What happened last week. What we're watching for next week.
"The only thing faster than the speed of light is a rally in a bear market." - Ralph Wanger, manager of the Oakmark Small Cap Fund
What Mr. Wanger was saying was that bear markets are often punctuated by swift and brief rallies that don't go anywhere. It's true. You could look it up.
We had a nice little rally last week that gave rise to a chorus of pundits calling for the end of the correction. Well, not so fast. Serious damage has been done to the market in 2018, and it will take more than a few flash rallies to repair it.
If I sound skeptical, it's because I am. But I'm not outright bearish at this point. That's because I don't see a recession on the near-term horizon. It's coming, but not for several months at least.
That means that the correction is nearing its climax, and I expect the next few months to be characterized as a long, slow recovery. Will we make a new high? I don't know. But I do know that there are some juicy bargains starting to pop up, and I want my clients to start nibbling.
To get some clarity about what's happening now and what the next year may look like, I return to my trusted indicators of what's going on under the surface of the headline numbers that get all the press attention.
Chart 1. S&P Periodic Returns
However the market pundits want to spin it, the fact remains that this is a damaged market. Just look at the periodic returns. The only positive number is the year-to-date return, which only covers the period from 12/31/2018 to 1/11/2019. If that is enough to keep you optimistic, great. But I take a longer view, and what I see is massive damage that will take months if not years to repair.
Chart 2. Distance from Key Markers
The next chart reinforces what we saw previously - a market that is under attack by the sellers and seemingly unable to mount more than a two- or three-day rally before caving in again.
Chart 3 - Chart of the Week
This chart brings long-term context to what's going on today. Each column represents the compound annual growth rate (CAGR) for the period that begins at the year specified up to today. It's a reminder that market swings of one or two years are not very meaningful when you have a longer-term perspective.
We've had a reprieve in the market. I believe that we will see more rallies over the next few weeks and months, and some of them will probably be quite strong. But I'm less and less convinced that we will make a new high before we finally succumb to the next bear market.
I could be wrong, of course, but I follow my models, and they are showing increasing risk and diminishing prospects for a new high.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.