As we are at the end of the month and quarter, we take a look at the dismal performance of the indices over the last three months and have to make an assessment. The quarter is down well over 6% as of this writing, and certainly one of the worst performance in years. Our assessment is of the trend, which is always your friend! If the trend is lower, what is the reason to fight it?
While the markets are not technically in a bear market (down 20% or more), there are more than 50% of stocks that are down more than 20%. The indices seem to be driven by only a few stocks, and I don’t have to remind you that cannot continue for much longer. Back in the early 70’s there were the ‘nifty 50’, a select few stocks that always rose and lifted markets – the ‘hedge fund hotel’ type names.
Eventually that would come to an end, and once buyers did not step up to pick up the dips the markets swooned. This had nothing to do with fundamentals only that players were looking for places to hide. When the covers were pulled, that was the end of it.
We need to pay attention to these signposts and react, but not anticipate.
But markets have been running on technicals, sentiment, and emotion. The fear is elevated, and that is normal at this stage of a bull market ending. Who is going to get out the door first and hurt the least, rather than the opposite of those piling on, going ‘all in’?
Polls have been negative, breadth has been weak for years, the MACD on the monthly SPX rolled over in April and the bullish percent index (point/figure buy signals) has been declining for months. In addition, turnover has swelled into the price declines – if you knew nothing else then this was good enough to raise the red flag of caution.
Is the economy strong? By some measures it is, but the stock market is discounting the future, telling us there is trouble ahead in 2016. The Fed sees it too, erring on the side of caution in their last meeting. Regardless of the latest strong GDP print, the future is suspect. Soon, many companies will tell us the same.
