Were Bears Just Invited to Dinner?

Let’s cut through the fluff and get right to the meat and potatoes of the market – did last week’s sell-off after the Trump Tweet announcing more China tariffs represent the end of the road for the bull market?

Too early to call. But judging from the futures markets, the balance has been upset. It looks like more than a 1.5% pull-back is on the horizon for the open today.

At this point, the markets — and the SPX specifically — would be best to stay above the June pull-back lows near 2725. That leaves some additional room to decline, as futures imply an open around 2875 or so today.

The challenge is in the economic data. With earnings still rolling along, but guidance still cautious, and the Fed lowering rates on eroding data — plus the rest of the world’s central banks already at lows — the ‘race to the bottom’ for rates could be accelerating. If that happens, it will get harder to stave off deflation.

Markets know this. After all, if 10-year money only yields 2%, how much up-side is expected in the long term? The problem is, the markets also know there’s been nowhere else to find yield, so the blue chips have been the ‘risk’ asset folks seem to have flocked to to extract yield. At some point, this riskier play may come back to haunt.

While it’s not yet time to worry, it’s time to be ‘on alert.’ The concern is that many investors have been watching for a signal that the bull is dead. The same investors that were forced into the market seeking yield may be the ones that get nervous and exit just as quickly. If so, we could see risk re-price quickly.

When do the bond substitute-ers run for the door? Who knows? But if risk is truly mispriced, when they do run for the door, the markets should notice.

The new issue that comes with the question is, how long before the bear trumpets become a self-fulfilling prophecy? At some point, every prior bull market has come to an end. Most believe this will be the case again. But how to recognize it?

The concern comes in how quickly sentiment seems to be shifting. Markets have been climbing a wall of worry for months – maybe even years now. Those little naysayer voices are getting louder though. At some point, what starts as a pull-back will become an actual bear event. Call me crazy, but I think the place to watch right now is those blue chips – the same mega-caps that have carried the index to all-time highs while masking the underlying weakness in small and mid-caps may be the very tell-tail that markets are turning.

Before you let your emotions get the best of you though, consider this: the trend is not broken, and every other pull-back this year has been similarly violent.

The issue is, there really isn’t any ‘new’ information that justifies panic. Trade is still an issue, rates are still super low, and TINA is still forcing yield-seekers into higher risk assets. The Fed has also maintained its commitment to as much transparency as it can muster, all but showing us the hand they’re holding as they make policy. So there’s not an issue of transparency. There’s simply a question of when will investor sentiment shift enough to move markets into bear territory?

If you have the answer, by all means, share. Otherwise, we’ll just have to stick with the data and the key numbers. This week, the SPX will likely open around 2875 or so. The week could get ugly though. If the market doesn’t find a bid, the 200-day moving average may be in sight in the next couple of weeks. That’s down around 2790.

The “Oh Crap” level is below 2744 or so. This would indicate a close below the June lows. It would also be a ‘lower low’ in the pricing pattern. While it’s unlikely the markets will fall that low this week, it’s a number to keep in the back of your mind. A breach of this level — or the intra-day lows of 2728.81 — would be a bearish signal. At that point, the SPX is likely to go into office correction territory. We’ll take a deeper dive in this blog should those events occur.

For now, look for a rougher week in the markets — or certainly a rough Monday. The BF database is still over 77% long, but we can expect that will shift over the week should volatility continue over the next few days.

This is a normal part of markets. Not every day goes up. And we’ve been spoiled with low volatility for a few years now. It’s often important to remind ourselves of this. Keep perspective – investing is long-term, and this is all part of a market. This is also where opportunities are born. So we’ll be keeping our eyes open.


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