After CNBC’s Fast Money Interview yesterday, if more time had been available, I would have made these additional points:

Stock market history has shown that forecasting is a futile effort in the long run. Yet I am routinely asked: “Where do you think the market will bottom?” “How high can this market go?” In my opinion, no individual on the planet is smart enough to figure that out consistently. Interpreting market direction is the most complex and important piece of the investing puzzle, which is why we study it so carefully.

Should the market turn around in a substantive way and resume its uptrend, then I would change my negative outlook on it and participate. In our shop, we never dig in our heels when it comes to the stock market; we remain flexible in our thinking. Quite frankly, I would love to have the market prove me wrong and resume a meaningful uptrend. Remember, there is never really a bull or bear side, just the right side.

My big concern at this point is the lack of a catalyst. For the risk-reward ratio to improve in our favor, I believe we need resolution on some of the more pressing domestic and international issues. My father recently told me that in his 50 years in the industry, he has never seen so many major issues happening across the world at the same time. Certainly meaningful job growth in this country would help. And the way to grow jobs is through the creation and expansion of businesses, particularly small businesses. Small business creates roughly 85% of all jobs in this country. We also have to implement an effective solution to the real estate housing glut.

Studying the recovery phase of the last seven major bear markets (those down 45% or more, peak to trough), the average gain in year three was 3%. We are now in year three. So, to me, the best-case scenario right now is a continuation of a sideways, back-and-forth, volatile market, which is the most dangerous type. A choppy market is much more dangerous than a downtrending market (assuming the investor uses selling rules). Thus my interpretation of the risk-reward at this time is very, very poor. We will inevitably get several short-term bounces, but will they be significant enough to build substantial positions over time? My goal is to make the trend my friend, no matter its direction.

Best Returns,

Scott O’Neil


MarketSmith, Incorporated