Major Technical
Failures Confirm
Bear Market Risk
In last week’s
discussion, we
stated the “bear
market” was
not yet
complete. This
was despite the “market
rally,” which
convinced the
media the “bull
market was
back.”
While it was
indeed a sharp “reflex
rally,” and
expected, “bear
markets” are
not resolved in
a single month. Most
importantly, as
we discussed in
our employment
report on
Thursday, “bear
markets” do
not end with “consumer
confidence” still
very elevated.
“Notice that
during each
of the
previous two
bear market
cycles,
confidence
dropped by
an average
of 58 points.”
This past week,
we saw early
indications of
the unemployment
that is coming
to America as
jobless claims
surged to 10
million, and
unemployment in
April will surge
to 15-20%.
Confidence, and
ultimately
consumption,
Which comprises
70% of GDP, will
plummet as job
losses mount. It
is incredibly
difficult to
remain
optimistic when
you are
unemployed.
No Light At The
End Of The
Tunnel – Yet.
The markets have
been clinging on
to “hope” that
as soon as the
virus passes,
there will be a
sharp “V”-shaped
recovery in the
economy and
markets. While
we strongly
believe this
will not be the
case, we do
acknowledge
there will
likely be a
short-term
market surge as
the economy does
initially come
back “online.” (That
surge could be
very strong and
will once again
have the media
crowing the
“bear market” is
over.)
However, for
now, we are not
there yet. As we
noted
last week’s Macroview there
are two issues
currently
weighing on the
economy and
markets,
short-term.
“Most
importantly,
as shown
below, the
majority of
businesses
will run out
of money
long before
SBA loans,
or financial
assistance
can be
provided. This
will lead to
higher, and
a
longer-duration
of
unemployment.”
Furthermore, the
bill only
provides for
two and a half
times a
company’s
average monthly
payroll expense
over the past 12
months. However,
the bill fails
to take into
consideration
that not all
small businesses
are labor and
payroll
intensive. Those
businesses will
fail to receive
enough support
to stay in
business for
very long.
Furthermore, the
bill doesn’t
provide for inventory,
other operating
costs, and
spoilage.
Small
businesses, up
to
500-employees,
make up 70% of
employment in
the U.S. While
the government
is busy bailing
out self-dealing
publicly traded
corporations,
there will be a
massive wave of
defaults in the
small- to
mid-size
business sector.
Secondly, we are
not near the end
of the virus as
of yet. As noted
last week:
“While there
is much hope
that the
current
‘economic
shutdown’
will end
quickly, we
are still
very early
in the
infection
cycle
relative to
other
countries.
Importantly,
we are
substantially
larger than
most, and on
a GDP basis,
the damage
will be
worse.”
This was
confirmed again
this week by
the New
York Times’
columnist David
Leonhardt:
“Five ways
we know that
the American
response to
the
coronavirus
isn’t yet
working.
-
There is
still no
sign of
the
curve
flattening.
-
The
caseload
is
growing
more
rapidly
here
than in
Europe.
-
The
shortage
of
medical
supplies
continues.
-
There
is still
a
testing
shortage.
-
Nationwide,
the
policy
response
remains
inconsistent.
What the cycle
tells us is that
jobless claims,
unemployment,
and economic
growth are going
to worsen
materially over
the next couple
of quarters.
The problem with
the current
economic
backdrop, and
mounting job
losses, is the
vast majority of
American’s were
woefully
unprepared for
any disruption
to their income
going into
recession. As
job losses
mount, a virtual
spiral in the
economy begins
as reductions in
spending put
further
pressures on
corporate
profitability.
Lower profits
lead to higher
unemployment and
lower asset
prices until the
cycle is
complete.
Two important
points:
-
The economy will
eventually
recover, and
life will
return to
normal.
-
The damage
will take
longer to
heal, and
future
growth will
run at a
lower
long-term
rate due to
the
escalation
of debts and
deficits.
For investors,
this means a
greater range of
stock market
volatility and
near-zero rates
of return over
the next decade.
The Bear Still Rules
Over the last two weeks, we
published several pieces of
analysis discussing
why the “bear
market rally” should be
sold into. On Friday, our
colleague, Jeffery
Marcus of TP Analytics,
penned the following:
Meanwhile, the charts below
of the S&P500 benchmark tell
TPA the following:
-
When the 11-year bull
market trend ended,
other shorter trends
were also violated. In
late February, the S&P
500 fell below its
14-month uptrend line,
and in early March the
13-month uptrend line
was violated. Those
breaks set in place the
steep declines seen in
the 2nd and
3rd weeks
of March.
-
While it may seem like
an epic battle is going
on around S&P 500 2500,
the real problem is the
downtrend forming from
the 2/19 high.
-
TPA still continues to
see real
long term support in the
3% range between 2110
and 2180. A
less likely move below
that support, would
leave long term support
levels of the lows of
2014 and 2015.
S&P 500 – Long Term
His analysis agrees with our
own, which we discussed with
you on Tuesday:
“While the technical
picture of the market
also suggests the
recent “bear market”
rally will likely fade
sooner than later. As we
stated last week:
‘Such an advance will
‘lure’ investors back
into the market,
thinking the ‘bear
market’ is over.’
Importantly, despite the
sizable rally,
participation has
remained extraordinarily
weak. If the market was
seeing strong buying, as
suggested by the media,
then we should see
sizable upticks in the
percent measures of
advancing issues, issues
at new highs, and a
rising number of stocks
above their 200-dma.”
Chart updated through
Friday.
On a daily basis, these
measures all have room to
improve in the short-term.
However, the market has now
confirmed longer-term
technical signals suggesting
the “bear
market” has only just
started.
Major Technical Failures
Price is nothing more than a
reflection of the “psychology” of
market participants. The
mistake the media made by
calling an “end” to the
“bear market” is they were
using an outdated proxy of
a “20%
advance or decline” to
distinguish between the two.
However, due to a
decade-long bull market,
which had stretched prices
to historical extremes above
long-term trends, that
20% measure is no longer
valid.
Let’s clarify.
-
A bull market is
when the price of the
market is trending
higher over a long-term
period.
-
A bear market is
when the long-term
upward trending advance
is broken and prices
begin to trend lower.
The chart below provides a
visual of the distinction.
When you look at price
“trends,” the difference
becomes both apparent and
more useful.
This distinction is
important. With the month,
and quarter-end, behind us,
we can now analyze our
longer-term weekly and
monthly price trends to make
determinations about the
market.
The market has now violated
the 200-week (4-year) moving
average. Given this
is such a long-term trend
line, such a violation
should be taken seriously.
Also, that violation will be
very difficult to reverse in
the short-term, and suggests
lower prices to come for the
market.
Using the definition of “bull
and bear” markets
above, the market has also
violated the long-term “bull
trend” on a “confirmed” basis.
A confirmed basis is when
the market violates a
long-term trend, rallies,
and then fails. As Jeffery
Marcus, noted above, that
market is now establishing a
confirmed downtrend with the
recent rally failing at
downtrend resistance. (Also,
the 50-200 dma negative
cross will apply more
downward pressure on any
forthcoming rally.)
Most importantly, for the
first time since the “Great
Financial Crisis” lows,
the market now has a
confirmed close below the
bull-trend line. If the
market is able to rally in
April, and close above the
long-term trend line, then
the “bull
market” will
technically still be intact.
However, if the month of
April closes below that
trend, a confirmed “bear
market” will be
underway and suggests
markets will see lower
levels before it is over.
There are reasons to be
optimistic about the markets
in the very short-term. We
will get through this
crisis. People will return
to work. The economy will
start moving forward again.
However, it won’t
immediately go right back to
where we were previously. We
are continuing to extend the
amount of time the economy
will be “shut
down,” which
exacerbates the decline in
the employment, and personal
consumption data. The
feedback loop from that data
into corporate profits, and
earnings, is going to make
valuations more problematic
even with low interest rates
currently.
This is NOT the time to try
and “speculate” on
a bottom of the market. You
might get lucky, but there
is very high risk you could
wind up losing even more
capital.
For long-term investors,
remain patient and let the
market dictate when the
bottom has been formed.
This was a point we
discussed in “Rothschild’s
80/20 Rule:”
You can have the top 20%
and the bottom 20%, I
will take the 80% in the
middle.” – Rothschild
This is the basis of the
80/20 investment philosophy,
and the driver behind our
risk management process at
RIA.
Yes, you may sell to early
and miss the 10% before the
peak, or you sell a little
late and lose the 10% from
the peak. Likewise, you may
start buying into the market
10% before, or after, it
bottoms. The goal is to
capture the bulk of the
advance, and miss the
majority of the decline.
Investing isn’t a
competition of who gets to
say “I
bought the bottom.” Investing
is about putting capital to
work when reward outweighs
the risk.
That is not today.
Bear markets have a way of “suckering” investors
back into the market to
inflict the most pain
possible.
This is why “bear
markets” never end with
optimism, but in despair.
