In our previous commentary, we predicted that the market would begin a big trending rally, and we were right. We cleared almost two years of a range-bound S&P500 and other major indices, which served to wash out any excesses from previous rallies. During the last two years, many traders and investors were on the sidelines due to the whipsaw nature of range-bound markets.

Once markets break out of the range, as they did in October 2019, many investors don't initially trust the move since they've seen so many rallies fail over the previous two years. However, the major difference from the fall of 2019 to that of 2018 was the fact that the Federal Reserve reversed course and pursued an easy money supply environment. The FED was lowering interest rates and expanding the balance sheet, and the European Central Bank began a new round of QE. Couple this with positive China/US trade developments, and we had the recipe for a major rally.

At Glass Bead, we formulate a most likely scenario based on probabilities, considering many different factors, including macro-economics, fundamental analysis, technical analysis, psychological analysis (using sentiment indicators), and tape reading. Patterns repeat themselves over and over again in the stock market because human nature is the same today as it was 20, 50, and even 100 years ago. Understanding how human emotions play out in the overall market is something we pay very close attention to.

Currently, we are seeing high levels of Greed in the market, and this is one reason we believe a correction is imminent. There are many examples of individual stocks that have had tremendous moves driven largely by momentum traders and market technicals (short squeezes). There are other factors that we are looking at that point to the start of a correction.

We are still very bullish over the intermediate term as we are in a favorable investing environment driven by ample liquidity and low interest rates. However, short term (60-90 days), we believe this is a good time to take some chips off the table and wait for what we believe will be a much better entry point in the weeks and months to come. At Glass Bead, our primary objective is capital preservation when we see clouds on the horizon. We believe it's important to have a strategy that will protect you during the inevitable downturn but will also make you money while you stay invested during the good times.

About Author:

Jean has been serving high net worth individuals, family offices, and institutions for nearly 15 years. Currently he is Chief Investment Officer in Glass Bead Capital Management LLC