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 16, 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.
We’ll cover the following topics in this post:
- We agree with Leon Cooperman
- The U.S. stock market is not in a secular bear market
- Risk of a black swan event is overblown
- NYMO points to new lows for the S&P 500
- How earnings season is playing out
We agree with Leon Cooperman
Leon Cooperman is arguably one of the best investors in the world, and he recently went on Bloomberg to talk about his views on the U.S. stock market. This is what he said:
- “Since 1950, the market has always peaked after the Federal Reserve raised interest rates.” We stated this point in Why the First Federal Reserve Rate Hike is Important for This Bull Market.
- “Bear markets occur for a reason. They are usually caused by valuation, economic, or exogenous problems. The risk of these things happening is very small right now”. We agree. This is what our long term S&P model is built on.
- “This isn’t a bubble. Yes, stocks are overvalued. But the U.S. stock market is far being in a bubble-like state.” We agee.
- “The U.S. stock market has already seen a significant correction. Many stocks have already fallen more than 20%.” While we agree that the U.S. stock market is in a significant correction, our medium term S&P model does not state that this correction is over.
The U.S. stock market is not in a secular bear market
Investors should be convinced that we are in a bull market, whether it’s “secular” or “cyclical”. After all, the S&P is 35% higher than where it was in 2000 and 2007. However, some bearish investors still think that the U.S. stock market is in a secular bear market. They think that the S&P’s recent decline will take it down below 1600 or 1500. We disagree.
This is the most ridiculous chart we’ve seen in a long time.
Bearish investors argue something like this:
The market has gone through distinct “bull” and “bear” phases over the past century. These last 10-15 years each. Specifically
- A 29-year bull market from 1900-1929
- A 20-year bear market from 1930-1950
- A 15-year bull market from 1951-1966
- A 15 year bear market from 1967-1982
- An 18 year bull market from 1982-2000
- A ? year bear market from 2000-?
Bearish investors argue that each secular bear market lasts at least 15 years. They state that the U.S. stock market is still in a secular bear market since this bear market began in 2000. According to their reasoning, this secular bear market MUST last at least 15 years.
This argument is wrong on all levels.
There was no “secular bear market” from 1967 to 1982. The Dow did not make a new high during those 15 years. However, the Dow is not a good representation of the U.S. stock market since it only includes 30 stocks. The S&P 500, on the other hand, was constantly making new highs from 1967 to 1982.
There is no rule stating that each secular bear market must last a minimum of X years. Bull and bear markets exist because of underlying fundamentals. If the underlying fundamentals continue to improve, which they are right now, then we are not in a secular bear market.
This is why our firm does not use the idea of “secular” or “cylical” bull or bear markets. We only define market environments as “bull markets” or “bear markets”. Some bull markets last decades (i.e. 1974-2000) because the fundamentals allow for such a long bull market. Other bull markets last only a few years (e.g. 2002-2007) because the fundamentals only allow for such a short bull market.
Risk of a black swan event is overblown
The financial media was abuzz with this chart earlier this week.
The SKEW Index, calculated and distributed by the Chicago Board Options Exchange, shows the risk of a “black swan” type of event in equities within the next 30 days.
Basically, it shows the risk of a swift, sharp drop in prices as determined by options traders in the S&P 500 index.
According to the CBOE (see here), when the SKEW is high it shows that options traders are pricing in a higher risk of a sudden decline. When the SKEW is low, then traders are relatively sanguine and the risk of a black swan event is low.
This is NOT a contrary indicator.
Note that the U.S. stock market is never in the midst of a bear market when SKEW becomes very high. The Skew Index is actually pretty low by the time a bear market begins. SKEW was relatively low during the 2000-2002 and 2007-2009 bear markets. The only other time SKEW was this high was during the big correction of 1998.
With SKEW so high right now, the odds of a black swan event (i.e. bear market) are actually very small.
NYMO points to new lows for the S&P 500
NYMO is a breadth indicator for NYSE stocks.
The weekly NYMO had a reading that exceeded 85 as of last week’s close. Such a high weekly NYMO reading has only occurred 5 times in the past 16 years.
NYMO is a contrarian indicator. The interesting thing about this indicator is that each time it exceeded 85, the S&P 500 eventually made a new low.
- 2004: S&P eventually made a new low.
- Early 2009: S&P eventually made a new low.
- Later 2009: S&P did not make a new low (keep in mind that the bear market had just ended, so a fierce rally was to be expected).
- 2011: S&P eventually made a new low.
- October 2015: will the S&P make a new low? We think so.
How earnings season is playing out
We keep a tab of how the individual stocks are responding to their respective earnings reports during each earnings season.
The interesting thing is that the S&P index is holding up pretty well despite this weak earnings season. Is this a short term bullish sign? Perhaps.
||Stock’s 2, 5, & 10 day trend
||Stock’s 2, 5, & 10 day trend
||Other Dow companies
||Stock’s 2, 5, & 10 day trend
|JPMorgan: Tues Oct 13
||Intel: Tues Oct 13
||Johnson & Johnson: Tues Oct 13
We follow our models 100%, and our medium term S&P 500 model states that this significant correction is not over. So we wait.