posted on 21 February 2016
by Lance Roberts, Clarity Financial
As opposed to last week, the market action during the first half of this past week was much more positive. What was interesting, was despite the absolute drubbing that investors have taken since the beginning of the year, the three-day advance saw a surge of "bulls" running into the fray "claiming victory" over the bears. This is hardly the case.
In last week's missives, I discussed the potential for an oversold, short-covering bounce which was to be used to further rebalance portfolios and reduce equity risk. The target zone was 1940 to allow for the completion of the "risk reduction" process.
I have updated the chart above, below. As discussed last week, the "bulls" did come stampeding back into the market as expected which pushed the markets back into extreme overbought territory.
Importantly, note that in the last week the spread between the 200 and 400-dma collapsed this past week from a near 5-point spread to just a little more than 1-point at Friday's close. This signal will cross next week. Whether or not the "crossing" is the signal of a new cyclical bear market is yet to be seen, but historically it has almost always been the case.
TOO MANY BEARS?
While there are many indicators suggesting more extreme levels of bearishness, which are often the catalysts for at least a short-term push higher in the markets, this has not always been the case. As shown in the chart below, courtesy of Ed Yardeni Research, the bull/bear ratio is now under 1.0 which suggest rather extreme levels of bearishness. Time for the bear market to be over, right? Not so fast.
As you will notice, while in many cases excess bearishness led to rallies during cyclically trending bull markets, during more "bearish" markets, bearishness tended to remain bearish and rallies led to deeper corrections.
However, while bearish sentiment generally provides fuel for shorter term rallies, it is ultimately the underlying fundamentals that provide the sustainability to market direction. As Yardeni also point out, markets tend to follow fundamental underpinnings very closely. If the current downturn in fundamentals continues to build momentum, the markets could be very early in their corrective process.
As I have noted before, bearishness tends to remain a constant companion during cyclical bear markets. As investors are repeatedly molested by ripping bull rallies, and plunging declines, such action keeps markets in oversold territory until the "beatings have improved overall morale."
Yes, this time "could be different."
The Fed could use negative rates, launch another round of QE, or even a combination of the two which would once again push markets higher. However, until such a "Unicorn" appears, we must live in the land of reality and deal with "what is."
OECD - IT ISN'T MENTAL THING
Beginning in 2011, I began tracking the Federal Reserve's quarterly economic assessments released after each of the policy-making meetings. Besides the fact they are the absolute worst economic forecasters ever, it was provided to give a sense of transparency into the Fed's actions.
However, following the January policy meeting, there was a very material issue, "no economic outlook." From the NYT:
HedgeEye nailed it with this cartoon:
Apparently, if we want an assessment of the domestic and global economy, we need to visit Switzerland and speak with William White, Chairman of the OECD and former Chief Economist for the Bank of International Settlements, to wit:
And Mr White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again.
And then there is this:
As I have repeatedly discussed in this missive, despite the constant gum-flapping of "nattering nabobs" the economy is no-where near recession, this is only due to the skewing of the data by seasonal adjustments in the short-term. Over the next year as current economic data is negatively revised, the true weakness in the economy will be exposed.
But if you don't believe me, how about a raging bull now turned economic "bear." Joe LaVorgna, in a recent interview, stunned CNBC hosts with a smattering of the truth about what is currently happening beneath the bullish headlines.
Or, how about the same from real estate investing legend Sam Zell, who built the multi-billion dollar empire of Equity Office Properties and sold just prior to the financial crisis.
Okay, see, its not just me. While I have been quite clear that the economic data simply does not support the bullish meme, the trend of prices, deterioration in internal measures and decline in momentum, all suggest that the market has figured out the "game is afoot."
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