I’m Worried About The Next Bear Market
In case you weren’t worried… now would be a good time to start.
However, I’m pretty sure everyone is already worried about something right now.
Coronavirus is a general worry. Sending kids to school could be a worry for some. Other parents are worried about schools closing and kids starting remote learning again. Many are worried about employment. And there is much more to worry about.
This week, the stock market made its way onto the “worry” list.
2 Takeaways From These Charts
Let’s start with a look at market breadth. The chart below shows the New York Stock Exchange Advance Decline (A-D) Line. This indicator is found by taking the difference between the number of advancing stocks (stocks that closed up) for the day and the number of declining stocks (stocks that closed down).
Every day, the value is added or subtracted from the previous value. Breadth is bullish when the trend in the line is up and bearish when the trend is down.
The NYSE A-D Line appears to have topped. This is important because it shows what the majority of stocks are doing. If breadth is down, the majority of stocks are likely to fall.
At the bottom of the chart is my Income Trader Volatility (ITV) indicator. ITV is a versatile momentum indicator that rises when momentum is bearish. The current setup on the chart appears similar to the pattern seen at the top in February.
Takeaway No. 1: Breadth is starting to take a bearish turn after reaching a new top. ITV confirms this.
Next is a chart of the SPDR S&P 500 ETF (NYSE: ETF) where daily ITV is already on a “sell” signal. The potential top in price can also be seen on the next chart.
Takeaway No. 2: The broader market also looks like it’s about to take a dive.
The Fed Factor
So, both breadth and price have turned bearish. On top of all that, last week the Federal Reserve released economic projections that indicate bearishness in the economy.
Below is the Fed’s updated economic projections. In general, the outlook is more upbeat than it was in June.
Source: Federal Reserve
The Fed expects unemployment to improve quicker than they did three months ago, falling to 7.6% by the end of the year instead of 9.3% as expected in June. GDP is also expected to improve quicker.
But to me, the most interesting part of the projections is the inflation numbers. Since the June projections were released, the Fed announced its new policy to target average inflation of 2%. This means they will tolerate higher inflation for a time. Yet the projections show inflation is expected to be just 2.0% in 2023.
If the Fed were confident in their ability to fine-tune inflation, it’s reasonable to expect inflation would rise rapidly now that their official policy is to tolerate inflation. However, the Fed is almost admitting an inability to meet that goal.
This indicates the economy is unlikely to recover consistently. That’s consistent with the high-frequency data we are seeing like stubbornly high claims for unemployment and a slowdown in retail sales.
The last chart this week shows that the transition from bull market to bear market could be underway.
This chart shows SPY in two timeframes, daily (left) and weekly (right). Stochastics, a popular momentum indicator, is at the bottom of both charts.
On the daily chart, the pattern is similar to what we saw before the selloff in March. The initial wave of selling pushed stochastics to an oversold extreme. There was a big signal in the indicator, which was quickly reversed. That is where the indicator stands now. On the weekly chart, we see a “sell” signal while the indicator is at an overbought extreme. These signals have preceded significant declines in the past.
This popular indicator confirms the signals from ITV.
Action To Take
I don’t like adding to the list of things you should worry about. But we can handle the things that we prepare for. Burying your head in the sand never works.
The stock market is in a weak state right now and at risk of a significant decline. But don’t worry too much… it’s still possible to find winning trades in any market environment.
P.S. America faces what my colleague Dr. Stephen Leeb calls a “reset” of our economy. It will revolutionize the way we work, save and invest. Advanced technologies are coming to the fore that will usher in a world that you’ll barely recognize.
Millions of Americans could soon be left behind by this historic shift — but you don’t have to be one of them.