Never Mind the Fed, the Bear Market Had Already Arrived

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

On the drive back from Phoenix Wednesday I heard some very bearish sentiment on Fast Money from most of the crew and Dennis Gartman. Gartman said he thinks the rest of the year will be down, and that he has lost all faith in Bernanke and thinks he should go.

Earlier, on Tuesday afternoon, Joellyn and I were out Christmas shopping, when I heard Jeff Macke make a comment to the effect that he sold a lot of stock as a result of the first bit of Fed news.

I have been clear for many months that I thought that this market cycle was close to ending and that in fact a bear market had started.

My opinion of course should have no bearing on you and your portfolio. The context here is if you think a bear market or big decline is coming...

I have outlined the general tact I have taken, and why, in past posts. As a matter of normal cyclicality, volatility increases at the end. For anyone interested in trying to avoid some portion of down a lot, it makes sense to reduce volatility a little if the chance of it being late cycle is high.

click to enlarge

In looking at this chart, there are of course different conclusions that can be drawn. I believe the green line will turn out to be the most important, but whether that is true or not, I do not believe anything changed this week with the Fed news. Bear markets turn slowly. As I have been saying, they do not start with one news item like the Fed did X. However, the Fed could make things worse.

Financials have been in trouble for months now and, again as I have been saying, I expect more to come. A stock market is very unlikely to do well without its largest sector. This entire event from the first yield curve inversion through to the present day has been very textbook. Here I am talking about the effect of the crisis, as opposed to the details that created the crisis.

The news of the week is simply a part of the equation: either the Fed is behind the curve, or there is no real action to take, other than to sit it out. We know that if nothing else, time will solve it. We don't know how much time it will take (at least I don't).

The path I chose (and wrote about) was simple, and relied on the assumption that this time things were no different. Inverted yield curve equals trouble for financials and probably for the rest of the market. Expecting trouble meant trying to avoid the full impact of a normal decline.

Looking ahead there is no way to know whether in fact a bear market has started (we may look back and point to a certain date), or whether any action taken to cushion the blow will work if it is a bear, but bear markets do come along every now and then, and the way they start is pretty similar to what is going on now. I may be adding 1+1 and getting eleven, or I may be right, but I can build a good case personally that says some defense here makes sense. So far this path has worked very well and we'll see about the future.