Or the madness of crowds.
The (ADR) is a simple measure of how many stocks increase versus how many decline. A ratio of 1 means 1 company’s stock increases to every 1 that declines. A ratio of 4 means 4 increase to every 1 that declines.
It is a good measure of the bullishness of the market participants. The magic number I am using for this analysis is an ADR of 4, as anything above 4 increases to 1 typically indicates a turning point in the market.
Price – Log Weekly
AD Ratio – 10 Bar Moving Average + 200 Bar Moving Average
AD Ratio Red Line = 4 Indicating Extreme Bullishness
There are two stories here. You need to decide which one you believe.
Pre 2008 Crash – The Madness of Crowds.
During the Financial Crisis crash from 2007 to 2009 the crowds were simply wrong. Extreme ADR indicated only temporary market bottoms, which were followed by brief rallies then market collapse.
Post 2009 – The Birth of Bull Markets.
Since 2009 the market participants signaled extreme positive sentiment with an AD ratio above 4 on 9 separate occasions which all indicated the end of the bear market and birth of a new bull market.
This suggests one of two things:
1. During a major market crash the crowds are overly optimistic, underestimating the full impact of the economic devastation.
2. During a long-term bull market, the crowds are correct, in fact, it is the crowds of course, who power the bull market.
The Key Point.
The Corona Crash has shown us 2 extreme bursts of ADR buying above 7 for the week’s March 9 and April 6.
This means either the birth of a new bull market or the radical underestimation of the impact of Corona on the economy.
I am not convinced either way.
Part of me thinks that this is the start of the new bull market, because in fact governments have done everything possible to stimulate the economy and save jobs and industry, there is no other choice apart from instant economic devastation. Interest rates will remain close to zero for the next 10 years and in governments stimulate that the debt will eventually reduce by itself (according to the Economist April 24th Edition)
The other part of me thinks that we simply cannot move to a new market high without further market correction to account for the large losses in future .
Do not forget.
This market is driven now by central banks, Trump and Macro-economics. This market will turn on its head with a few massive headlines.
Let’s have a discussion, let me know your thoughts below, I will try to reply to all.
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Don't forget the following Next steps in the coming years:
1. crises (civil wars, currency or politics) in "second world" countries like Brazil, southafrica, Venezuela, Vietnam, Bangladesh and "great" britan (India maybe)...this will influence our economies too
2. sovereign debt crisis: US and Europe + England.....this will influence our economy too ;)
3. housing bubbles in Canada, Germany, Austria, Australia, China+-, New Zealand, Sweden, Norway (This time not the US, but a correction will take place too)