Here we are, again, standing at the fortified wall built by the Bears (aka the Rally-Sellers) back on July 26, 2019.
The Bulls (aka the Dip-Buyers) are determined to punch a hole in the wall and release their thundering herd into the breach.
The Bears are ready to push them back, again, and protect their sacred ground.
Origin of the phrase
This phrase appears in Act-III, Scene-I of Shakespeare’s play, Henry V. The scene begins in the middle of the blockade of Harfleur, as King Henry’s army has blown up some French fortifications. He encourages his army to attack the city again by uttering these famous lines: “Once more unto the breach, dear friends, once more; / Or close the wall up with our English dead.”
Meaning
The literal meaning of this phrase is “let us try one more time,” or “try again.” King Henry speaks this phrase to encourage his soldiers, who are launching an attack on through a gap or breach in the walls of Harfleur.
His troops disrupt the gap in the city walls and fight against the defenders. On the other hand, the king urges them to attack again, and demonstrate courage.
Here “breach” means gap, and by “unto” we mean “into.” In common expression, this phrase implies that one goes into the battle again, no matter whether it is a real battle in the battlefield, or a battle in daily life; one should always try again.
Relevance to today's market
Now that I've beaten this metaphor nearly to death, what's the relevance to this juncture in market history? The first and most obvious is that we are now just a stone's throw of breaching the old high of 3025 on the S&P 500. The Bulls could achieve this tomorrow if they have the will to do so. Or it might take a few days or weeks to summon the strength to push through this significant resistance level.
One thing is certain. The Bears will not go quietly into this good night. They will put up a fight and defend the wall at all cost. It's shaping up to be a classic battle of wills between the two camps and we all have a ringside seat.
Other forces at work
There are other forces at work that should be pointed out. First there is the issue of weak corporate earnings. This isn't just my opinion, it's the consensus of professional analysts who do this for a living. The Bulls will tell you that the market can, and will, look past this earnings slowdown (some even call it an earnings recession) and carry on to make much higher highs before the bull is finally put out to pasture.
The Bears will tell you that corporate earnings are slowing for good reasons. The injection of adrenaline from last year's tax cuts have now worn off. Where is the next stimulus going to come from, they will ask.
Valuations are another issue. Bulls say that the market is fairly valued, and they might be right. But the Bears have more data to support their view that valuations are stretched. I tilt towards the Bears on this one.
The flat-to-inverted Treasury yield curve is troublesome at best, and a significant warning of recession at worst. In my opinion, discretion is the better part of valor and I'm raising cash in stages for client accounts.
The Fed
Bulls point out that the Fed has now backed down from its mission to shrink its balance sheet and raise short term interest rates. A dovish Fed is good for the stock market, as the story goes, but what about the mountain of debt and the exploding deficits that have been happening lately?
Is there a limit to how much debt the U.S. can handle before inflation rears its ugly head? If you listen to the Bulls, the answer is no. Deficits don't matter, as Dick Cheney told us during the Bush administration.
This idea of unlimited debt, helicopter money and stimulus-on-demand has caught on among our fearless (feckless?) leaders in Washington. Nobody appears to have the courage to stand up and say "enough already!"
But that's what they should be doing. It feels like we're on a huge gravy train where there is no limit to how much we can spend because we just put everything on Uncle Sam's credit card. And who is on the hook for said credit card? You and me, of course.
If you believe in free and unlimited money, maybe you should take a night class in Macroeconomics. Your company will probably pay for it.
The Breach in pictures
It's always helpful to use pictures to illustrate your point. That's coming next.
Chart 1 is a snapshot of market drawdowns over the last 12 months. It illustrates that we've been here before, like last July and last May. Will the Bulls break through and make new highs this time? I don't know, but they're only a chip shot away.
Chart 1. Drawdowns over the past 12 months
The mean streets of October
Chart 2. The Fall 2018 Market Rout
We have clawed our way back from that low point, to where we are today - about 1% from the previous high.
Final thoughts
Whether you're on the side of the British soldiers bravely charging ahead under the command of Henry V or the French soldiers vigorously defending their heavily fortified wall against a potential breach, this is an interesting battle of will and determination.
One of the questions I've been asking myself lately is this - what happens after the wall is finally breached? There can be no doubt that eventually it will happen, but what comes next? Experienced investors have considered this question and many of them have a good idea about how much upside the market has, and how much downside.
This risk-reward ratio is a cornerstone of investment theory. Surprisingly few retail investors have an answer to my question when I ask them for their assessment. I have my own opinion, of course, but the only opinion that matters is your own.
I believe that there is twice as much downside than upside right now. That doesn't mean I'm out of the market but it does mean that I'm reducing my risk profile and I'm ready to become aggressively defensive as this battle plays out.