Bulls have been quick to assure us that this market “bears” no resemblance to the dot-com bust. We agree—but probably for very different reasons. Among them are the conventional breadth measures, which provided little warning of this year’s January peak. And, the initial decline off January’s top has been much broader than during the first phase of the dot-com bust.
In the latest Green Book, we noted that Producer Price Inflation does not usually become a challenge for the stock market until its annual rate breaks above 4.0%. The day that comment was published, the year-over-year gain in the March PPI for Finished Goods spiked to 6.0%, thanks mostly to the well-celebrated COVID-19 anniversary-effect.
Bear markets need a “hook”—some sort of misdirection that keeps the majority hoping. Our work suggests a primary bear market is underway, and we fear oil is this bear’s hook…but the problems run deeper than oil.
As quantitative investors, the disciplines of the numbers trump stories—even our own. But we’re struck that the stories depicted by our Major Trend Index and other market tools over the past two years are entirely logical and sequential. Unfortunately these stories rhyme with those of past market cycles.
Major Trend Index remains decisively negative at 0.72. The “market action” category is the primary culprit behind this bearish tally, but we’ve also seen the Economic category deteriorate in recent months and would expect this trend to continue. This sequence is typical: Market action leads economic trends (and, we would argue, is a major cause of those trends).
While the Major Trend Index, at 0.90, is now in its negative zone, it’s not as if all the traditional bearish bellwethers have lined up in a row (… then again, they never do).
Whether it’s the start of a new bond bear market or not, there’s no need to rush... and why shorting bonds may not be the best idea, even during a bond bear market.
Most costly market decoy in the last six weeks has been unusual (relative) strength of the Dow and S&P 500 indexes. Resilience in blue chips is characteristic of the early and middle phases of a bear market, but recent blue chip performance has been so stellar (again, in a relative sense) that most investors curled up comfortably in the “correction” camp…while small caps, cyclicals and virtually all foreign markets were screaming “BEAR!”