The coronavirus epidemic/pandemic is getting the bulk of the blame for the sudden collapse in U.S. equities, and certainly qualifies as one of the few “black swans” seen in modern market history. We do not think the ultimate path of the coronavirus contagion can be analyzed at this point, and medical experts foresee possible outcomes ranging from a serious epidemic to a short burst of illness that fades with the summer weather.
The S&P 500 has rallied 9.2% in the 22 trading days since its June 3rd low, but the move hasn’t (yet) been enough to lift the Major Trend Index out of its negative zone.
The setback from the January 26th market peak represents the ninth correction of 7% or more since 2009, the most ever recorded during a single cyclical bull market.
So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?
Last spring’s “Double Death Cross” in the Dow Transports and Dow Utilities had been partially reversed even before the February low, when the Dow Utilities’ 50-day moving average crossed above its 200-day moving average (thereby issuing a “Golden Cross”). The Dow Transports remain in a bear pattern based on the 50/200-day relationship, but the gap is closing fast.
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).
The safest highs to sell in the stock market are “lonely” new highs. Fortunately, the April 24th bull market high in the S&P 500 was anything but, as that index enjoyed a varied swath of Large Cap, Small Cap, and foreign company (although the DJIA was a mysterious no-show).
The stock market generated enough positive evidence by the second week of February to knock us from our comfortable perch on the fence. We covered a portion of our equity hedges on February 12th, bringing net equity exposure in the Core and Global Funds up to 58% from the 50% level that had prevailed since November.
Extreme market viewpoints get the headlines, but it’s baked into our disciplines that we will (occasionally) be noncommittal.
The Major Trend Index rose 0.03 to a high neutral reading of 1.04 in the week ended November 21st, driven (unsurprisingly) by a healthy gain in the Momentum/Breadth/Divergence work. The Core and Global Funds remained positioned with net equity exposure of about 50%, but we are prepared to cover some equity hedges if this work strengthens in the weeks ahead.
Considering the Major Trend improvement, new bull market highs (Nov. 6th) on the S&P 500, DJIA, and DJ Transports, we present a list of talking points we’d use if forced to make a bullish stock market case.
Ben Bernanke seems at peace with his looming retirement from the Fed. He’s certainly more relaxed and confident, and even looks more youthful. So much so, in fact, that Ben’s last appearance had me thinking of a young Tom Cruise - or more specifically, Cruise’s character Pete Mitchell (“Maverick”) in the 1986 film Top Gun. Remember when Maverick froze up during a dogfight with a Soviet MiG fighter, with his crosshairs trained perfectly on it?
Maverick: “Uh, it’s not good. It doesn’t look good.”
Someday in the faraway future, in the midst of a low-volatility, peace-time bull market, we plan to write a Green Book “Of Special Interest” piece on the investment wisdom of Yogi Berra. “Ninety percent of the game is half mental.” Classic. “You can observe a lot by watching.” Words that I live by.