This Week’s Message: Bull Market In Tatters

If you had told me at the beginning of this year that come year-end we’d be within a stone’s throw of the deepest correction of the current bull market, while I would have told you that anything’s possible, and that corrections are common affairs, I’d be surprised (by anything other than your garden variety -10% to -12%), based on the state of general conditions at the time. 

Well, here we are, a stone’s throw from something along the lines of 2011 and, yes, I’m surprised. Although I did state emphatically at the beginning of the year — and many times since — that the one thing that would put my then bullish thesis to the test would be protectionism (read trade war). 

While I recognize that other concerning factors are currently in play, I guess I’m just surprised that the trade issue has been allowed to get this far. 

So here we are, trade war (etc.) intact, bull market in tatters! Now what do we do?

Well, we step back, we breath, we turn off the media and we reassess general conditions. 

We are forever in search of the signs and signals that say “warning! Recession ahead!” As, typically, bear markets are things of recessions. 

So how do we do that? We do that by testing the data that matter against the periods that led up to past recessions. And as we perform that function here today, the character of the data on balance (per our proprietary macro index) does not yet signal recession, and remains notably more positive than it was during the whopping 2011 correction, and slightly better than the 12+% draw down of early 2016, yet somewhat worse than conditions during the 2015 correction.

Here’s a small sampling of the data we track (shaded areas are recessions, I circled the areas around the 2011 correction and the back-to-back corrections of 2015 and 2016). I of course cherry-picked examples that emphasize my point, and those that most folks are familiar with and/or can relate to:

First, here’s the S&P 500 Index itself:   click charts to enlarge…

Yes, right now the present price action in stocks rivals the worst of what we’ve seen since the last bear market.

But take a look at retail sales:

Online sales (purple) haven’t missed a beat since the last recession, although, as you can see, brick and mortar (white) has definitely had its ups and downs. Presently, however, it remains in a definable up trend. Nevertheless, we currently score it neutral, as it has yet to make a higher high after the last dip. That said, its trajectory looks notably better than it did during the past three corrections, let alone the periods leading into the past two recessions.

For the rest I’ll simply throw up each chart and let you judge whether or not the data should have us running for the exits.

Weekly Jobless Claims:

Unemployment Rate:

Job Openings:

Consumer Confidence:

Institute for Supply Management Purchasing Manager Surveys (manufacturing purple, services yellow):

Small Business Optimism:

Industrial Production:

Truck Tonnage

Rail Traffic

As you no doubt noted in the above, as it relates to the featured charts, present conditions do not remotely resemble recessions past, or even the 2011 and 2016 market corrections. 

As for the remaining data we follow (which include indicators of credit risk, commodities trends, financial market conditions, etc.), and score, while we’ve seen marked deterioration since the beginning of the year, the overall result still has odds favoring continued expansion (and, thus, bull market) over recession (and a protracted bear market) for the foreseeable future: Our index presently scores +20, versus +8 during the 2011 correction, +29 in 2015 and +18 at the bottom of the 2016 correction. As for the past two bear markets, the back tests scored -29 at the 2000 market peak, and -33 at the 2007 S&P 500 all time high.

In summary, our assessment of the present state of stock market affairs is that the price action deviates from the underlying fundamentals. Of course the question here would be, will the price action ultimately reverse and reflect present fundamentals, or will the fundamentals ultimately roll over and reflect the action (the message?) in stock prices?

History suggests that this — a correction amid an ongoing economic expansion — is the stuff strong rallies are made of. And we’ve seen albeit minor hints recently of what might be in store — such as Wednesday’s initial, and extremely short lived, 400-Dow point surge in reaction to the Fed decision, and Friday’s 400-point pop on Fed governor Williams dovish commentary. Not to mention the +1,500-point week we had leading into the President’s untimely, and rally-killing, “I’m a Tariff Man” tweet. 

The sentiment expressed in the latter, as I stated at the top of this message (and for months now), is in my view the central issue that explains the utter mess the market finds itself in. 

Not to discount other pressing issues — government shutdown, the shocking James Mattis resignation, Fed rate hikes, and so on — but if the trade war makes its way too far into the not too distant future (which, thankfully!, would be a political nightmare [read incentive] for the players), I suspect that we’ll ultimately be staring down some ugly looking charts and a negative score for our index: A scenario that will have us committedly moving to a defensive posture within client portfolios sooner, alas, than we otherwise would have. 

In the meantime, as nerve wracking as it may be, we stay the course. Although, having said that, we are now readying ourselves to begin getting incrementally defensive should conditions deteriorate further from here. 

If, in your case (if you’re our client), us moving incrementally to a defensive posture if the data further deteriorate is an uncomfortable proposition (i.e., not careful enough under present circumstances); i.e., if you can relate to the highlighted portion of the following, call me right away. My cell number is 559-313-3612…

My 10/25/18 post:

The “Best” Move

Had a nice email conversation with a dear old friend yesterday. One of the questions he asked me was if, in light of the huge hit to recent paper profits, I saw any point in exiting the market with what recent (let’s assume he means that which was accumulated in the latter half of last year) profit is left, “even for yourself”?

Here’s from my response to that question:

“…. nope, with general conditions not pointing to a recession I’m holding tight with my long-term money. I never let volatility shake me up, I only (other than tweaking sector weights) adjust when general (economic, etc.) conditions suggest that a contraction going forward is more likely than a continued expansion, which isn’t the case currently. When general conditions remain constructive, pullbacks should typically be bought, not sold (I make no guarantees, however).” 

“All that said my friend, as we’ve discussed before, in my view this stuff isn’t worth losing sleep over. A few times over the years (can count them on one hand) I have suggested that a client sell at a time when I did not feel it was the best investment move, but rather when it was the best emotional move… which is most important in my view….”

I left him with this Jesse Livermore quote:

“That is about all I have learned—to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured—and figured correctly—that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you.”


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