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The Stock Market is NOT Down Because of Inflation and War

Don't Believe the Hype

We are now in our third decade of actively participating in the financial markets as professional investors.

Through this time, we have developed a few insights that are quite distinct from what you hear from the media and most investors.

One of these insights is that in the short term, the movement in the stock market is almost NEVER correlated to whatever news items are being cited.

The recent downward volatility in the stock market is a perfect example.

If you are listening to the media and the "smart" money, they will tell you that inflation fears have returned. They will also reference the (tragic) events in the Middle East.

To them, these are the CLEAR reasons why the stock market has undergone this most recent correction.

We disagree.

We wrote several issues in this publication a month ago, telling our readers that the stock market needed a break. 

On March 21, we wrote the following report…

Look at the chart of the S&P 500, and you will see that it was almost the top in the stock market. The S&P 500 would go 10 points higher (+0.25%) in the next week before peaking.

Based on many technical indicators and our long experience, we were very confident that we would see the stock market stop moving higher soon.

We also were confident that it would retreat vs. go sideways, most likely doing so in a painful fashion for investors.

The enthusiasm we were witnessing, combined with the overbought technical signals, told us that a sharp correction was a high-probability event. We didn't know whether it would happen in a week or a month. Or whether it would happen from those levels or higher levels.

We just knew it was coming… How could we be so confident?

One reason is that the combination of technical signals we saw told us we were in a high probability position for consolidation and a pullback. That is the data.

The other is our experience. We have been here before…many, many times.

Returning to our insight about how moves in the stock market are never about what the pundits are talking about, we like to make an analogy about the stock market as being a raft on a river.

Imagine investors are on a raft going down a river. 

Where the raft is going is dependent on the current. 

Sometimes, there is no movement; sometimes, it moves along at a mild but bumpy pace, and sometimes, it is rushing forward strongly. Rarely will the raft go BACKWARDS as you get into the rockiest parts.

The "current" is the underlying market trend. Most of the time, it is higher without massive movements. Very rarely does it enter into a BEAR market and go down. 

Occasionally, though, it speeds up and moves with incredible force. This is what has been happening in the last year.

Once the raft moves faster, it becomes much easier to destabilize on any rocks.

There is another factor, though, as the investors on the raft also tend to move around. Think of it as them looking for the sunniest part of the raft.

As the raft speeds and more and more investors seek the sunniest side, they crowd onto that side.

Now, when the speeding raft hits even a tiny rock, the whole thing can shake violently and tip over as it is very out of balance.

We know this seems like an unusual analogy. Still, it is good to explain the concept of trading "potential."

Much of the near-term forward movement of a stock has to do with what has been going on most recently.

Strength usually begets strength, and weakness usually predicts more weakness. EXCEPT when either one gets to extremes, they become contrarian indicators.

THIS is what happened three weeks ago when we wrote that report.

Our advice then was that if you had big profits to take, you should take them. You should be prepared to BUY back your significant positions in a little bit of time at much more attractive prices.

We had no idea about the CPI report. We had no idea about Iran launching an attack on Israel.

We just knew this is how markets REALLY work.

We hope you took advantage of that opportunity. We also hope you are prepared to take advantage of the NEXT opportunity. 

BUY this stock market. 

We are not saying to go "all-in" tomorrow. Still, we remain confident that the stocks will be higher in the intermediate term. 

It may go lower first. It may take a week, a month, or several months. We don't know, but the probabilities are in our favor.

What will be interesting to watch is what the market pundits blame THAT move on…

For the 10th episode of the HX Podcast we caught up with our former colleague Ram from Octahedron Capital. He is probably the best connected investor we know in the technology world and our conversation BLEW US AWAY! It is a MUST WATCH. His advice on investing is powerful!

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