The Market Does Not Get the Benefit of the Doubt

For a long list of reasons (see below) I believe we have entered a bear market and similar to late 2007 the market for now does not get the benefit of the doubt until the bear question gets proven right or wrong. For anyone new I believe I made a good call in this regard in late 2007. Last summer when the SPX breached its 200 DMA I took a little defensive action but I don’t think I ever proclaimed bear market as I am now.

In no particular order the first issue is that the SPX is below its 200 DMA, actually a long way below. The 200 DMA is now at 1286. Later in the post I was going to list one reason I might be wrong is that the 200 DMA is still moving up except when I just went to Stockcharts.com to get the 1286 number I saw that the 200 DMA is headed lower ever so slightly. If I am seeing that incorrectly then it becomes a risk factor to my call.

The SPX is also a few days from having its 50 DMA cross below its 200 DMA and in certain cycles (in a let the chips fall where they may sort of way) this type of crossover can be more effective than a simple 200 DMA breach. This time it looks like it is turning out to be the simple breach that is more effective. Both indicate unhealthy demand for equities and if demand is unhealthy then that is a reason to be defensive.

As reader Andrew commented a week or two ago the 2% rule has been invoked. As a reminder an average 2% (or there abouts) decline three months in a row is evidence of a slow rollover which is consistent with how bear markets start.

When the GDP printed recently I said that I believe we are now headed into a recession based primarily two quarters in a row below 2% on GDP. ISM was no great shakes either. A common argument on TV about why we are not headed into a recession is that corporate profitability is very healthy. I think lousy GDP trumps healthy corporate profitability (if you even believe profitability is now healthy). If there is a recession soon we should expect stocks to go down first which I think is happening now. Also a recession so soon after the last one is supported by the idea of a balance sheet recession.

Slightly bigger picture all of the policies and programs by the Fed, Treasury and Administration proved out to either not work or be far less effective than anyone thought. When I say anyone I mean people constructing and implementing the policies and programs. And now some in the market wonder what the Fed will try next. That is not good.

The Fed yesterday set an expectation that they will need to keep short rates where they are until mid 2013. All of sudden we look more like Japan than we did a few days ago. By the way, three dissents at the Fed this meeting? Someone referred to that as a mutiny. For more on the Fed read this from Bruce Krasting but fair warning it is a bleak post.

Housing and jobs data still stink. The ten year treasury yields 2.18%. The US’ debt was downgraded. All of the grownups in the room in Washington appear to be in way over their heads on how to fix this or more correctly on how to let things fix themselves. I will again say that the worst crisis in 80 years should take a long time to fix itself, unfortunately. This little nugget from Bespoke isn’t too encouraging.

A little more anecdotal, the largest single day moves in either direction occur during bear markets. The decline on Monday was 6.66% . The rally yesterday was 4.74%. Early in the day I decided that if we got to up 4% for SPX on the day I would sell something (specifically a materials sector ETF for large accounts). We got there with a few minutes left in the day. Amusingly I placed the order with 5:12 left in the day and it was too soon. The idea here was that with a 2% rally for the day the likelihood of a lot of buying power remaining is pretty high but less so with a 4%, or more, rally.

There are plenty of reasons as to why this call could be wrong including just being wrong but based on what I know of market history and what I think is going on now this is the conclusion I draw. The consequence for being wrong will be that we lag, not miss, a big rally.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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