Has The Bull Market Ended?

Written by Lance Roberts, Clarity Financial

Why am I giving Option #2 (see below) the most weight? It is the most “bearish” of the three potential outcomes.

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Two days ago in The Market Breaks I discussed market options going forward:

Option 1: The market regains its bullish underpinnings, the correction concludes and the next leg of the current bull market cycle continues. It will not be a straight line higher of course, but the overall trajectory will be a pattern of rising bottoms as upper resistance levels are met and breached. (20%)
Option 2: The market, given the current oversold condition, provides for a reflexive bounce to the 100-dma and fails. This is where the majority of the possible paths open up. (50%)
- The market fails at the 100-dma and then resumes the current path of decline violating the current bullish trend and officially starting the next bear market cycle. (40%)
- The market fails at the 100-dma but maintains support at the 200-dma and begins to build a base of support to move higher. (Option 1 or 3) (20%)
- The market fails at the 100-dma, finds support at the 200-dma, makes another rally attempt higher and then fails again resuming the current bearish path lower. (40%)
Option 3: The market struggles higher to the previous “double top” set in February, retraces back to the 100-dma and then moves higher. (30%)

As I was laying out all of the possible pathways, the majority of the analysis continues to suggest the most likely path currently is lower. The supportive backdrop for asset prices continues to wane:

The ongoing rhetoric from Washington over “trade wars” combined with complete fiscal irresponsibility,
The reduction in support from Central Banks in terms of liquidity support.
The continued insistence of the Fed to hike rates which continues to reduce the “low rate supports higher valuations” argument.
The risk of further contagion from Facebook and other “big data” companies on the technology sector (which comprises roughly 25% of the S&P 500) as global threats of “internet taxes” or other data collection policies are considered.
Revenue growth continues to remain week which is leading to downward revisions in earnings estimates.
Both domestic and international economic growth has peaked.
Inflationary pressures from wage growth remains non-existent while the cost of living continues to rise (this will be exacerbated by Trump’s “trade wars.”)
The yield curve continues to deteriorate and LIBOR has blown out which have typically been early warning sides of bad outcomes.

I can go on (valuations, fundamentals, etc.) but you get the idea. There is little evidence to support the “bullish case” other than “sentiment based” data which can, and does, change very rapidly.

But even with that said – the current ongoing “bull market” that began in 2016 has NOT ended…yet.

With the market 2-standard deviations oversold with a test of the 200-dma in progress, on a short-term basis a “reversion to the mean” HAS occurred.

If, and this is a big “if,” the market can maintain support at the 200-dma, and the upward trending “bullish trend” line, then Option #1 and #3 above remain viable outcomes.

However, if we step out to a “weekly” basis on our analysis, a much more “bearish” backdrop is currently emerging which is why I am giving more weight to Option #2 above.

While even on a longer-term basis a correction back to the bullish trend line that began in 2009 would not negate the current bull market, the destruction of capital back to that level will wipe out almost 2-years of gains.

In other words, while the “bull market” may not have ended, for most investors it will “feel” like it has and the destructive consequences to financial plans will be just as bad.

Note above the gold “vertical” lines which are weekly “sell” signals as we have now. Each occurred with a correction back to the long-term trend or worse.

This is more clearly shown in the WEEKLY chart below.

The confirmed “weekly” sell signals, as we have been discussing over the last few weeks, have been warning of a deeper correction. With the market violating accelerated bullish trend line last week, the lower bullish trend line from 2009 comes into focus. Currently, that trend line resides at 2250 which would equate to the roughly 24% decline from the recent peak shown in the longer-term chart above.

However, there is a “risk” of an even bigger corrective process. I have extrapolated the chart above back to 1990 on a MONTHLY basis to smooth out data volatility. As you will see, when “buy signals” have been triggered at very high levels, last seen in 2016, it was indicative of a late stage “blow off” rally for the market.

With the market currently overextended, overbought, and overvalued against a backdrop of negative underpinnings, the longer-term bearish case should not be ignored.

There are numerous “alarms” going off currently.

It is absolutely possible, these alarms are “false” and could be quickly reversed given the right stimulus. However, there is substantially higher possibility currently that “where there is smoke, there is fire.”