S&P500 Update: Is a Bear Market Around the Corner and why Fundamentals won’t tell.

Recently, a lot has been said about if the US financial markets are already in or soon to be in a Bear Market. Many definitions have been used, but one way to look at it is to simple assess where the indices Simple Moving Averages (SMA) are in relation to each other. Also that can of course be made as complicated, but as you have come accustomed to from me, I prefer the KISS method.

Below is a chart of the S&P500 since 1980. I define Bull markets when the 50-day SMA crosses above the 200d SMA and the latter is rising. I define Bear markets when the 500-day SMA crosses below the 200d SMA and the latter is declining. Now how’s that for a KISS method huh 😉

SPX 50 and 200d SMA only

Please note that I don’t include or look at economic data, as markets can be in a Bear Market without an economic recession. More about that in a minute. So what we can observe is that there were six instances since 1980 when the S&P500 was in a well-defined; two were since the lows made in 2009. However, we can see that a Bear Market ended in 2016, and a new Bear Market appears to be just around the corner as the 50d SMA is about to cross below the declining 200d SMA.

Thus with this additional data at hand, I continue to prefer to look lower in the indices and not higher, as outlined in my recent post: see here.

So why can’t fundamental data help is in assessing if a Bull or a Bear Market is around the corner. This I explained to my premium members in last week’s market digest, and which I would like to share with you today in light of the Thanksgiving Holiday Spirit:

As you’ve come accustomed to from my work, I prefer to only look at price to tell me where the markets are most likely heading next instead of Fundamentals, Earnings and News. Let me reiterate why; as this is IMHO an important aspect of understanding the markets. This week Wallmart, HomeDepot and Macy’s reported strong earnings, but were sold off nonetheless. Pundits continue to tell us that weakness in brick and mortar retail is simply a sign that consumers are doing more shopping online. But, is that true? Amazon, the largest online retailer in the world (!), continues to trade lower (now below its 200d SMA) and has already lost ~20% (!) since the start of September: bear market territory. So, what’s wrong with Earnings (and Fundamentals)? Well inherently there’s nothing “wrong” with them, but they say nothing about the future, or even the present. They only tell about conditions of a couple of months ago. Nobody knows the fundamentals for this current quarter. Yet we keep hearing with much certainty and “fist-on-table-pounding” that fundamentals and earnings remain bullish. The problem here is the stock market is forward looking. So, trying to forecast a forward-looking mechanism with old data is, well, shall we say not the smartest thing to do, or is it?! In addition, we are also being told that the US economy is doing great despite the fact that the rest of the world -including Europe!- is already weakening and has been weakening for most of the year. Counter argument is then the usual “the US will pull the whole world out of its misery.” Wrong again, as the US often plays catch up during tops: strong economies falter the last but also rise the first.

Bottom line: Would you prefer to trade the stock market using price data from two months ago, or would you prefer to use the most recent data? I think the answer is rather easy, clear, and simple. And that’s why I look at the price charts. They provide the most up-do-date information on the state of the stock market. In addition, since stock markets are forward looking, and have been selling off over the last month, they are likely also telling us something about the fundamental/earnings reports coming out next quarter. Thus, while we sit in the driver’s seat of the car called stock market, I am certain it is much safer to look through the front window to know where we’re going, and not the rear-view mirror.

Adapted from: stockcharts.com

Hence, by assessing the actual charts and price data objectively, with a flexible non-biased open mind I come to accurate and trade-able/actionable price-target zone forecasts, while keeping the big- picture as shown here always in mind. My recent free posts, see for example here, here, here are just examples of my reliable market calls my premium members receive daily and weekly. The proof is in the pudding and my private twitter account followers and hedge fund are banking nicely on my reliable forecasts. All my price target-zone forecasts you can easily use for your daily, weekly, and monthly trading decisions*.

Arnout, Ph.D.

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Founder and President Intelligent Investing, LLC

Vice President NorthPost Partners, LP

*Compliance / legal language… “It should not be assumed that future performance will always be guaranteed and/or profitable. Nor will future performance necessarily equal past performance or past performance trends. All trading and investment decisions are the sole responsibility of subscriber.”

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