Have you noticed how the general tone of market commentary has become less opinionated in the last month? It’s probably because there are a lot of very smart market pundits wishing they could take back their recent bearish forecasts.

After the worst January in market history, many bright minds were convinced that the bull was mortally wounded, but instead we have been treated to a wicked counter-surge back to the ‘balance point’ in the S&P 500 (around 2060), based on volume traded over the last year.

What does this rebound mean? It is an all-clear signal?

I think it’s much more complex than that.

There is a well-known relationship between margin debt and stock prices. The last two bulls died from “hypermarginosis,” a condition in which margin debt went parabolic. Ten months after margin debt peaked in March, 2000, the economy entered a recession. Just five months after margin peaked in July 2007, the economy entered the ‘Great Recession.’

But here’s where things get weird.

First, this bull market did not have a margin debt surge comparable to the 2000 and 2007 blow offs. Margin has increased at a fairly normal rate in sync with the S&P 500.

But, according to NYSEData.com, margin debt peaked exactly one year ago. So here we are, 12 months after the bell has supposedly tolled, and there are no signs of a U.S. recession whatsoever. And instead of a bear market crash, most likely the indices are headed for new highs even as margin debt is flattish.  

What conclusion should we drawn from this anomaly? Simply this: something is different this time. Very different.

Indeed, if the markets have topped there was no sign of euphoria, either. I’ve traded through two bull market tops and I use TV ads to gauge investor sentiment. We are just now starting to get ads from E*TRADE (with not one, but two Hollywood stars) that hint at irrational exuberance. But it’s hardly euphoria. And the AAII sentiment numbers have been sanguine all year. No fear, no greed… no drama.

That said, there are signs of micro-bear markets all over the place. When the Bear strikes an industry, a sector or a country its claws are deeply felt. The world has become an economic minefield: shipping, crude oil, drillers, biotech, the art market, European banks, emerging markets are all suffering.

The simplest explanation is that Bear Market 2.0 has already begun. It wasn’t ‘telegraphed’ because it is just like the new economy itself: complex, rotational, differentiated and disruptive. It’s more like a virus than a heart attack.

Bear Market 2.0 is upon us due to the secular economic disconnect implicit in the demographic ebb tide: as the Boomers retire and sell assets, the Millennials lack the wherewithal to purchase them. The Millennials, by necessity, are a generation seeking experiences, not assets. Therefore, the risk of deflation in Boomerland is now very real.

Bear Market 2.0 will be different (and much more drawn out) this time, due to domestic indifference. But, on the plus side, the U.S. remains the best house in a troubled global neighborhood and we are clearly benefiting from the ability of a global investment community to selectively allocate capital to U.S. assets with the click of a button: real estate, equities, high yield bonds, you name it. What the Millennials cannot afford, the [Chinese… or someone] possibly can.

Bear Market 2.0 is neither your father’s bear market, nor the bear market most were expecting. Welcome to the future of finance. Have a nice day.

  

www.daytradingpsychology.com (Coaching for private traders.)

www.trader-analytics.com (Peak performance consulting to RIAs, hedge funds  

and banks.)