What happened last week.
What we're watching for
next week.
There is a showdown coming for this market
The market is setting up for a classic, bare-knuckle brawl between the bulls and the bears. Or, as I like to call them, the dip-buyers and the rally-sellers. These two tribes rarely face a confrontation as fraught as what we're seeing today.
Last year the rally sellers beat the dip buyers, but not by much. 2018 was just a scrimmage compared to what's in store for us in 2019. Ahead is the nearly existential question: can the Fed, the Congress, and the Administration work together to find a way forward for the economy, and by extension the stock market?
That seems like a tall order to me. There is friction among all constituents and the art of compromise seems to have gone by the wayside. That leaves us with the question of whether or not the economy can maintain forward momentum in spite of the conflicting agendas of those who have the power to set policy.
The way I see it is that there is less room for economic growth and stock market gains than there is room for stagnation or worse. Put another way, if you were to ask me how likely it would be that the economy will pick up the pace of growth and spur a new major rally in the stock market, I would have to say it would be possible, but not very likely.
If you ask me about the likelihood of a sideways, grinding economy and stock market I would say that's fairly likely. And if you ask me about the likelihood of a recession, accompanied by a bear market, I would have to say that it's not just possible, but very likely.
Chart 1. S&P periodic returns.
Another positive week for the S&P. That makes 8 in a row. The market is up 11.4% year-to-date and it's only February 22nd. Things are looking pretty good right now, wouldn't you say?
Chart 2. Distance from Key Markers
The next chart reinforces what we saw previously - a market that is rallying strongly and shows no signs of stopping.
Chart 3 - chart of the week
This chart comes from Jill Mislinski and Doug Short from AdvisorPerspectives. I chose this chart because it closely matches my own recession warning model. The risk of recession is now above 50% but only slightly. This indicator could bounce above and below the zero line for months.
Final Thoughts
We've had a nice rally in the market. But I'm not yet convinced that we will make a new high before we finally succumb to the next bear market.
I could be wrong, of course, but I follow my models and they are showing increasing risk and diminishing prospects for a new high.
For a full analysis of the probability of a bear market or a new recession, see my Monthly Intelligence Report.
As always, if you like what you see, or have suggestions for improving this recap, leave a comment below, or email me at info@zeninvestor.org
Eric,
Saw this article https://seekingalpha.com/article/4151734-stocks-vs-bonds-answer-might-easier-think on Seeking Alpha public site and found it compelling. Thought you might like to see it and comment.
darryl