It Is Not That Simple
Before you look at the charts below and say “hey this is easy…now is the time to buy”, keep in mind the first two charts show similar CCM Market Model readings within the context of a bull market. The same model readings were present numerous times between October 2007 and March 2009 (a bear market). Nothing says 2015 cannot flip into a bear market, which means we have to remain open to all outcomes (good and bad).
If The Evidence Improves…
The blue arrows show similar CCM Market Model readings (2003-2007) to what we have seen in the past few days. During a bull market with more conviction than the current bull market, low model readings were followed by impressive gains in stocks, telling us to keep an open mind about bullish outcomes in 2015.
This Chart Is Probably More Like 2015
The last few years of the current bull market have been fueled by record low interest rates and have featured somewhat tepid conviction and confidence in central planners. Notice in 2010 and 2011 during “crisis periods”, bottoms tended to be a multi-month process rather than the sharp reversals between 2003 and 2007.
Compare and contrast how long markets remained in a weak technical state in the two bull markets; compare the number of blue arrows before a rally was successful. The recent clustering of blue arrows speaks to waning confidence in the economy and central planners (investors are more skeptical). The higher degree of skepticism may also result in a much harsher bear market the next time around. People may be willing to run for exits much faster in 2015 than they were in October 2007. The million dollar question is “when could that process begin”. It may have already started; it may not start for several years.
How Can This Help Us?
We are currently in a bull market until proven otherwise, meaning the bull market analysis remains relevant for now. The present day readings of the CCM Market Model simply tells us to be ready to redeploy cash if/when the hard evidence begins to improve. There is no need to guess or anticipate. If a sustainable rally occurs, the evidence will improve. If a sustainable rally does not occur, the improvement in the evidence will be muted/contained.
The difference between the bull markets (2003-2007/2009-2014) and the low readings found in early 2008 is the hard evidence began to improve significantly during the bull markets, which was not the case in 2008. Therefore, as always, the hard evidence, price, charts, and model will continue to guide us. If we see enough improvement, we will take action. If we do not, we will remain patient.
After a volatile week, we want to keep you informed.
Economic Basis For Large Bear Market Declines
As we noted in a recent “recession odds” article, bear markets typically are caused by one of two things: a recession or tight monetary conditions. For example, the 2000-2002 bear market featured a rough economic period in 2001 (see table below).
The chart below shows a period in 2001 that featured a 27% drop in the S&P 500, which even in isolation crossed the widely accepted 20% threshold defining a bear market. The big drop occurred during the period of weak economic growth as shown in the table above.
2001 vs. 2008 vs. 2015: Another Perspective
This week’s video makes additional fact-based comparisons of the present day to both 2001 and 2008, allowing us to better understand correction odds relative to bear market odds.
How About 2008-2009 And Economic Growth?
Stocks did not drop like a lead balloon for no reason during the financial crisis. The economy experienced a significant contraction (see table below).
The vast majority of the losses in stocks during the financial crisis occurred during the window marked by negative GDP.
How Does The Same GDP Table Look In 2015?
Respecting that economic forecasting is difficult at best and negative growth could be around the corner, the facts we have in hand look quite a bit better than those during the “plunge periods in stocks” shown above (2001, 2008-2009).
Odds Of A Recession: August 10, 2015
The Federal Reserve Bank Of Atlanta has done a good job with the difficult task of forecasting economic growth recently. While the Atlanta Fed is forecasting a tepid GDP figure of 0.7% growth in Q3, their GDP-Based Recession Indicator Index is not screaming “run for the stock market and economic exits”. From the Atlanta Fed based on data as of August 10, 2015:
The GDP-based recession indicator index rose a little with the latest GDP figures, and currently stands at 13.3 percent. There has been a modest but temporary jump up in the index during the first quarter of each of the last three years, reflecting in part the weak winter GDP numbers. Even so, a value of 13.3 percent is not particularly high by historical standards. A paper by Marcelle Chauvet and James Hamilton (from Nonlinear Time Series Analysis of Business Cycles, 2006, edited by Costas Milas, Philip Rothman, and Dick van Dijk) concluded that the U.S. could be said to have entered a recession when the index rises above 67 percent.
How Can This Analysis Help Us?
The GDP figures we have in hand and the charts in the video tell us the current odds favor the next bout of weakness being a correction within a bull market rather than the start of a multiple-year decline in stocks. The tweet below outlines why the previous statement is helpful.
Investment Implications - Flexibility Required
Our purpose here is not to paint an “everything is fine” picture. The observable evidence tracked by the CCM Market Model has deteriorated in a significant manner, calling for a reduction in our model equity exposure. The GDP data and technical evidence in this week’s video, along with recent sentiment data, help us with the “stocks could still surprise on the upside” scenario, allowing us to remain open to an improvement in the hard evidence. Until the hard data begins to improve, a healthy dose of skepticism and respect for risk management remain in order. It also remains prudent to have migration plans for both bullish and bearish outcomes.