Last week, I discussed the potential for a “Santa Claus” rally as we head into the end of the year based on both the more extreme levels of short-term oversold conditions coupled with the statistical tendencies going back to 1990. To wit:
“IF ‘Santa’ is going to visit ‘Broad & Wall’ this year, it will most likely occur between the 10th through the 17th trading days of the month. Such would equate to Friday, December 14th through Wednesday, December 26th.
While the current oversold condition is supportive of a rally over the next couple of weeks, that does not mean this is a ‘stocking’ you should stuff everything into. Given the macro-backdrop, any rally may be short-lived going into 2019 unless some of the pressure from weaker economic data, Brexit, Washington politics, “trade wars”, balance sheet reductions, and softer-earnings growth is relieved.”
Well, I was clearly wrong.
After being good all year, all investors got last week was a “big lump of coal.”
The relief that was needed to allow the “bulls” to take charge, at least temporarily, failed to materialize.
Trump doubled down on his “trade war” rhetoric.
He picked a fight to “shut down” the Government over border wall funding.
Economic data continued to weaken this past week in some of the most important areas
The Fed said they will continue their balance sheet reductions
They are also on track to continue hiking rates regardless of financial market conditions
Fed Ex’s global outlook noted marked deterioration in the past quarter.
Geopolitical stresses continue to rise from France, to Russia, and China.
Chinese economic growth has weakened markedly which is an immediate feedback into the U.S. economy.
This past week was one of the worst December performances on record.
How about some Christmas cheer?
The market has not been this oversold at any point in the last 20-years, on a monthly basis, as shown in the chart below.
The other bit of good cheer for the bulls is that unlike the previous two starts to more protracted bear markets, the long-term monthly uptrend has not been broken, yet. As noted above, the market is sitting on that uptrend support line which began in 2009.
At this point, the risk/reward for traders is clearly sided to the bulls…for now.
Unfortunately, given that we have now triggered a monthly sell signal for only the 4th time in 20-years the longer-term outlook remains with the bears. As you will notice in both of the previous “bear” markets, oversold conditions reversed even as the bear market continued.
Here is another way to look at it.
When I look at price indicators, I like for an individual signal to be confirmed by other indicators which are measuring different aspects of the market. This helps reduce the number of false signals a single indicator can provide over time. The chart below combines several measures of the market into one monthly chart to look for periods of uniform confirmation.
There are two important points to take away from this chart:
With all of the signals now confirming a “bear” market is likely in progress, such does not mean there can not be substantial counter-trend rallies to sell into, and;
If this is indeed the beginning of a “bear” market, there is likely substantially more downside to go before a lasting bottom is formed and valuations are “mean reverted.”
But that is just my take.
Tim Hayes of Ned Davis Research recently suggested a cut to the recommended equity allocation for a second time since October. Down by 10 percentage points to 40 percent, the assigned proportion is the lowest since 2008 and has “reached the downside extreme of what we would ever recommend for equity allocation.”
The downgrade comes as the MSCI World All-Country Index heads for its worst quarter in seven years. Stocks may not find a floor before March because the research firm’s models on market trends and breadth keep deteriorating and extreme fear has yet to emerge.
“Advising maximum defensive positioning whatever your constraints and risk tolerance, we would view any rallying as an opportunity to lighten up ahead of increasing volatility in 2019. We have not seen the levels of panic, volatility, and downside volume needed to consider the market sufficiently washed out for the start of a bottoming process.
Market conditions will get worse before they get better.’”
Greg Jensen, co-chief investment officer of Bridgewater Associates, the biggest hedge fund in the world, recently stated:
“The biggest theme developing is that you are going to have significantly weaker growth, near recession-level growth in 2019, based on our measures, and the markets are generally not pricing that in.
Although the movement has been in that direction, the degree of [ the market’s decline] is still small relative to what we are seeing in terms of the shifts in likely economic conditions. 2019 will be a year of weaker growth and central banks struggling to move from their current tightening stance to easing and finding it difficult to ease because they have very little ammunition to ease.”
All of this should sound very familiar if you have been reading our work over the past year.
“Less than three months ago there was a great lament about how employers couldn’t fill job positions because of a shortage of job seekers. This week FedEx announced voluntary employee buyouts, presumably to reduce payroll. In view of this, I offer you the Swenlin Basic Economic Theory:
Things get better and better, until they are as good as they’re going to get. Then they get worse and worse, until they are as bad as they’re going to get. Repeat cycle.
If you have a kid headed for college to study economics, think how much money I just saved you. Seriously though, the BPI (Bullish Percent Index), which is the percentage of S&P 500 stocks on technical BUY signals, shows that conditions are worse than they have been for almost 10 years. What may offer some hope to the bulls is that the low readings in 2011 and 2015/16 set the market up for major rallies. The problem is that those setups occurred during a secular bull market, and I think a secular bear market has begun. The two periods I have bracketed between 2000 and 2009 are probably more typical of what we are going to experience.”
“Based upon that, it’s probably going to get worse.”
More and more evidence continues to mount that a bear market has begun.
Again, as I stated above, it doesn’t mean we can’t have some extremely strong reflexive rallies along the way. When they do occur, the media will presume the bull market has returned and encourage you to jump in.
There will be a time when the market trends have resumed a positive, healthy, trend.
Currently, that is not the case.
After have been stopped out of Emerging, International, Small Caps and Mid Caps earlier this year. We were stopped out of some of our core positions last week as well.
With a lot of cash on hand, and our bond portfolio (which we have consistently recommended buying bonds above 3% despite all the rhetoric about the end of the bond bull market) performing well, there is little for us to do right now except wait.
In the meantime, all of us at Real Investment Advice and RIA Pro want to wish you and your families a very Merry Christmas and a happy and safe New Year.