Market Gets Crash(ier)

Over the last three weeks, as interest rates surged above 3%, we explored the question of whether something had “just broken” in the market.

As I stated last week:

“This past week has been a decidedly tough struggle for stocks to pick themselves up after last week’s drubbing. While we saw a sharp reflexive bounce earlier this week, that bounce quickly faded as stocks returned to retest support at critically important levels.”

While the market was oversold last week, there was no follow through on bounces which ultimately led to a “crash” open on Friday morning.

Now, all this sounds terrible. And, after having THE single longest uninterrupted bull run in the history of the market with record low volatility it FEELS even worse.

So, before we get into the not so good news, let’s keep this all in perspective for a minute.

For the year:

The S&P 500 index, not including dividends, is down 0.56%.

The S&P 500 Total Return index is still positive by 0.98%

A 60/40 model (60% Vanguard S&P 500 and 40% Vanguard Bond Fund) is down1.72%

What has been different this year so far, is that bonds, while they have reduced the volatility of the recent decline in the S&P 500 index, have not contributed to portfolio returns this year so far. So, the only place to hide has been cash.

However, if we take a look at the market from 2009 to present, we can gain some better context.

The recent decline is very much like the previous corrections in the market. The red circles denote when both “sell signals” align (a correction of overbought conditions and a triggered sell signal). These corrections have specifically coincided with periods where the market was extremely deviated above the running bullish trend line (gold boxes.)

Currently, the correction, while painful in the short-term has been nothing more than a correction back to the running bullish trend.

So why worry?

The “difference this time” is significant:

The Fed is hiking rates versus either lowering or keeping them at zero.

The Fed is reducing rather than increasing their balance sheet.

The current Administration is insisting on a “trade war” which slows global growth.

The economic cycle is mature rather than recovering.

Record levels of debt at risk of rising rates versus a re-leveraging cycle with ultra-low rates.

A mature housing, auto, and consumption cycle versus a recovery.

Global central bank interventions have begun to taper versus expansion

Peak earnings growth versus expansion

Peak valuations versus expanding valuations

I could go on, but since you want “short and to the point,” I will stop there.

Here are some simple observations from Doug Kass (click here for recent interview) which dovetails into the following market analysis.

The S&P Index and most non U.S. equity markets are broken technically.

The worldwide fundamental outlook (economies and profits) are worse than are generally expected by the consensus.

Few still believe a large equity markdown is likely.

The consequences of a pivot in monetary policy in the U.S. (and elsewhere) is understated and not understood by many.

There are now legitimate alternatives to stocks available in risk-free Treasuries. Those yields only recently have exceeded the S&P dividend yield.

Stocks don’t go down in a straight line – it usually looks like a jagged line.

We are in a new regime of volatility.

A changing market structure – in which passive money overwhelms active money – remains a significant market risk and disruptive influence.

Daily View

In early October, the market broke the bottom of the previous short-term bullish trend channel and tested initial support at the 61.8% retracement level of the push higher from the April lows. That move failed at the 38.2% retracement level and has now violated previous support this past week. This is not a good development and suggests that a failed rally back to that previous support will set the markets up for a retest of the April lows.