Possible bear market coming

One of the reasons I publish this blog is to provide a record of my market and sector calls. You can see for yourself if I am accurate or not by looking back at the history of my calls. For example, in my recent guidance on my longer termed allocation to maintain inflation-benefiting securities, I recommended readers consult my blogs from late 2020 and early 2021 to confirm that my allocation views were correct at that time (which I was).  I believe that by being able to refer to my older market and sector views on the blog, you will have confidence in my current insights.

While I cannot possibly be correct 100% of the time, I hope to maintain a track record worthy of your attention – and that’s a goal best illustrated here on this blog, and through the performance of the ValueTrend Equity Platform here.  And I do hope that you will consider taking advantage of those insights through my Online Technical Analysis Course or my books. And, of course, if you want the best possible reflection of my insights, contact ValueTrend to discuss how we can manage your money directly.

My most recent neartermed call was a very strong call, indeed. I noted on April 7th that my Bear-o-meter signaled a “High Risk Alert”. Here is the blog, for the record. In that blog, I noted that ValueTrend was legging out of higher beta stocks and raising cash. I suggested you might want to begin legging out yourself. I do hope you listened. The market has turned decidedly bearish, suggesting that my high-alert Bear-o-meter reading on the 7th was accurate. That’s what I’m here to discuss today.

 

The chart below illustrates the following points – note that I have listed points such as seasonality and sector rotation that don’t appear on the chart:

  • SPX roughly hit  its last peak near 4600–and failed.
  • The SPX is below its 200 day SMA
  • Lower highs and lows prevail.
  • Moneyflow momentum (top pane) has fallen off the cliff
  • MACD has just crossed the zero line. This typically results in further downside momentum.
  • Positive Seasonality is about to end
  • Market leaders FAANGS are largely in trouble
  • Economic leaders – the US banks – have broken support
  • Market alpha is coming from defensive positions like utilities and staples
  • As the Fed struggles with the reality of fighting inflation while simultaneously fighting off recession, there is a good chance of the worst of both worlds: Stagflation.

Conclusion

The above factors do not paint a picture of a growth stock market environment right now (although, this too shall end). At best, my view is for a sideways consolidation with a floor near 4200 and a ceiling near 4600. A break of either of those levels implies a change from consolidation to a bull (if 4600 is broken to the upside) or bear (if 4200 is broken to the downside).

I believe there is a reasonable chance that the market will fall this summer, meaning that 4200 could be broken. Remember though, you cant predict, you can only prepare. In some ways, the SPX chart and overall market conditions look a bit like what I saw in 2008. That is, a former speculative environment, a lower low and a break of the 200 day SMA, and a breakdown of the market leaders (banks, oils at that time), and a housing peak & crash. This time, we have the bull market leaders of the FAANG’s rolling over in many cases, and variations of the same background conditions for the market.

This means that, beyond possible neartermed rallies (the market is neartermed oversold a bit) – the market has the makings of a potential correction and/or bear market. This implies a possibility of more downside before oversold conditions arrive – hopefully by or before the end of the summer. The Bear-o-meter blog (noted above) noted other conditions leading me to become more and more cautious at this time.

All in, this is a time for smart investors to profit by rotating into favored sectors, and holding some cash while awaiting opportunities. Markets move faster than they used to. Any bear market conditions can come and go in a few months. So – be nimble, be quick, and be smart. There are opportunities to be had in a bear market (assuming we get one), but you need to play it right to be one of the victors, rather than the victims.

Happy trading!

quote-teal

10 Comments

  • Near term:
    The energy companies will report outstanding numbers soon.
    In the current economic environment Do you think there will be a “take the money and run” mentality Even if oil & gas remain high?

    Longer term:
    Do you think a rising dollar, rates & inflation will stifle demand globally to the point that even the commodity sector will suffer?

    Thanks

    Reply
    • Good thoughts Mark. Hard to predict about the “take the money and run” potential–but it seems likely that – even with a possible settling of the Ukraine war- energy prices will remain high over the coming year. And yes, that translates to profits for the producers. Read my “boiling frogs” blog where I speak about the high likelihood for a neartermed correction in energy & producers (so far I appear to be correct on that) due to an overbought situation, but a longer termed potential for prices remaining high. A lot of supply has been removed from the chain, and there is a rebuilding period – assuming NA governments are smart enough to aggressively reopen exploration, production and transportation / pipelines again (and I have my questions about that!). I also note that the inevitable restocking of the US energy reserves that are currently being drained will pressure prices to rise when taking into account adding that demand to normal demand. So – the short termed selloff is happening now, and may play out a while more. But probability is that one year out, I feel energy is going to be higher.
      Per your other question—Commodities are traded in USD, and inflation is all about commodity pricing (and corresponding wage pricing). So commodities are the place to be if you have rising inflation.

      Reply
  • Could you elaborate a little on the “favoured sectors” please?

    Are we talking normal Spring ‘seasonally favoured’ sectors as outlined by Thackray’s seasonal investing guide, or perhaps the stressed demand/supply issue relating to commodities like energy or perhaps fertilizer and food or something else under current pressure?

    Thanks in advance.

    Reply
    • Yes, all of the above. low beta sectors like staples and utilities and possibly REITs may be the place to be. There may be more weakness in the commodity space but- per my “Boiling frogs” blog we view hard assets as an important part of our platforms for the coming 12 months.

      Reply
  • Hi Keith – took your course, based on that, the trend is broken. Hard to avoid the feeling of trying to predict where the market will go, but seems if 4200 is breached, then 3 bars might happen quick we are going to get a gap down one of these days. My question is how big is your computer screen?? Comparing dow/ttrans sentiment, a/d and volume etc., gets a “little busy” – question is … is there a summary chart vs waiting for your bear-0-meter? if we wait too long, it may be too late to get out.. thanks.

    Reply
    • David
      hopefully you have already raised a bit of cash. I only read the Bear-o-mter once a month. But I did act on its signal as described in the blog. We went to about 16% cash. If the SPX drops below 4200, and that lasts 3 days, we have concrete proof of the lower low taken out. So we will raise more cash. And so on.

      Reply
    • My Online TA course helps answer that question. Basically, Yogi Berra had the answer: it aint over until the fat lady sings. For now, read my next blog, as I have a thought or two there.

      Reply
  • Would not the bearish fundamental picture of the economy ( worse US leadership in its history, inflation, continuation of Ukraine war) trump ( no pun intended) any seasonality chart now?

    Reply

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