Via StockTwits, our friend Howard Lindzon called attention to this awesomely succinct "market update" from Mark Dow at Behavioral Macro:
Hedge funds are chopped and flat. Real money managers are more worried about getting caught out in a downdraft than missing an upside breakout. Risk positioning is light. The decline in bond yields is more about bad positioning and a shortage of AAA assets than it is about the bond market "knowing something."
But the vulnerabilities are also there: markets have had a big run, economic fundamentals are still tepid and falling on the short side of expectations. Implied volatilities are low. Market internals are bad. Bottom line: It will take a growth breakout into escape velocity or something like it to get a resumption of the rally, or, more serious disappointment to get the washout that so many are already expecting. Unsatisfactory though this is, the right move is to be patient. The bull market is not over, but it's not a smart time to press your bets. The longer we twist in this limbo, the more attractive the upside will become. Time heals. Keep your strategic positions and hedge out market beta as best you can. Sometimes you have to keep your bat on your shoulder - something guys collecting two percent management fees have a hard time doing.
Behavioral Macro, click here
We generally agree with this summation (and applaud the brevity of it).
Except for the implication of these two sentences (bold emphasis here):
The bull market is not over, but it's not a smart time to press your bets. The longer we twist in this limbo, the more attractive the upside will become.
That statement brings out the skeptic in us:
- How do we know the bull market isn't over?
- How does one quantify "over" versus "not over?"
- What if the upside to be patient here is not in longs, but shorts?
Take a look at the weekly chart for small caps (NYSEARCA:IWM) below:
The health of a market is best assessed along three vectors: Fundamentals, technicals (price action) and sentiment.
On the technicals / price action side, there can be no doubt of grave trouble. The most risk-sensitive portion of the market (tech and small caps) is already in bear market territory, as the below chart shows (hat tip to Business Insider):
The fundamentals side looks equally dodgy. Earnings for the Dow industrials (NYSEARCA:DIA) are no great shakes, and in fact earnings season overall looks surprisingly weak. There are strong arguments we are coasting on the fumes of "magic pixie dust" sprinkled around by Ben Bernanke, and that the transition to Janet Yellen is coinciding with the death of the OCBN.
The technicals are bad. Fundamentals are shaky at best and quite possibly bad (for equities that is - in this context the recovering US economy, with its attendant wage pressures and Fed withdrawal, is actually a negative). There is a logical argument that the stellar upside of 2013 represented a sort of last hurrah for faith in central banks to keep these markets elevated in a time of permanent malaise.
The times, as Dylan sang, are a' changin.'
And what about sentiment, the third leg of the stool?
Well, consider that Janet Yellen has shifted the conversation from "ZIRP as far as the eye can see" to when interest rates will rise. Consider that every observed uptick of US economic strength is now linked, psychologically, to reminders of stimulus withdrawal. Consider that record-level corporate profit margins, which have done a great deal to help keep equities aloft, are observed (correctly, we believe) to be the most mean-reverting data series in all of finance.
Are we declaring with certainty that "the bull market is over?" No, certainly not. We have respect for Jeremy Grantham and his powerful observations, re, "Year Three" of the presidential cycle (which runs roughly from November '14 through November '15). Grantham could be right... though the "moral hazard" driver for the Year Three phenomenon may also have been pulled forward to 2013.
So no, we aren't countering the statement directly. We do not declare with certainty "the bull market is over." At the same time, stating flatly that the bull market is NOT over seems a curious stretch. Why make that casual assumption with an implied high degree of statistical confidence? What justifies such confidence? A vague faith in inertia? Seems a little bit woolly, no?
Many years ago we pounded the table on something important: As traders, our focus is not on being right, but making money. In general terms, a trader should be as detached from the actual outcome of events as a bookie making a point spread. The process itself, if good, generates positive return over a meaningful number of statistical trials.
And our process is tapping us on the shoulder as of this writing, saying "Hey! No guarantees… but this bad boy could be rolling over in a big, long-term way…"
We are broadly short as of this writing, and can thus easily be accused of "talking our book." But if the narrative and evidence adjusts, we will adjust too. (No loyalty to positions and all that.)
And we can't help but wonder, in a devil's advocate sort of way, if a statement such as "the bull market is not over" is not meant to be a sort of comforting palliative - a glass of warm milk before bed for those who yearn in their hearts to be long and stay long.
Because, while one cannot make a slam dunk case the bull has been slain, there is certainly evidence - plenty of it - that the bear is no longer hibernating.
Disclosure: I am short IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.