The Bulls vs. Bears Death Match Intensifies
A few weeks ago, I wrote an article describing the current state of the market as a death match between two camps – the bulls and the bears. Or, as I like to call them, the Dip-buyers and the Rally-sellers. Today I’m going to lay out an argument that this bulls bears death match is far from over, but the Rally-sellers appear to be gaining the upper hand.
Exhibit A – The Dashboard
What we have here is a market that is down, but not out. In fact, the odds of this market making a new high before it rolls over for good is ~57%. That’s why my money is still on the Dip-buyers, at least for now.
Let’s go through the chart package and award points to each camp.
Drawdowns: 1 point for the Rally-sellers.
The market has now spent 65 trading days in correction territory. While it’s only down about 8.2% from the last high, it’s lingering in no-man’s land. 65 days is the 29th longest stretch for a correction, out of 17,200 trading days since 1950. That puts this correction in the top 0.1% of corrections in terms of duration.
Volatility: 1 point for the Dip-buyers.
After spiking in late January-early February, volatility as measured by the VIX index and the Bollinger Bands has settled down considerably. But it has not returned to the record lows we saw in 2017.
Momentum: 1 point for the Rally-sellers.
Momentum, as measured by the net number of up days versus down days over rolling 1-month periods, has softened, to put it politely. Low readings in January, February, and late March are a sign that the Dip-buyers have not been able to put together a serial run of up days since January.
When we look at the condition of the short- and long-term moving averages, we see further evidence of a market that is struggling to keep its head above water.
Year-over-Year Percent Change in the Index: 1 point for the Rally-sellers.
After a great 2017, which brought us 20% year-over-year gains, this indicator has been cut in half. We are now just 10% above the level from 12 months ago. If you are thinking “10% is pretty darn good!” I don’t dispute that. But we’re looking at trends here, and the trend has weakened by 50%.
The Slope of the market
One of the things I pay attention to is the ever-changing slope of the market. The slope reveals, perhaps more than any other single indicator, which regime is in charge and how motivated they are.
Let’s start with the long-term slope of the market since 2000 – a period that includes two nasty bear markets, the Obama rally, and the Trump rally.
Exhibit B.
This chart reveals that the slope of the market since 2000 is 0.2575. Not a very strong performance, given the two bear markets. But positive nonetheless.
Exhibit C.
This is the slope of the market during 2017, a very strong year for equities. The slope was 1.4574, which is nearly six times as strong as the long-term slope. In 2017 the Dip-buyers were firmly in control, and anyone who dared to challenge them got hammered.
Exhibit D.
At last we come to the 2018 market. Things are not looking that good for the Dip-buyers, but they aren’t about to turn tail and run anytime soon. They are still very much in the fight.
As you can see, the slope for 2018 is decidedly negative, at minus -2.0447. This is a very narrow time frame, but I think it’s useful for visualizing just how much the regime has changed from 2017 to 2018.
Final thoughts
As I’ve said before, being on the ropes is not the same as being down for the count. How many times did we see Muhammad Ali lean back against the ropes in his champion fights, and still end up the winner? Maybe the Dip-buyers are just playing Rope-a-Dope with the Rally-sellers.
Only time will tell.
If you would like to read more about the methods I use to evaluate market trends, go here and browse around.
If you want to read another article on this same subject, go here.