The Deep Dive
Trends vs. Bear Market History
However, what I really want to take a deeper dive into is this idea of trends vs. bear market history. Something I’ve heard a lot recently is that the technicals are overwhelmingly bullish, but the “macro” or fundamentals are bearish.
Now, regular readers know that I give no quarter to traditional fundamentals or economic forecasts and I frankly don’t agree that the technical “trends” are much better than neutral.
Nevertheless, I do believe in using history as a guide, and while every bear market is unique, these drawdowns and recoveries have patterns that tend to repeat, whether it be in returns, market behavior, or intermarket relationships. We’ll see just how unique this period is, and what that may mean for the future.
Specifically, this report will review:
Our past report and what has changed since
The S&P 500’s trading range and comparable bear market ranges
Just how weak this recovery would be if October was the low
The relationship between interest rates and bear market bottoms
Since the last report
The “downtrend line that everybody sees” has been broken
In one of the most important developments against the bear case since December, the S&P 500 has broken its clear downtrend and series of lower highs. Not only has that downtrend line broken, but the 200-DMA has begun to flatten out (indicating no trend vs. a downtrend) and we now have three consecutive higher lows, versus just one in December.
Defense is no longer leading
Since December 6, the S&P 500 Low Vol ETF has lagged the S&P 500 by more than 6%. This has sent this risk-on/risk-off ratio from a clearly defined uptrend, to the verge of 52-week lows in just 4 months. You could make the case that investors are flocking to large growth now instead, but that is still far more of a sign of risk appetite than going to staples and utilities.
All signals still point to a recession
I’m not going to rehash them all here (you can view the charts in the past report) but numerous recession indicators all say that we are heading into a recession, including the yield curve, LEI, and the 3-month underperformance of consumer discretionary to consumer staples. I will quickly note, that we have seen the opposite signal (discretionary outperforming staples by at least 20% in a 3-month period) immediately after the lows of the previous 3 bear markets, but have not seen that yet this cycle.
Stocks don’t bottom before the recession starts
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