What happened last week.
What we're watching for next week.
Two bad weeks in a row. What next?
There's no question that two bad weeks in a row has shaken things up. The spike in bond yields has spooked enough of the intrepid dip-buyers to render them, at least temporarily, powerless against the rally-sellers. Details to follow.
How bad were the past two weeks in the market?
In the Grand Scheme, not even close to a "rout" that many pundits are saying it was. An average down week in the market produces a decline of 1.8%. So an average down two weeks produces a decline of 3.6%. These last two weeks took the market down 5%. Worse than average, but let's remember - so far this is just a pullback in a bull market. It could turn into something worse, but we are far away from making that kind of market call.
Chart 1. S&P periodic returns.
There were some notable changes in the periodic return numbers. The 1-month return went even more negative than it was last week. The 3-month return was even worse, and it is now negative as well. And the 12-month return dropped all the way from 16.1% just three weeks ago, all the way down to 8.5%. This is a concern to me, but not yet an immediate call for aggressive selling.
This Week
Last Week
Let's look at the key markers for the market. For those who are new to this weekly report, I track the distance above or below some of the key levels that technicians and chartists obsess over. It has relevance because chart watchers have big followings and what they say about the direction of the market has impact.
The most salient point from this comparison is the fact that the market has now taken out three support levels, or Key Markers as I like to call them. But again, let's put this in context. It usually takes at least 5 violations of support to confirm a new bear market. Don't get ahead of the indicators.
What's particularly disturbing is that we are now within spitting distance of the 200-day moving average. We traded below it on Thursday, but on Friday the dip-buyers came out of the woodwork to save the day, at least for now. There is a large cohort of technical analysts who turn very bearish if we close below the 200-day.
Chart 2. Distance from Key Markers
This Week
Last Week
Chart 3 - chart of the week
The chart below looks bad. Quite bad, in fact. But let's put it in perspective. Even after a bad two weeks, the market is barely in pullback territory (a decline of 5% to 10%) Pullbacks in the market are as normal as pimples on a teenager's face. They happen.
Don't assume that the sharpness of the drop means that the party's over for the bull. The market can rally from here, as it has done many times throughout history. But there's no denying that this chart is ugly.
Chart 4. The Market Dashboard
Look at the drawdown chart in the upper left of the dashboard. The actual number of minus 5.6% isn't a big deal by itself. It's the swiftness of the decline that gets my attention.
Vix and Bollinger Bands, my two proxies for fear and loathing in the market, have begun to spike higher. The Year-over-year change in the S&P 500 is nose down. How low will it go? I only care about one thing: what is the probability that a bear market will arrive sometime in the next 12 months. I have a model for that, and subscribers to my monthly newsletter can track it along with other relevant indicators.
Final Thoughts
This week I'm watching the bond market. Especially the 10-year Treasury bond, which has had a notable spike in rate, with a corresponding drop in price. This is the proximate cause of the shift from risk-on to risk-off for equity investors.
We're stuck in a Catch-22 with bond rates. If the 10-yr Treasury continues to rise it will add fuel to the selloff in equities. But if it backs down, as it did on Friday, and the Fed continues to ratchet up short-term rates, the result could be an inverted yield curve, which would actually be a worse situation for equity investors. Why?
Because an inverted yield curve is among the most reliable indicators of an oncoming economic recession. A recession brings a bear market. That's the real threat today.
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
The market PE has been priced at a 1-2 % 10 year
The market PE is now adjusting to a 3-4 % 10 year
Buy the dip, the panic selling like the last two days always goes too far down and creates real bargains. The economy can do very well with a 4% 10 year. Buy the dip using SSO. Bear markets and recessions do not start with a 4% 10 year. The market will be higher by end of the year.
At 6 to 8 % 10 year start shorting by buying SDS
Howard Randall
I appreciate your views, Howard, but I couldn’t disagree more. You mention real bargains. Like what? I can’t find many. It sounds to me like you are one of the optimistic types who sees a silver lining in every dark cloud. I’m just saying that it might be a good idea to raise a little cash for those bargains you talk about.
Erik,
Thank you for your reply. I do two kinds of investing in the stock market. I try like you to sense when entering a recession and when the expansion from the recession begins. It is easier for me to sense the expansion beginning because it is easy to see when Fed turns on the monetary switch and the congress turns on the fiscal switch at a bottom. Then I buy SSO and keep it for a long ride up. I sold it recently due to a few recession signs around
For entering a recession I look for shortages (inflation) growing into over production resulting in layoffs beginning, and profit growth slowing or stop growing. At the same time the Fed has been tightening fighting inflation. It it hard for me to sense when all this actually turns the market into a real bear. I am often late but I buy SDS when it becomes clear a recession is happening. And hold it for the ride down.
I also look for very short term trades, based on what I call panic or irrational selling.
I discovered over the years that panic selling usually results in a nice very short term bounce. before the drop continues, or things settle down. This can be quite profitable. Usually a few days or weeks. Usually the bounce recovers about 1/2 of the drop. Panic to me has to have very high volume with big drop all of a sudden i.e. capitulation or selling climax. Some examples for me were large drops in WYNN, TSLA and S&P last Wednesday and Thursday.
I keep large amounts of cash on hand to take advantage of these when I sense a panic.
Right now I have no long term holdings because a few recession signs are around but not enough to start recession. So only doing my short term panic trading. Did buy SSO last Thursday in market panic. Will be out very soon.
I do not see enough recession signs between now and early next year that is why I mentioned market probably will be higher early next year. I assume a great Christmas buying frenzy will keep it up….after that will just wait and see if more recession signs show up. I am very cautious now like you.
Like your work very much and appreciate your thoughts on the market.
Howard