Before you read your favorite
author's work relative to the outlook for today's markets, we invite you to
go back into their article archives and see what they were saying in early
2008 and the summer of 2008. On February 13, 2008, with the S&P trading
at 1,348, we published Technical Breakdowns Call
For More Hedging. Unfortunately, much of our analysis from early 2008
applies to the current market, which is showing indications that a new bear
market may be on the horizon.
We are not yet in bear market
territory, but we have seen enough to go to a significant cash position
complimented by silver (SLV) and gold (GLD). We still have exposure to stocks
(SPY) since similar markets have recovered in the past (1994,
1998, and 2004). Even in the context of a bear market, the S&P 500 could
rally back to the 1,260 to 1,280 level, which aligns well with the early
stages of a new bear market. The Fed's upcoming Jackson Hole gathering could
also be a catalyst for stocks and commodities.
Before we show you the current charts
of the S&P 500 Index and the ailing French bank Societe
Generale, let's review our comments concerning U.S.
financial stocks in July 2008, several months before the implosion of Bear
Sterns and global financial system. The full text can be found in Risk Management in Trending
Markets. The S&P 500 was trading at 1,234 when the comments below
were made. It hit 666 in March 2009.
The chart below
[of the Financial Index (XLY)] illustrates the structural nature of the
problems facing the housing and financial industry. There are fundamental
reasons financial stocks have been hit so hard, reasons which go way beyond
short selling. Additional bank failures in the coming months would not come
as a surprise, which is supported by the rapid deterioration of the sector.
If we look at the present day charts
of the S&P 500 and Societe Generale
below, we are concerned that something is wrong, above and beyond what is
known by the markets today. We would not be surprised to see a major negative
news event surface in the coming months; it may be a bank that runs into
trouble, it may be a country, it may be a currency. What form the event may
take is not all that important. What is important is that the charts below
are trying to tell us to be very, very careful over the next few months.
French bank Societe
Generale has dropped 61% since late February 2011.
The 200-day moving average has rolled over, which increases the odds of
bearish outcomes over the next few months. A sharp snap-back rally is also
quite possible even if Societe Generale
has already entered a bear market. Societe Generale's Relative Strength Index's (RSI) recent trend
looks like a bear market, not a bull market (see bottom of chart below). The
failure to break into the orange box is a yellow flag for all risk assets. It
is not time to panic, but is it a good time to have specific risk management
contingency plans in place. Societe Generale could rally all the way back to its 200-day
moving average. However, the negative slope of the 200-day tells us a rally
may not produce higher highs.
The current chart of the S&P 500
looks a lot like the U.S. Financial Index did in July 2008. You can blame
speculators and computerized trading for the recent vertical plunge, but the
speculators and trading algorithms properly identified serious structural
problems with banks and mortgages in 2008. Have you ever seen speculators
successfully attack a sound company? Almost without exception, when markets
focus on a company in a negative manner, something is fundamentally wrong
with that company. Enron stock began to drop well before the fraud came to
For those of you that feel government
debt problems cannot derail strong companies like Coke and Apple ('my stocks
will be fine'), this video reviews parallels between the
mortgage/housing crisis and the current debt crisis. While iPads are great, no stock may be immune to the selling if
our leaders cannot plug the holes in the debt-crisis deck. The ship is still
floating so there is some hope for bullish outcomes, but we are taking on
Recent comments relative to the newly
formed debt committee do not give us much confidence that they "get
it" in our nation's capital, even after recent events. Bloomberg reported the less than co-operative tone
is unlikely to change between the two major political parties in the United
States - markets want to see some unity and leadership, not this stuff:
Grover Norquist, president of Americans for Tax Reform, an
anti-tax group, said the Republican negotiating team will serve as an
effective roadblock to tax increases. "Taxes are off the table for this
super-committee even more than they were when Boehner and Mitch
McConnell" were negotiating with the president for a long-term debt
agreement, Norquist said. "We're now going to
focus on spending cuts, and if the Democrats can't do that, we'll have the
We follow the 223 most liquid ETFs
using the CCM Asset Allocation Model. We recently reviewed all 223 in detail.
The list of ETFs includes stocks, bonds, commodities, and precious metals. While
it has not fully given a "buy" signal, the best stock chart of the
bunch is the Short S&P 500 ETF (SH), which is another reason to have bear
market contingency plans within an arm's reach.
If you are reading this analysis when
the S&P 500 is experiencing a monster rally, keep the three historical
rallies below in the back of your mind:
The three rallies above occurred in
the context of a bear market. If the current market can rally and the S&P
500's 200-day moving average can turn back up, then we would be more willing
to push our bear market concerns aside. But a rally that occurs with a
downward sloping 200-day moving average, even a big rally, should be viewed
with a dose of skepticism.
The charts of the three rallies above
illustrate two more points about bear markets:
rallies are common
We want to emphasize that it is not
all gloom and doom. If leaders step up and lead on debt issues, markets could
experience a monster rally, similar to what happened after sharp declines in
1994 and 1998. Our two primary market models remain in bull market territory,
but they are hanging by a thread. The CCM Bull Market Sustainability Index (BMSI) closed at 215 on August 10. The historical
risk-reward profile remains positive, but we are on the cusp of slipping into
bear market territory. The BMSI tells us to be cautious, but in a manner that
leaves the door open to better than expected outcomes.
The CCM 80-20 Correction Index also sits in a range still
associated with bull markets. However, unfavorable risk-reward ratios will
surface if stocks cannot gain traction soon. The 80-20 Correction Index
closed at 516 on August 10, 2011.
The ADX indicator at the top of the
weekly S&P 500 chart below measures the strength of a trend. The last
time the red ADX line hit a level as high as the recent level was in 2008
(compare points A and B). Notice the negative outcome in stocks after point
A. The black ADX line also sat at low levels in 2008, just as it does today.
Not the end of the world, but it is another feather in the bear's cap
relative to the intermediate-term outlook.
The thin blue line in the chart above
is the 200-week moving average, which sits at 1,155. A weekly close over
1,155 would be a good step for the bulls. Notice how the 200-week has acted
as both support and resistance (green, red, and orange arrows).