Bull or a bear market? It doesn’t look good


By: Dominic Frisby

Every few months I attend a dinner with a reprobate bunch of lowlifes from the City – fund managers, traders, analysts – you know the sort.

The idea is that everyone at the table speaks for two minutes about an investment idea that interests them – it might be buy Brazil, sell sugar stocks, anything.

After each talk, the table then argues the idea through to see if it has any merit.

Inevitably, the subject of the stockmarkets comes up. Given current goings-on, that subject invited even more discussion than usual at last week’s event.

At the end of the dinner, the matter was put to a vote. Normally, when we get a vote, there is a majority of some kind – 60%, 70% or 80% will agree or disagree with whatever is being suggested.

But when it came to the stockmarkets, the room was completely divided: 50-50. Twelve people thought we were headed higher, twelve thought we were headed lower (sideways was not an option for some reason).

Meanwhile, I was amused to read on the Reformed Broker blog yesterday this quote from Brian Rehling, co-head of global fixed-income strategy at Wells Fargo: “We could see the economy accelerate; we could see this global weakness pass, but you could also see things go the other way, where the global economy continues to weaken.”

In short, it could go up or it could go down. Nobody ever knows, of course, but at the moment, they really don’t know. You can read and research till the cows come home and yet it still boils down to a virtual coin toss.

The main argument from the bulls was a compelling one. It concerns sentiment. From the S&P 500’s high of 2,134 to its low of 1,867, this has only been a correction of 12.5%.

That is not so much. According to the conventional measure of 20%, we are not even in a confirmed bear market yet. Given the bull market there has been in US stocks – almost straight up since mid-2012, and a tripling in value since 2009 – a 12.5% correction is not only normal, but necessary.

Yet bearish sentiment, however you measure it, is off the scale. First there’s news and media analytics. The correction has achieved a huge amount of coverage; a disproportionate amount, perhaps.

There was a huge sloth of bears (I bet you didn’t know that was the collective noun for a group of bears) on the front cover of Bloomberg Businessweek the other week. Both The Economist and the New Yorker have recently had images of declining stockmarket charts, as Nick Glydon of Redburn points out. Negativity is everywhere.

Then there are technical readings. The Vix – the index which measures volatility – reached 53, a level which exceeds those reached during the taper tantrum of 2011, and not seen since the heights of the financial crisis of 2008. Other measures such as RSI and MACD were almost as extreme.

All this heightened, extreme emotion is normally concomitant with a low. So to have such extremity at a mere 12.5% correction is actually rather positive.

That emotion, however, came because of the speed and severity of the August move – and that is one of the main arguments in the bears’ case. When a correction is that violent it portends something bigger.

All those sentiment measures that went off the scale in August have rather settled down, even though the market is back down where it was, re-testing the lows.

Meanwhile, observe the bears, more and more stocks are now trading below their one–year moving averages and are in clear downtrends. Many of the sectors which previously showed leadership – the financials especially – are no longer doing so.

In fact, some look ugly – biotech in particular. Between Friday and Monday a US biotech ETF was down over 10%. It’s down over 25% from its July high (it was one of the sectors I warned on back in May).

Commodities continue to sell off, and the consequences keep on coming. Soaring rates in the junk bond market for oil producers. Glencore’s collapse on Monday. A dearth of funds for the sovereign wealth funds to invest, as John noted yesterday.

And then there’s this underlying feeling that all is not well. There’s the failure to raise rates, which is an admission of something. There’s China, of course, and the emerging markets implosion. And there’s the Volkswagen saga. What will the ramifications of that turn out to be for Germany? Were other car manufacturers playing the same game?

It’s very easy to make a bearish case and get submerged.

Me? I’m sticking with my simple interpretation from a few weeks back, and I’m keeping it simple. I said then that this feels like a bear market and it still does, so I’ve adjusted my portfolio. In my investment account, I’m something like 75% in cash.

Of course, I try to keep an open mind. I may be sitting in cash. But yesterday morning, in my trading account, I bought the S&P 500.  It’s retesting the August lows of 1,867. I think those lows could hold. If it falls below, I’m out of the trade for small loss.

But I think we’ve got a rocky October ahead of us. More on that tomorrow.



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