What Are The Odds A Bear Market Has Already Started?

May 29, 2015

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Most Recent Comments Via Twitter

May 29, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Stock Market Top-Callers Are Missing One Key Ingredient

May 28, 2015

Ding Dong! The Wicked Bull Is Dead

If you follow the markets, you may have noticed a recent increase in “the bull is over” articles. While it is entirely possible the S&P 500 has already peaked, the evidence says it may be a bit early to declare the dawn of a new S&P 500 bear market.

What Do The Facts Tell Us Now?

Regular readers know we are not fans of forecasting (bullish or bearish). Therefore, our purpose here is not to counter bearish arguments with bullish arguments, but rather to stop and look at some facts in place as of May 28, 2015.

Cannot Have A Bear Without This

Corrections and bear markets have one thing in common – they both feature the S&P 500 making a series of lower highs and lower lows.

Lower Low Came In October 2007

The chart below shows the S&P 500’s topping process as the bull market ended in October 2007. With the S&P 500 still trading at 1550, a lower high was made in October 2007. To have a bearish trend, we have to have a lower low as well – one was made in November 2007.

Lower Lows Come During Corrections

Just as day follows night, lower lows follow lower highs during multi-month stock market corrections. A lower high was made in early July 2011 – stocks did not find a bottom until several weeks later (see chart below).

Most Recent Event - Higher Highs

Has the S&P 500 recently made a lower high followed by a lower low? No, in fact the last significant event was a higher high.

NASDAQ Made A New High Yesterday

Markets make new highs when the net aggregate opinion of all market participants is bullish. If the net aggregate opinion was bearish, bullish conviction would be too low to push stocks to a new high. How long has it been since a new high was made by the NASDAQ? Answer: One day.

Global Stocks Are Weak, Right?

The ACWI All-World ETF (ACWI) has exposure to stocks around the globe. ACWI made a new high last week, meaning the global stock bears have some work to do.

Talking About A Minimum Threshold For Bears

If we see a lower high and lower low, does it spell doom for stocks? No, lower highs and lower lows are made all the time. The point is a lower high and lower low is one of the easiest bearish thresholds to cross, and yet, it has not happened as of May 28, 2015. Until one of the easier to check off bearish boxes is checked, some patience remains in order before participating in the nearly impossible game of picking stock market tops.

How Helpful Were These Calls For Gloom And Doom?

A May 11 article looks at dated article titles, such as “Warning: Crash dead ahead. Sell. Get liquid. Now”, allowing you to make a call on their value to investors.

If They Have Trouble With Football…

If the best football handicappers cannot predict the outcome of NFL football games with accuracy much better than a flip of a coin, how reliable can we expect market forecasters to be when trying to call a much more complex system known as the global economy and global stock markets?

Bears May Get A Boost Friday…They May Not

Friday brings the latest reading on the U.S. economy. Rather than attempt to predict (a) the GDP number, and (b) the market’s reaction to the number, our approach calls for taking it day by day. If the evidence, including a discernible lower high and lower low, calls for a reduction in equity exposure, we are happy to do it. Are we perma-bulls? No, the charts say what they say and are not impacted by our personal views or human biases. Are there things to be concerned about? Yes, a few “be careful” items are outlined in this video clip.

Is The Strong Dollar A Showstopper For Stock Bulls?

May 27, 2015

Easy To Blame The Dollar

During the May 26 selloff in stocks, we heard numerous “blame it on the strong dollar” comments similar to the one below via CNBC:

“I think the pressure today is coming from the stronger dollar,” said Peter Cardillo, chief market economist at Rockwell Global Capital. “The focus this week is the yield curve and the stronger dollar.”

Stocks Gained Over 70% With Strong Greenback

While the value of the U.S. dollar impacts countless areas in the global economy, a logical question is how concerned should equity investors be about a strong dollar? As shown in the chart below, the S&P 500 gained over 70% during a period of U.S. dollar strength between 1982 and 1984. Therefore, taken in isolation, a strong dollar is not a reason to cash in your stock portfolio.

A Bigger Concern Is The Length Of The Bull Run

Regardless of the dollar’s impact, there are three reasons telling investors now is a good time to water test their portfolio for the next inevitable bear market:

  1. The bull market is quite mature in historical terms.
  2. Bear markets can wipe out gains quickly.
  3. A new and different landscape may be emerging as interest rates come off of multi-decade lows.

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Back To History And The Dollar

Can we find another period in recent history when stocks and the U.S. dollar rose simultaneously? Sure we can – as shown below, the S&P 500 nearly tripled in value between 1995 and early 2000. Over the same period, the U.S. dollar surged over 25%.

Investment Implications – The Weight Of The Evidence

Tuesday’s big drop in stocks did not constitute a material change to the hard evidence when viewed on our investment time horizon.

With a big GDP number coming Friday, it is important to remain flexible and open-minded. The market will guide us if we are willing to listen.

Most Recent Comments Via Twitter

May 26, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

The Most Important Thing At This Stage Of The Bull Market

May 22, 2015

After you watch the video below, visit The CCM Twitter Feed for more resources, charts, tables, facts, and links about bear market risks associated with “safe” dividend stocks and “well-diversified” ETF/mutual fund portfolios.

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Transportation Average – A Big Concern For Stock Bulls?

May 21, 2015

Weakness In Transports In 2015

If you follow the markets, you have probably heard about the “non-confirmation” warning being flashed by the fact the Dow Transportation Average has failed to post a new high simultaneously with the Dow Jones Industrial Average.

Dow Theory Is Useful

We have written about Dow Theory many times in the past; a July 2014 article explains the economic rationale behind the theory. We believe Dow Theory is useful, but it is one of many sources of information.

Is It A Showstopper?

We will answer the question above with a few historical charts. Charts allow us to reference facts rather than human bias or emotions. If I showed you the chart below, it would represent a “non-confirmation” period since the Dow Transportation Average has failed to push to a new high. We have removed the dates from the chart below to minimize historical bias.

How Did The S&P 500 Do Over The Same Period?

The chart below shows the exact same period as the Transportation chart above. Did a new bear market start during the period of non-confirmation? Would it have made sense to sell all our stocks because the Dow Transports failed to make a new high? Answers: No and No. In fact, the non-confirmation was not particularly insightful or helpful at all since the S&P 500 gained 25% over the same period.

Bringing The Charts Together

The chart below allows you to see both indexes together. Dow Theory is relevant, but the fact that the Transports have not made a new high in 2015, taken in isolation, is not a reason to sprint for the equity exits.

You Can Always Find Bearish Data

If you are bearish, you can always find a chart that supports your personal outlook. The same can be said for the bullish side of the ledger. It is prudent to look at any information (bullish or bearish) in the context of a broader array of useful inputs. Our concerns about the Transports in 2015 would be greater if more inputs were singing off the same hymnal. That may happen, but we need to see that data, rather than anticipate it.

Some Other Takes On Trannies

This is a hot topic on Wall Street. You may want to see what others have been saying:

  • Dow Theory signaling market doom? Nah
  • Dow Divergences Part 1: Transports
  • Why Dow Theory isn’t a red flag for the market
  • The Weight Of The Evidence Takes Precedence

    We can learn something about the market and economy via the recent weakness in the Transportation Average, but it is not prudent to make decisions in any field based on one input viewed in isolation. The links below allow you to look at the 2015 stock market through a broader lens:

  • 2015 And Historical Bear Market Triggers
  • Is The Smart Money Running For Cover?
  • Stock Correction Odds Increasing?
  • Rail image from Ron Cogswell via Flickr

    2015 And Historical Bear Market Triggers

    May 20, 2015

    Common sense tells us something typically changes as stocks shift from a bull market to a bear market, meaning people need a reason to say “I am getting out.” Gluskin Sheff’s Chief Economist & Strategist, David Rosenberg, highlights the two big historical bear market triggers. From Business Insider:

    “For stocks, it always comes down to the Fed and the economy. The reality is that bear markets do not just pop out of the air. They are caused by tight money, recessions, or both.”

    Fear Eventually Turns Into Deflationary Fear

    As noted in “Is The Smart Money Running For Cover?”, bear markets tend to be deflationary and fear-based events, which eventually triggers demand for defensive-oriented bonds. Therefore, looking at hard data from the bond market can help with the assessment of recession probabilities.

    2007 Recession Odds

    The Wall Street Journal recently published the two recession probability charts below. The first one tells us the odds of a recession, based on hard data, were sitting at roughly 40% in late 2007. Was the hard and observable data helpful? Yes, the S&P 500 dropped from 1468 on December 31, 2007 all the way down to the intraday low of 666 on March 9, 2009. The hard data was in hand before stocks dropped an additional 54%.

    2015 Recession Odds

    How does the exact same chart, on the exact same scale, look in 2015? Answer: much better.

    Investment Implications – The Weight Of The Evidence

    The relatively low probability of a recession aligns with numerous other forms of hard data as outlined in “Are Stock Correction Odds Increasing?”. Could it be different this time? Sure, it could be, but fear is fear and eventually it has to start showing up in the hard data. A shift toward fear could start tomorrow, but under our approach we need to see it, rather than anticipate it. Remember, the data was waving red flags in late 2007 before stocks plunged an additional 54%, no anticipation was necessary. The point of the exercise is to look at historical data and 2015 data, rather than play the “but, what if” game, which can always be played under all market conditions.

    Breakouts Or Fakeouts?

    May 19, 2015

    Conviction Drives Pricing

    When the conviction to own stocks is higher than the conviction to sell stocks, markets tend to rise. Therefore, we can learn something in any market by focusing on the fact that all trades have a buyer and a seller.

    A Bullish Triangle For The Bulls

    The S&P 500 recently broke above previous resistance (see green arrow in chart below). The series of higher lows prior to the breakout told us buying conviction increased at higher and higher levels within the period of consolidation, which leans bullish. Has the concept of higher lows been helpful? Yes, a May 1 video clip covered the “higher lows allow for some patience” strategy in detail.

    The study of charts is not a form of voodoo or witchcraft, but rather a way to monitor the actions of human beings within the context of simple and easy to understand economic principles. The formal name of the S&P 500’s recent pattern is an ascending triangle. From stockcharts.com:

    An ascending triangle has a definitive bullish bias before the actual breakout…the horizontal line represents overhead supply that prevents the security from moving past a certain level. It is as if a large sell order has been placed at this level and it is taking a number of weeks or months to execute, thus preventing the price from rising further. Even though the price cannot rise past this level, the reaction lows continue to rise. It is these higher lows that indicate increased buying pressure and give the ascending triangle its bullish bias.

    Consumers Drive The Economy

    If we felt like we were about to lose our job or felt like it may be difficult to pay our mortgage, we probably would not be planning a discretionary family trip. The projections for travel this year also align with the market’s recent push to new highs. From Bloomberg:

    About 37.2 million Americans will travel 50 miles or more from home during the upcoming holiday weekend, the most in 10 years, according to AAA, based in Heathrow, Florida. This 4.7 percent projected increase from 2014 includes trips by car, air, cruise, train and bus in the May 21-25 period. Memorial Day provides “a good indication of what’s ahead” because the holiday marks the unofficial start of the peak vacation season, said Julie Hall, a spokeswoman for the largest U.S. motoring association. This “very positive forecast” should continue throughout the rest of the summer, she said.

    More Than Just Shampoo

    As we covered in detail in Is The Smart Money Running For Cover?, the ratio of growth-oriented small caps vs. defensive-oriented Treasuries had a “risk-off” look during the 2008 financial crisis. The chart below aligns with economic common sense and was helpful in terms of reducing risk between the October 2007 high and March 2009 low in stocks.

    The 2015 version of the same IWM:TLT ratio has been trying to form a constrictive base since September 2014 (see below). Bottoms can form after sellers have been “shaken out” in a pattern of fear, followed by a larger spike in fear, and then one last, but more shallow, bout of fear.

    The formal name of the pattern above is an inverse head-and-shoulders. From stockcharts.com:

    As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower.

    Confidence Returning To Credit Markets?

    In the ETF world, if you are experiencing maximum economic fear (think 2008), then you believe three things:

    1. The economy is nowhere close to recovering,
    2. Stocks will be losers for some time, and
    3. The Fed is not even remotely close to raising interest rates.

    Under maximum fear conditions, return of principal is more important than yield and longer maturities are more attractive to “lock in your coupon rate”, which means there tends to be great demand for Treasuries (TLT) backed by the full faith and credit of the United States government. If return of principal is more important than yield, then high-yield bonds (JNK) with higher default rates are much less attractive than TLT. The JNK:TLT ratio also has a head-and-shoulders bottom look in 2015.

    Yes, we understand there is a maturity mismatch between JNK and TLT in the chart above; maximum confidence means the economy is stronger and rates may go up – therefore, you want to diversify maturities by adding some shorter-term bonds to the mix. We are looking at max confidence vs. max fear.

    Stocks Outpacing Bonds

    The ratio of stocks (SPY) to bonds (TLT) also supports the recent breakout by the S&P 500.

    How did the same SPY:TLT ratio look in 2008? Answer – quite a bit more fearful (see below).

    How About A Cup Of Coffee?

    The 2015 weekly chart of financial stocks (XLF) has a potentially bullish formation known as a “cup with handle”.

    Like some of the previous charts, markets often need to shake out investors with doubts to bring investors with greater bullish conviction into the mix, which is what is happening in the cup and in the handle above. From Investopedia:

    “A pattern on bar charts resembling a cup with a handle…As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend… then it takes off. “

    Housing Provides Some Economic Hope

    Charts have people and economic data behind them. The most recent read on housing aligns with the bullish economic case and charts above. From CNBC:

    U.S. housing starts jumped to their highest level in nearly 7-1/2 years in April and permits soared, offering a glimmer of hope for an economy that is struggling to regain strong momentum after a dismal first quarter. Groundbreaking surged 20.2 per cent to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said on Tuesday. The per cent increase was the biggest since February 1991.

    What Could Spoil The Bullish Party?

    If you want something to be concerned about, look no further than the Fed and interest rates. If market rates rise too quickly, it could spook both the stock and bond markets similar to 1994.

    Investment Implications – The Weight Of The Evidence

    The charts above are part of the weight of the evidence tracked by the CCM Market Model. Nothing really new to report – the hard evidence is still calling for an equity-heavy portfolio via a mixture of U.S. and foreign stocks. If the evidence shifts, we are happy to make the necessary adjustments, but we need to see it rather than anticipate it. If you want to expand on these concepts, this week’s stock market video compares 2015 to a pre-correction period for stocks in 2011.

    Is The Smart Money Running For Cover?

    May 18, 2015

    Will Greece Be The Bearish Straw?

    The debt clock continues to tick in Greece, which is something the stock market bulls need to respect. From CNBC:

    “What is coming into focus is an alternative approach. Instead of forcing Greece into a Grexit (a Greek exit of the euro zone), they will simply force Greece into a default – an inability to pay not just the IMF but also internal payments,” Anatole Kaletsky, co-founder and chief economist at Gavekal Dragonomics, told CNBC. “Literally, the Greek government is running out of money to pay its own wages, pensions, public spending,” he added. “At that point they have to say: ‘We either have to tighten our belts even more than we would under the austerity program or we have to do a deal with the EU’.”

    Is Fear Picking Up In The Background?

    Markets are always reassessing the balance between bullish information and bearish information. If concerns about anything, including Greece, were significant relative to bullish information, we would expect to see a look of “increasing fear” on market charts. The 2007-2008 chart below provides us with an example of what fear looks like. The chart shows the performance of growth-oriented small caps (IWM) relative to defensive-oriented Treasuries (TLT). The negative slope of the ratio is a fearful look.

    How Does The Same Ratio Look Today?

    Instead of making a series of lower highs and lower lows as it did in 2008, the 2015 version of the same small-caps vs. Treasuries ratio recently pushed to a new high favoring growth-oriented small caps.

    How About A Normal Stock Correction?

    The charts above tell us the present day does not have a bear market look, but what about a garden-variety 10-15% correction in stock prices? This week’s video compares numerous ratios during a corrective period in 2011 to the present day.

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    Back To The Bear Market Comparisons

    Corrections and bear markets tend to be fear-based and deflationary events. For example, the chart below shows the demand for more inflation-friendly stocks was significantly lagging the demand for deflation-friendly bonds during the last crisis in the United States.

    Is There Fear In The 2015 Ratio?

    The 2015 version of the same stock/bond ratio recently pushed to a new high in favor of equities. Notice in the chart below, the ratio has broken above previous areas of resistance (see orange arrows).

    Investment Implications – The Weight Of The Evidence

    Is it possible all the charts shown in this article begin to morph into a more bearish look in the coming days, weeks, and months? Yes, it is quite possible, but under our approach we need to see a shift in the hard evidence rather than anticipating a shift that may or may not occur. Given the facts we have in hand, our market model continues to favor growth assets relative to defensive assets.