Our long term S&P 500 model states that the U.S. stock market is not in a bear market. “Bear markets” are declines that exceed 33.33% and last more than 1 year.
Our medium term S&P 500 model has been predicting a significant S&P 500 correction since the end of March 2015. Significant corrections are either big corrections or long consolidations.
Neither a big correction nor a long consolidation has been completed as of October 20, 2015. Hence, we are waiting for a significant correction to be completed before we buy stocks.
If the S&P 500 completes a long consolidation, we’ll buy back our UPRO (3x leveraged S&P etf) at approximately the same price that we sold it at. If the S&P 500 completes a big correction, we’ll buy back our UPRO at a 40%+ discount.
Fund managers will buy stocks in November and December
We explained why seasonality is bullish in November and December in a previous post. However, this year’s Santa Claus Rally may be more bullish than most.
A lot of funds are cash heavy and have been lagging the S&P’s performance this year. Most of these funds were heavily long going into the August 24, 2015 crash. They cut their stock holdings at the bottom of the correction because they thought that a bear market might begin. With the S&P having recovered more than half of its decline, these funds have failed to participate in the recent rally.
Sentiment data shows that fund managers have not been this bearish on the U.S. stock market since 2012. Fund managers have not had this much cash in their portfolios since 2009. Fund asset allocation is a contrarian indicator because most funds underperform the S&P index. Hence, such a high level of cash is a bullish indicator for U.S. stocks.
Many fund managers are focused on their year end review during Q4 of each year. Investors don’t care if your fund is losing money or not. They care how you perform relative to your peers. This means that if everyone else is losing money and so are you, that’s ok. But if everyone else is making money and you’re lagging the group, BOOM. Investor redemptions at 12 o’clock.
This mentality forces fund managers to chase performance. This means that fund managers who are lagging the index tend to buy assets on every dip in a last ditched attempt to “catch up” to their peers. All it takes is one bad year and investors will redeem their funds en masse. Since most funds rely on asset management fees instead of profit sharing schemes to survive, fund managers will do anything they can to prevent investor redemptions.
That is why Q3 earnings season is turning out to be so bullish. The earnings reports have been pretty terrible on a whole. 7 out of 7 companies missed their earnings expectations yesterday. Half of the Wall Street banks missed expectations. However, almost all of these stocks – including the ones whose earnings reports missed expectations – have gone up.
Indeed it seems that all the dips are being bought.