MacroView: March Was A Correction, Bear Market Still Lurks


As we have been discussing, this past week, the S&P 500 index set an all-time high. Importantly, the breakout to all-time highs confirms the 35% decline in March was only a correction and not a bear market. The implications are important as the change of definition suggests a bear market still lurks for the full-market cycle to complete.

“The S&P 500 set a new record high this week for the first time since Feb. 19, surging an eye-popping 51% from its March 23 closing low of 2,237 to a closing high of 3,389 on Tuesday. This represents the shortest bear market and third fastest bear-market recovery ever.” – Sam Ro

To understand why March was not a “bear market,” we have to break the analysis into several key components:

  1. What defines a bull and bear market?
  2. What exactly is a “full-market cycle?”
  3. How deep will a “bear market” contract?

Bear Market Definition Is Arbitrary

Let me start with an insightful note from Sentiment Trader:

“The S&P 500 finally did what it’s been trying to do for days now, and crept to a new high.

This ended its shortest bear market in history. Using the completely arbitrary definition of a 20% decline from a multi-year high, it has taken the index only 110 days to cycle to a fresh high. That’s several months faster than the other fastest recoveries in 1967 and 1982.”

Such was a point I discussed on May 20th in “Just A Big Correction:”

“Price is nothing more than a reflection of the ‘psychology’ of market participants. A potential mistake in evaluating ‘bull’ or ‘bear’ markets is using a ‘20% advance or decline’ to distinguish between them.”

As Sentiment Trader notes, the 20% rule is arbitrary. The question is, after a decade-long bull market, which stretched prices to extremes above long-term trends, is the measure still valid?

What Defines A Bear Market

To answer that question, let’s clarify the premise.

  • A bull market is when the price of the market is trending higher over a long-term period.
  • A bear market is when the previous advance breaks, and prices begin to trend lower.

The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and useful.

The distinction is essential.

  • “Corrections” generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
  • “Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

Using monthly closing data, the “correction” in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trendline holds.

I discussed this concept in the video below.

What Is A Full-Market Cycle

One of the most important concepts to grasp is that of the “full market cycle.”

It is not surprising after an 11-year, liquidity-fueled bull market, investors have begun to make the assumption the current trend will last indefinitely. However, throughout history, bull market cycles only make up on one-half of the “full market” cycle. During every “bull market” cycle, the market builds up excesses, which must ultimately revert through a market correction. In other words, as Sir Issac Newton discovered:

“What goes up, must come down.”

The chart below shows the full market cycles over time. Since the current “full market” cycle is not yet complete, we can only guess at the ending valuation level.

Over the last two bear market cycles, ending valuations were higher than the previous “bear market cycle” lows. Given changes to market environments over time, we can reasonably assume the next valuation low will be closer to the long-term CAPE average of 16.7x earnings. However, given markets are currently pushing 30x trailing earnings, completion of the mean reversion process will not be mild.

With the current trailing valuations at one of the greatest deviations from the long-term average, historically, “reversions to the mean” are tenacious.

How Big Of A Decline To Trigger A Bear Market

So, if a 35% correction in March wasn’t big enough to be considered a “bear market,” how deep of a decline will be needed?

There are really two issues with that question.

  1. How deep of a correction is needed to violate the bullish trendline from the 2009 lows, and
  2. Where will the bottom of such a bear market likely be to reset valuations?

If we put corrections into a bit of perspective, it becomes easier to visualize that damage that could, and most likely will, eventually occur.

10% Correction

A correction of 10% is entirely reasonable for a market in any given year. However, investors have become so complacent in the market, a 10% correction will “feel” much worse. However, such a decline would NOT trigger a violation of the bullish trend and would only set the market back to October 2019.

20% Correction

A 20% correction from the recent highs is a bit more serious. While not as serious as the drop in March 2020, it will be emotionally distressing nonetheless. Try and remember how you felt during the March decline. This is where investors begin to make emotionally driven investment mistakes.

Currently, a 20% decline would NOT trigger a “bear market.” However, it would reset your portfolio back to where it was in December 2017, wiping out all the gains of the past two years. While not the end of the world, your retirement is now set back by almost 4 years as you will have to make up the 30% gain from 2019 plus two more years of lost growth.

30% Correction

Given the current deviation of the market from the 2009 bullish trendline, it will require nearly a 30% correction to break the previous trend. A decline of this magnitude takes you back to the beginning of 2017. While losing just 3 years of growth may not seem that bad, assuming you need 6% a year to reach your retirement goal, you will need almost 9 years to recover. (Remember, it takes 42.9% to rescue the 30% loss, plus you have to make up the 6% annual gains you needed, but didn’t accrue, during each year of recovering the previous damage.)

However, a 30% correction has not yet reset valuations back to levels which typically denote the end of a “bear market cycle.” Assuming a 30% decline from current levels would value the market at roughly 26x earnings. That is still a good bit from the 15x level we discussed.

40% Correction

Okay, this is starting to get ugly. A 40% decline takes the market back to 2014 levels and has now wiped out 6 years of your gains. While a 40% decline requires a 66.7% recovery to break even (10 years at 6%), the lost accrual years are going to make it very difficult to meet retirement goals.

At this juncture, valuations have declined to 21x. The expected bear market “mean reversion” is now in full swing.

50% Correction

I know, I know… this can’t happen. (It just happened twice the century already.)

A drop of this magnitude will reset the market back to the market highs of 2000 and 2007. For individuals who were close to retirement in 2000, their portfolio, on an inflation-adjusted basis, will have been completely reset.

At this point, retiring is no longer an option for most. However, the good news, if you want to call it that, is the market is now trading at 18x earnings and beginning to align with expected bear market cycle lows.

60% Correction

Given the amount of debt, leverage, and overvaluation in the markets currently, a 60% correction is not entirely out of the question. Corrections of such a magnitude would reset portfolios back to 1999 levels. The devastation is more than investors can currently imagine, and retirement goals would disappear entirely.

However, market valuations have now retraced back to 15x earnings. Such a level is consistent with the beginning of a long-term secular bull market cycle where forward returns rise significantly for investors.

Lost And Found

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. (No, March was not it.) After a decade-long bull-market cycle, fueled by central bank liquidity, it is understandable why mainstream analysis believed the markets could only go higher. What was always a concern to us was the rather cavalier attitude they took about the risk.

“Sure, a correction will eventually come, but that is just part of the deal.”

What gets lost during bull cycles, and is always found in the most brutal of fashions, is the devastation caused to financial wealth during a “mean reversion” process.

Such is the story told by the S&P 500 inflation-adjusted total return index. The chart shows all of the measurement lines for all the previous bull and bear markets. It also denotes the number of years required to get back to even.

What you should notice is that in many cases, bear markets wiped out substantially all of the previous bull market advances.

Many signs are suggesting the current Wycoff cycle has entered into its fourth, and final stage.

Bear market cycles rarely end in a month. While there is a lot of “hope” the Fed’s flood of liquidity can arrest the market decline, there is still a tremendous amount of economic damage to contend with over the months to come.

In the end, it does not matter IF you are “bullish” or “bearish.” What matters, in terms of achieving long-term investment success, is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

None of this will happen, you say?

Maybe? I certainly hope not.

But are you willing to bet your retirement on it?

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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This stock-market indicator produced a ‘timely’ buy signal in March, and now its message is: Sell


Tensions between the U.S. and China have stepped up a notch but U.S. stocks are also on the up at the start of the week.

After Washington imposed sanctions on leading Hong Kong officials, including Beijing-appointed Chief Executive Carrie Lam over the weekend, China responded on Monday with sanctions of its own on 11 Americans. Senators Ted Cruz and Marco Rubio were among those hit by Beijing’s unspecified sanctions. However, U.S. stock futures pointed higher ahead of the open, after President Donald Trump extended jobless benefits and deferred payroll tax over the weekend.

In our call of the day, Morgan Stanley said its combined market timing indicator (CMTI) was now giving a sell signal for the first time since January 2018.

The indicator, which factors in equity valuations, fundamentals and risk, gave a “timely buy signal” in early March and remained in buy territory until mid-June, the U.S. investment bank’s strategists said. Improved earnings revisions and mutual fund flows turning “less negative” in the past two weeks has led to the CMTI now producing a sell signal, the strategists said.

“With global markets appearing tactically stretched, a sell signal on our market timing indicator would certainly add to the notion that upside on markets may be capped near term,” they said in a note. Historically, after a sell signal, European stocks have fallen 3% over the subsequent six months.

The bank’s equity strategist also said the U.S. dollar was the most oversold in 40 years, noting that its macro strategists have turned tactically neutral on the currency from a bearish stance last week. The DXY
DXY,
+0.05%

index was trading 3.6 standard deviations below its twelvemonth average as of Friday, the most oversold level since 1978, they said.

The chart

Goldman Sachs economists now expect at least one coronavirus vaccine to be approved later this year, leading to a boost to U.S. economic growth in the first half of 2021.

The markets

After closing higher on Friday to book a 3.8% weekly gain — the biggest since June 5 — the Dow Jones Industrial Average
DJIA,
+0.88%

was 0.8%, or 224 points, in early trading. The S&P 500 edged 0.1% lower, while the Nasdaq was 0.8% lower. European stocks rose in early trading after Trump’s stimulus moves over the weekend, and Asian markets were mostly higher overnight.

The buzz

Trump signed four executive orders over the weekend, including one that extends federal unemployment benefits at a rate of $400 a week from the expired level of $600 a week, and another that temporarily cuts payroll taxes.

Simon Property Group, the biggest mall owner in the U.S., has been in talks with Amazon.com over plans to turn some of its anchor department store spaces into Amazon fulfillment centers, The Wall Street Journal reported.

Shares of technology and pharmaceutical company Eastman Kodak plummeted 47% in premarket trading, after reports the U.S. International Development Finance Corp. is withholding its planned $765 million loan.

Hong Kong police arrested media tycoon and pro-democracy activist Jimmy Lai and raided the publisher’s headquarters on Monday, in the most high-profile use yet of the new national security law imposed by Beijing.

Saudi Aramco’s
2222,
-0.30%

net income plunged by 50% in the first half of the year, according to figures published on Sunday, highlighting the impact of the coronavirus pandemic on one of the world’s biggest oil producers. Profits plunged to $23.2 billion, half of last year’s $46.9 billion in the same period.

Warren Buffett’s Berkshire Hathaway reported an 87% jump in profit in the second quarter as the paper value of its portfolio rose with the stock market.

Random read

With a shot for the ages, golfer Collin Morikawa wins his first major at the PGA Championship.

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His fund is up 60% this year after he called the March bottom — now, he sees potential for a ‘severe collapse’


Michael Gayed says he’s not trying to scare anyone, but you wouldn’t know it from his latest take.

Back in May, the fund manager warned of the possibility of two crashes: first bonds, then stocks. With his ATAC Rotation Fund
ATACX,
-0.06%

continuing to deliver the goods — it’s up almost 60% so far this year to rank among the best in its category — he’s still waving the yellow flag.

“It is a wild time in the markets,” said Gayed, who also runs the Lead-Lag Report. “Despite a crippling global pandemic, where the U.S. is failing miserably at a response with daily record after daily record cases being broken, and a U.S. economy that seems to be teetering on the edge of yet another Fed Monetary Policy response, stock markets have not seemed to blink when recovering.”

Yes, 2020 is certainly unique, considering, as he pointed out, that stocks crashed by more than 30% at one point, only to rally almost 50% from there. All that in less than eight months.

After having been bullish near the March bottom, Gayed now says that leading market indicators could very well be signalling a “severe collapse” in stocks.

The yield on the 10-year Treasury
TMUBMUSD10Y,
0.534%

, for instance, is looking at around 0.5%, while the yield on the 30-year
TMUBMUSD30Y,
1.197%

is under 1.5%., which he says is setting up for a potential reversion to the mean.

“It’s often said that bond-market investors are the smart money and tend to lead the stock market in anticipating economic activity,” Gayed explained. “The fact that yields have not risen meaningfully (quite the opposite) in the very short term is quite troubling as historically such short-term movement has tended to precede major periods of equity stress.”

Add to that, action in the utilities sector, which is seen as a recession-proof, safe-haven investment, could spell trouble for the broader market, he said, pointing to this chart showing how the defensive investments have managed to outperform the S&P 500 in the past month:

“That should raise some red flags as an equity investor, and frankly this alone gives me pause,” he said. “A similar movement occurred right before the COVID crash this year.”

Lastly, complacency could become a serious issue, with Gayed pointing to several factors, including the wild recent trading antics of Robinhood traders.

“The S&P 500 is now positive in a year that is expecting economic catastrophe. The Nasdaq is flying. And no one seems to think the market can ever go down,” he wrote in a recent note. “It sure feels like everyone forgot that investing in stocks carries risk — and the conditions are changing so rapidly right now, it looks like risk might come back into full force.”

No big crash Monday, with the Dow Jones Industrial Average
DJIA,
+0.43%

, S&P 500
SPX,
+0.76%

and Nasdaq Composite
COMP,
+1.48%

all starting off the week in the green.



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Return of March panic is the biggest risk to the S&P 500 right now. Here’s the trigger


Big highs and big lows. Our call of the day is all about the triggers for the S&P 500
SPX,
+0.45%

in weeks to come.

“As we look ahead, the biggest risk to markets is the return of panic, as we saw into the March 23 bottom where money was simply trying to get out. The only way panic at that magnitude returns is if the % positive number of cases continues to trend higher off the lows, which is very possible into the fall,” writes Adam Kobeissi, founder and editor in chief of the Kobeissi Letter, an investment newsletter.

Kobeissi said that percentage of U.S. cases is currently hovering at 6%, from a low of 4.5%, according to Johns Hopkins University. If that figure starts inching higher, he expects the S&P will start to pull back. Note, U.S. cases topped 50,000 for the first time on Wednesday.

Over the short-to-medium term, he said the path of least resistance for stocks appears to be higher, with the technical picture suggesting a move to 3,150, which marks the high from June 15 to June 23, and a break above that would send the index to 3,275.

But from there, the index could pull back to a low of around 3,000 that was seen this week, partly due to simmering COVID-19 concerns. “It is important to note that ‘higher lows’ have formed SIX times since March 23, and the 2965-3000 support range marks the last two ‘higher lows.’ A break below 2,965 opens for significant downside, and we would expect to see 2,730 within a few trading sessions,” Kobeissi said.

The chart

Technology continues to swing its weight, as this Goldman Sachs chart shows:

“At the peak of the tech bubble, information technology never generated more than 14% of the S&P 500’s earnings. The profit contribution from info tech increased over the past few years and the sector now accounts for 21% of S&P 500 net income,” says U.S. equity strategist David Kostin and a team in a note.

Random reads

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Protesters with pitchforks set their sights on the New York Hamptons’s wealthiest.

Harvard graduate says she was fired over a viral TikTok video.

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The number of Americans skipping mortgage payments drops for the first time since March and delaying graduation could have long-term financial consequences


Congrats on getting through Monday, Marketwatchers! Here’s today’s top stories:

Personal Finance
The number of Americans skipping mortgage payments drops for the first time since March

A smaller share of home loans are now in forbearance, but that could change if government assistance dries up.

As coronavirus cases surge, California is the latest state to require face masks — why other states may want to follow its lead

A recent study looked at the effect of orders requiring face masks to prevent the spread of coronavirus.

Thousands of restaurants reopen and riders return to subways as New York City enters Phase 2

New York state has gone from the deadly U.S. epicenter of the pandemic to a state with enviable statistics.

How America perfected the ‘art of demonizing black men’

George Floyd’s death and other such incidents represent a moment that Americans should not just walk away from.

5 critical mistakes that created the biggest public-health crisis in a generation

100 days of the COVID-19 pandemic: Don’t wear a mask! Everyone should wear masks!

‘We are filling the stockpile in anticipation of a possible problem in the fall’: Government preparing for coronavirus second wave

Coronavirus cases in the U.S. have surpassed 2.2 million, and there are record daily highs in half-a-dozen states.

A dilemma facing college students during the pandemic: Delaying graduation could have long-term financial consequences

New survey data suggest that the pandemic is making it harder for low-income students to graduate

Your blood type may determine your odds of contracting the coronavirus, study finds

People with Type A blood were ‘associated with’ a 45% ‘higher risk of acquiring COVID-19’ compared to people with other blood types, a study published in the New England Journal of Medicine found.

Existing-home sales drop in May, but signs point to a big rebound in the real-estate market this summer

‘The leading indicators for home sales are soaring.’

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SEC’s regulatory work could be hamstrung by leadership change with Clayton set to exit, analyst says

The Securities and Exchange Commission is likely to be hampered by the Trump administration’s move to nominate SEC Chairman Jay Clayton for U.S. attorney for the Southern District of New York, according to one analyst.

Sarah Sanders says Mick Mulvaney once called John Bolton a ‘self-righteous, self-centered son of a b—-’

The former White House press secretary rips Bolton in her upcoming memoir. Bolton’s own tell-all hits Tuesday.

He’s 34 years old and owns $550 million worth of Apple — so why is he hoping the stock gets hammered, again?

“I learned from dad when I was 13. He showed me a chart comparing real estate to stock market returns, and it was really easy decision. I’ve been doing it ever since,” he said. “But it’s hard for me to find things I like and find attractive.”

Here’s the secret sauce to handle the stock market’s election and virus fears

Proper risk management — of which there are at least 12 examples — should be high on investors’ list.



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