, and I’m expecting something really bad to begin sometime in 2021. But at this week’s close, before I get really bearish I want to see more. I’d like to see a positive 2% day next week, something to get everyone at CNBC to cheer about. If so, I’d be tempted to purchase a few out-of-money puts expiring sometime in late summer on a major market index. The Russell 2000 would be my choice as it has been the hottest index from the March 23 market bottom.  Just thinking it over, I’d give these puts two weeks to become profitable before I closed them should nothing happen.  

This of course assumes I’m taking my own advice and take the plunge, which I may not.

Here’s a chart plotting the Dow Jones’ daily bars from last April. Compare the daily volatility between bull and bear markets in the chart below. Everything was just find until it wasn’t anymore. And we see exactly when things stopped being fine; with the arrival of Mr. Bear’s 2% days; those dreaded days-of-extreme market volatility.

Every major market event is unique, but it’s fair saying this was how the Great Depression and other big bear market declines began: everything was just find until it wasn’t anymore, as seen below. This is why I closely watch for Dow Jones days of extreme market volatility – 2% days, as they are an excellent gauge for when something important is starting.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 647\Chart #6   DJIA OHLC.gif

If a reader of my commentary decides to take the plunge and speculate a bit with a put, don’t gamble with your rent money. This is only intended to be a side bet on the market to make things a little more interesting on an early-stage technical development that may not pan out.

Here’s the Bear’s Eye View values for the major market indexes I follow. The week started out with a few BEV Zeros, then on Wednesday we see “liquidity” flow out of the market as the week progressed. The Russell 2000 (#9) was down over 4% by weeks close. The Dow Jones Transports (#14) were down a whopping 7.71%. Do they sell puts on the Transports?

Before my greed glans become too excited and I embarrass myself in front of everyone, it’s best to wait to see if Mr. Bear next week offers us some additional Dow Jones 2% days.

Look at silver at #2 above, while gold has been stuck at the bottom of the list at #22 for months. I look at why this may be at the end of this article.

Something interesting happened this week. I don’t know all of the details but it seems members of Reddit  were buying some deadbeat stocks hedge funds were shorting, forcing them (the hedge funds) to cover, taking significant losses as they did. This wolf pack of Reddit renegade investors’ broker then prohibited these rank amateurs from further purchases, placing a sell-only limitation on their accounts to bail out the hedge funds. Even members of Congress became involved; Senator Elizabeth Warren sent an open letter to the SEC demanding action to protect Wall-Street insiders from the public.  

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Disclosure: None.

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