2016 started really bad for markets in general, and stocks in particular. Everyone was calling for the end of the stock bull market, and the start of another 2008-alike collapse. So far, that has not materialized. Given the strong 9-week rally off the February lows, one could believe that the sell off in stocks is over, and the bull market is about to resume.
Which scenario is playing out now: a bear or bull market? Let’s try to answer that in this article, in a factual way, based on charts.
If anything, pessimism in stocks is peaking. Consider the following data from Sentimentrader:
Margin debt declined again in February. Investors pulled back on loans taken out against the value of their brokerage accounts, a sign of risk aversion that has been evident for nearly a year. Since last February, debt has declined by more than 5%, which actually has been a negative indicator for stocks going forward.
Also from Sentimentrader:
Mutual fund managers raised cash in February. They are now holding 3.7% of assets in cash, up from 3.4% in January and an all-time low of 3.2% in December. Historically, this is still an uncomfortably small cushion against investor redemptions, though it’s about average when looking at the past five years.
These are just some of the data points that prove the extremely high level of pessimism among stock investors. From a contrarian perspective, this could indicate that selling is over, and buying is about to resume.
Is that thesis confirmed by the chart(s) though?
Well, the correct answer is: “potentially, but not yet”. As seen on the first chart, the global stock market (represented by the FTSE All World Index) arrrived at a critical juncture. The index is trading right in the center between its 90 week moving average (representing the long term trend) and the ascending trendline which supports the bull market which started in 2009. Both are about to touch each other (green circle), which underlines the observation that we are at a decision point.
Which direction will stock markets globally go: up or down? That is hard to say at this point, as we prefer to let the charts do their work, i.e. confirm a breakout or a breakdown.
A couple of things are clear, however. First, pessimism has been peaking, suggesting that stocks will continue to climb their wall of worry. Second, monetary policies of central banks around the world continue to be driven by monetary easing which is a favorable environment for stocks. Third, from an intermarket perspective, crude oil, being the key driver of the recent sell off in stocks, seems to have bottomed. As crude’s secular chart shows, it almost tested a secular trendline back in February, which leaves the downside potential limited.
All in all, we believe the bullish scenario holds a much higher probability to play out than the bearish scenario. The fact is that we will know before the summer whether global stocks markets have entered a bear market or whether the huge bull run which started in 2009 is resuming (after a severe correction that washed out weak investors).