As doubts persist over the green shoots theory, it now looks as though the major averages may embark on the retesting phase.
From Gluskin Sheff economist David Rosenberg: [via clusterstock]
Over the last year, we have seen four other testing phases
and they all failed as the market did break to new lows. Under the proviso that the S&P 500 hit an interim peak of 946 back on June 12 (it’s down over 5% since), here is what the recent historical record tells us to expect (at a minimum,
• The average length of the testing phase is 53 calendar days and 38 business days (versus 45 calendar days and 33 business days for the interim bear market rallies).
• On average, the S&P 500 undergoes a correction of more than 20%.
• The sectors that led during the rally, corrected most during the selloff. This means that financials, consumer discretionary, materials and industrials should underperform in the next few months, while health care, consumer staples, utilities and telecom services should emerge as the leaders.
• Market volatility more than doubles, on average.
• Bonds rally, with the 10-year Treasury note yield down nearly 15 basis points, on average.
• The flight-to-safety during these periods implies that the Canadian dollar declines (on average by 10%), while the trade-weighed U.S. dollar rallies more than 6%.
• Commodity prices decline an average of 15%, again as cyclical trades unwind.
• Corporate spreads (Baa) widen an average of more than 60 basis points; it is very important to be focused on high-quality paper during these market testing periods as high-yield spreads widen, on average, by more than 300 basis points (and keep in mind the vast outperformance, which is typical during bear market rallies).