Bear market appears to be getting its second wind
Back in mid-October, one expert after another was quoted in the financial media as saying that the worst was over and the best move for investors was just to hang on. In my weekly commentary, I wrote that from all the indicators I know of, there was no evidence that the markets had reached bottom.
In October, major indices never reached the lows set back in the 2000-2002 bear market. The last week of October the indices rallied and many of the experts who earlier said the bottom was in started saying “I told you so.”
Now it is my turn. So far in November, the market bias has been decidedly negative. And this week major indices surpassed the lows set during the 2002 bear market. I wrote a month ago that every technical indicator that I knew about was negative. That remains the case today.
Below is a chart of the price activity of the S&P 500 so far this year. I added a red line to show the technical support that the index failed to break through on prior attempts. The first time it reached that support in November, a strong one-day rally pushed it back above 900. But a week later the index has easily broken through that support and could freefall from here.
Normally I am not an advocate of short positions. Somehow it makes me uncomfortable and even a little unpatriotic to place a bet against American industry. Normally my short positions are reserved for hedging. But early in November I took a position in a fund that shorts the S&P 500.
It was the indicator in the middle section of this chart that convinced me. That section shows a moving average convergence divergence (MACD). I think the MACD is a pretty good tool for forecasting near-term market behavior. Notice the red arrow I added to the MACD. See how it only made it about halfway back to the zero level before it rolled over? That is a very negative sign.
The bottom section of the chart is a relative strength index (RSI). It faltered early in November when it reached the 50 level and could not break above it. That is also a negative sign.
By every technical, fundamental and cyclical indicator, this is a very powerful bear market that wants to go lower. The fact that Congress and Wall Street and virtually every investor in the world want it to reach a bottom and turn back up is meaningless right now.
Once again today on the radio I heard a commentator telling investors there is no need to panic they should remain invested in the stock market. He said that U.S. stocks historically average a return of 10% a year and that as long as investors stay in the market, they will quickly recoup their losses.
My three horses produce less manure than he was throwing around. Major indices are already approaching 50% losses for the year. So if his 10% figure is correct, it will take investors 10 years to recoup what has already been lost. (Do the math. It takes a 100% gain to make up for a 50% loss.)
But there are no signs that the markets aren’t going to keep dropping. How low can they go? A month ago I wrote that 600 on the S&P 500 seemed very possible. At the time the index was at 950. Today it closed at 752. Now I am thinking that there is a distinct possibility that it could fall as low as 500 before this bear market ends.
Rod Jackson is the chief architect of our managed investment strategies. A few days ago someone asked him about the next level of strong technical support for the Dow. He said he thinks 4,000 is possible.
Until we see dramatic increases in consumer spending and confidence and until corporations return to profitability, the only direction the market can easily go is down.
F.S.