For a long list of reasons (see below) I believe we have entered a bear market and similar to late 2007 the market for now does not get the benefit of the doubt until the bear question gets proven right or wrong. For anyone new I believe I made a good call in this regard in late 2007. Last summer when the SPX breached its 200 DMA I took a little defensive action but I don't think I ever proclaimed bear market as I am now.
In no particular order the first issue is that the SPX is below its 200 DMA, actually a long way below. The 200 DMA is now at 1286. Later in the post I was going to list one reason I might be wrong is that the 200 DMA is still moving up except when I just went to Stockcharts.com to get the 1286 number I saw that the 200 DMA is headed lower ever so slightly. If I am seeing that incorrectly then it becomes a risk factor to my call.
The SPX is also a few days from having its 50 DMA cross below its 200 DMA and in certain cycles (in a let the chips fall where they may sort of way) this type of crossover can be more effective than a simple 200 DMA breach. This time it looks like it is turning out to be the simple breach that is more effective. Both indicate unhealthy demand for equities and if demand is unhealthy then that is a reason to be defensive.
As reader Andrew commented a week or two ago the 2% rule has been invoked. As a reminder an average 2% (or there abouts) decline three months in a row is evidence of a slow rollover which is consistent with how bear markets start.
When the GDP printed recently I said that I believe we are now headed into a recession based primarily two quarters in a row below 2% on GDP. ISM was no great shakes either. A common argument on TV about why we are not headed into a recession is that corporate profitability is very healthy. I think lousy GDP trumps healthy corporate profitability (if you even believe profitability is now healthy). If there is a recession soon we should expect stocks to go down first which I think is happening now. Also a recession so soon after the last one is supported by the idea of a balance sheet recession.
Slightly bigger picture all of the policies and programs by the Fed, Treasury and Administration proved out to either not work or be far less effective than anyone thought. When I say anyone I mean people constructing and implementing the policies and programs. And now some in the market wonder what the Fed will try next. That is not good.
The Fed yesterday set an expectation that they will need to keep short rates where they are until mid 2013. All of sudden we look more like Japan than we did a few days ago. By the way, three dissents at the Fed this meeting? Someone referred to that as a mutiny. For more on the Fed read this from Bruce Krasting but fair warning it is a bleak post.
Housing and jobs data still stink. The ten year treasury yields 2.18%. The US' debt was downgraded. All of the grownups in the room in Washington appear to be in way over their heads on how to fix this or more correctly on how to let things fix themselves. I will again say that the worst crisis in 80 years should take a long time to fix itself, unfortunately. This little nugget from Bespoke isn't too encouraging.
A little more anecdotal, the largest single day moves in either direction occur during bear markets. The decline on Monday was 6.66% . The rally yesterday was 4.74%. Early in the day I decided that if we got to up 4% for SPX on the day I would sell something (specifically a materials sector ETF for large accounts). We got there with a few minutes left in the day. Amusingly I placed the order with 5:12 left in the day and it was too soon. The idea here was that with a 2% rally for the day the likelihood of a lot of buying power remaining is pretty high but less so with a 4%, or more, rally.
There are plenty of reasons as to why this call could be wrong including just being wrong but based on what I know of market history and what I think is going on now this is the conclusion I draw. The consequence for being wrong will be that we lag, not miss, a big rally.
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10 comments:
First panic and fear post I remember reading from you.
panic and fear? really? I sold into euphoria.
Roger, good call.
What do you consider large accounts ?
GI
we have three types of accounts large medium and small.
all have taken some defensive action.
large account are such where 35-ish holdings on the equity side makes sense from a commission drag standpoint. there is no hard dollar figure to the definitions.
Roger, this is one of the most insightful post ever. As I read through it, I kept saying to myself "yes, but how about ..." and then you covered it.
Yes, we are in a bear market; whether double-dip or just continuation is a meaningless differentiation. Big swings up followed by big swings down, with net down; as I type, the markets have given back most of yesterday's big gains. The differences between today and 2008 are significant and make the outlook worse than 2008: We now see countries and states failing, as opposed to companies in 2008. We now have an ideologue socialist in the White House, as opposed to a "compassionate conservative." The US has now lost its AAA credit rating (something else Obama inherited from Bush), is $3T more in debt, and has no credible plan on how to get out (the no credible plan part is not a change, but the problem is worse).
Interesting. Harry Reid went first in naming his super committee members. His picks are 2 hard left-wingers, John Kerry and Patty Murray, and Max Baucus, who may put the country ahead of party. Guess we'll soon see who the other 9 members are. Maybe, hopefully, this committee will come up with something that will be positive and can pass the Senate and House, and get a Presidential signature.
We do live in interesting times. Digging out of the government debt-pit we are currently in will not be easy
JCarr
thank you jcarr
Roger,
it is incredible that even value investors have been reccomending value stocks like csco, nok, msft and others and have been making new lows. Vitaleiy who is a russian was making such reccomendations on jtx jack hewet and the stock is now close to zero. This guy has even been writing a few books. I think one should head to the market language. If anything goes down must take defensive action. Now I am 98% in cash and waiting for the market to tell me what to do. I have learned allot since I started in 2007.
Jeff from Milan, Italy
You sold into euphoria IF it is a bear market. You sold 4% above the bottom if it is a bottom or significant bounce.
I think a bounce or bottom is much more likely and patience and thinking should come first.
You normally display no emotion MUCH better than most.
Nobody, you, me, etc is perfect.
We now have an ideologue socialist in the White House, as opposed to a "compassionate conservative."
Over the years of reading this blog, that is quite possibly the stupidest sentence I have yet to encounter in the comments.
6:23 (and if you are the commenter from before) I think you're more making an argument for why I might be wrong but the action was taken based on the above which i've been framing out for a long time here.
and as I said, this most definitely could turn out to be incorrect.
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