Where Are the Bears?

Includes: DIA, QQQ, SPY
by: Daily Trading

I've spent some time today reading back through our articles of the last few months. The comments have provided some great reading, many thanks for these. I don't hesitate to say that I have learned a thing or two.

One thing that struck me was overall the bearish tone of the comments diminished as the markets have relentlessly climbed. Most of the bears seem to have gone into cryogenic hibernation.

In the light of this observation, the reception to the recent home sales and factory orders news has our interest. This is another in a line of increasingly positive news. Perhaps "less bad news" is a better phrase.

We all observed that the overall market, as measured by the S&P500, barely moved. This is the kind of indication that makes us wonder if we have reached a top in the market. Has the market's enthusiasm for increasing prices run its course? And is this the first sign of the bears awakening from their slumber. If they are anything like me they will be a bit grumpy and extremely hungry when woken from a deep sleep.

We, and I suspect many others, are expecting some form of correction after an upwards run of this magnitude. This is purely based upon our experience and is just a feeling. There have been a few small corrections, but nothing of any real consequence.

One of ways we look at to see if equity markets will move materially lower is to look at the "risky" high yield corporate bond market. We can get a feel for risk aversion by looking at the corporate bond and emerging bond markets. The conservative nature of these markets usually means that weakness is visible here before the more speculative equity markets.

There are various different ways to look at this. One relatively quick way is to use the Fidelity New Markets and High Income funds as proxies for the emerging market bonds and US high yield corporate bonds.

From looking at these two graphs we hold the view that there is still quite a bit of bullish sentiment left in the markets. We may see some short term corrections, but nothing that causes us to put on bearish or short positions.

Bearish sentiment will no doubt re-appear at some point. What we don't know is at what level and at what strength.

When would we get bearish? Perhaps after around 60 days of downward momentum, we would also take into consideration a range of other indicators.

Disclosure: Long JNK, PCY