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The Voice of Reason

January 11, 2018

As a lifetime stock speculator, I know this: A roaring bull market makes dumb people feel smart and smart people get dumb. As I see it, this bull market is playing out in precisely that fashion. As a result, I am becoming increasingly confident that this market is going to see a relatively sharp pullback that will catch virtually everyone off guard.


Make no mistake, I’m long stocks and continue to enjoy this wonderful ride. Recently, we've seen many stocks  breakout of bases and that could run this market up even more. But experience has taught when everyone is happy, bubbly and overjoyed, prepare for the other side of the trade. I don't know what the catalyst will be, but the news always intersects with the line of least resistance.


I have heard many people say “we’re ok, the market doesn’t crash from the top” becuase we keep making new highs in the indexes.  That’s not entirely true. And that’s what I’m going to cover here by sharing some facts and letting you decide what they mean to you. And these are not just facts I’ve looked up, but times I actually lived through, traded and survived. Of course, the pundits would say “it’s different this time.” NO, IT’S NOT!


All of the following declines came from new highs or very close to the highs.  It's important to note that many of these fast pullbacks did NOT start a bear market. I could go back much further, but if this doesn’t make my point, more data probably won’t. 


October 1989 – the NASDAQ hit a new high and just 5 days later fell 8.20%. On day 3 the index was down more than 3% and on day 4 more than 4%.

March 1994 – NASDAQ declines more than 10% in just 10 days.

July 1995 – NASDAQ declines almost 7% in 2 days; more than 5% came in one day.

June 1996 – NASDAQ declines more than 19% in 25 days.

October 1997 – NASDAQ declines 16% in 11 days; more than 7% in just 1 day.

March 2000 – NASDAQ plummets almost 30% in only 7 days. Start of one of the worst bear markets in history.

February 2007 – NASDAQ pulls back 7.5% in 7 days; 4% in a single day.

October 2007 – NASDAQ declines 9.63% in 8 days. Start of a bear market.

April 2010 – NASDAQ falls 13.60% in 8 days. On 5/6/10 the index was down 8.90% that day.

July 2011 – NASDAQ slides 18.41% in 12 days.

July 2015 – NASDAQ slides 17.85% in 25 days.


To think that this market can’t or won’t pullback 5 or 10%, is ridiculous. Looking at melt up phases going all the way back to 1901, the current melt up in the Dow ranks as one of the most overheated. Of the 24 melt ups we measured, only 6 of them went higher and only 1 lasted longer.  The point here is, the market doesn't have to "roll over" or even start a new bear market to experience a sharp pullback. Even the crash of 87 was a cyclical correction within a secular bull market that lasted 12 more years.


It is likley that we are in a secular uptrend that could carry the market even higher; I've argued for years that the economy is in a "sweet spot" with near perfect conditions for a continued bull run in stocks. But right now sentiment is at a 30-year high, the retail investor is finally throwing in the towel and turning bullish and I can’t find a bearish person anywhere. People actually get mad and take it personal if you say something bearish about their beloved market... LOL! 


I'm not a bull market hater; I would love to see a continued run. Especially when so many stocks are meeting my own criteria and the low volatility makes it easier than ever to hold my stops. It's beautiful! My own risk model has been persistently on a buy signal through this entire run and remains so today. But my gut tells me a setback is not too far away, and history is on my side. My stops will take me out, so I don’t need to predict. My advice is: don't get complacent.


Mark Minervini

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