We have been warning of this 1st quarter 2018 correction since late 2017 that was forecast to be greater than a 10% decline before new investments in stock should be considered. Given the lack of extreme fear, lower and longer are the themes of this correction required before the psychology of fear is sufficient to form a solid bottom.


We also noted that the greater than 10% first quarter correction arrived so quickly that more time was required to generate the requisite pessimism that pullbacks need to achieve a significant low


We wouldn’t rule out a few more months of churning given the entrenched complacency of Buying the dips mentality that needs to be quelled. Our contrarian view is that: in a correction, pessimism is good and extreme caution is great. New lows are likely as sentiment is not yet oversold. When investors start doubting the rallies and standing aside, that will be the start of low risk entries. One technical clue will be AAII (small investor sentiment) near 20% Bulls (33 last) and the 20 day equity put/call ratio in the lower 50’s (63 last).


This fits in with my thoughts from last month that the earlier 10% drop and subsequent immediate rally were both so fast that there was no time for fear to develop in the normal equity portfolio owners.


If they did not look at a newspaper for a week, they barely noticed any change in their equity value.


It normally takes some time for fear to develop to provide an indication that a bottom is forming.


Behavioral Finance, investor sentiment, newspaper headlines, cocktail party and golf course stock market chatter, and price action are all things that I will be watching for.


As I wrote and showed you in charts a couple of months ago, the lack of prior volatility was unusual and historic.


When the pendulum swings back to volatility again, it will not stop in the middle, it will tend to swing to the other extreme.


Welcome to the other extreme.


It has been quite a while since investors have had to endure this type of market action.  Remember, this is what markets do.  They test investor resolve.


An old stock market saying is that bear markets are when equities return to their rightful owners.  In other words, it scares out the people who really have no business being in the market in the first place and those weak hands sell at a loss / out of fear to the strong hands who ride out the emotional roller coaster of completely normal market extremes and cycles that only feel like “this time is different”.


Brian Sly and Company, Inc.