Bear Market Ahead? Not so Fast.

True Religion

The markets are about to find religion again. That’s not news to you. I’ve been warning as recently as last week that we are headed lower, maybe much lower. The economic situation in the US is one that promises anemic growth at best. Europe is not much better and Japan, well, Japan really doesn’t seem so do much of anything anymore. China is putting on the brakes too. This does not leave much of the developed world or the emerging market powerhouses left to pick up the slack.

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The results of the first half of this year are in. The strangest bedfellows win the gain game, while the market touted as the fastest growing with the greatest potential and least amount of outside debt came in last. Strange times indeed.

Gold and the US Treasuries came in first and second respectively, with Gold, our number one pick up more than 13% and Treasuries as measured by the Barclays Index up almost 6%. The biggest loser? Why China of course with the Shanghai Composite down more than 27%.

How strange that the country that owes more money than any other country on earth sees better performance than the country to which the debts are owed. Gold and the US Dollar gained simultaneously, something nobody would have predicted could ever happen considering the number of new dollars being printed. We can thank the Greeks for that last paradox. The PIIGS crisis solidified the role of the US Dollar as the World’s Reserve Currency for some time to come.

As for the market as measured by the S&P? Well, most of the action occurred towards the end of the second quarter, a quarter in which the markets suffered losses of more than 10% closing the quarter at the year’s lows. Worse still, a major technical indicator is on the brink of flashing SELL. That indicator is called a Death Cross. It occurs when the 50-day moving average of the S&P 500 crosses over the 200-day moving average. Such a “death cross” usually signals a bear market ahead.

The New Bear

I would like to think that the market is a predictable creature. It would certainly make life easier knowing that the average bear market always lasted a couple of dozen months or that the average bull market lasted for four years. Problem is that none of this really means much today.

We are entering a new paradigm my friends. We are in a place where nobody knows what will happen, how severe it will be and how strongly we will recover. The “flash crash” which wiped out 10% of the market’s value in 20 minutes one May afternoon has made this clear. We could be in for a bear market that lasts for years…or one that is over and done with in a matter of weeks.

Hasta La Vista Baby, I’ll Be Back

Everything is accelerated today. The trading is done by machines, not humans, and these machines are all trying to outdo each other by thinking one step ahead. So, just when you think that bargains are about to be had, someone else figures that they will pay a couple of cents more than you and get that tasty morsel first.

Death Crosses are not new news. Technical analysts have been following such movements for decades. So, now we are here. Then what. If everyone knows something big is supposed to happen…it rarely does. We’ll see if this holds true.

Based on the current levels of the S&P, if it closes under 1040 convincingly for a few days, we should see a drop to 900. I think we will, but it maybe another one of those flash crashes which satisfies the technicians, not some long drawn out affair.

And, once there, the signal will be to buy again. This is no longer investing my friends, this is now a trading game. The machines have succeeded.

The Glimmers of Hope

It’s always easier to be a bear. Cynicism takes less effort. There are some positive signs out there which could prove to be the bear’s undoing. The first, as I wrote about last week is this “wall of worry”. Rarely is the herd right about anything. And, everyone’s worried right now. That means they’re either selling or they’ve sold.

Ford Motor just announced that it has paid back $4 billion that it borrowed from a union retiree trust, on top of another $3 billion it paid off in debt earlier this year. $7 billion is a nice chunk of change and paying down 20% of your debt in six months is quite a feat. If the US government could do that, gold would be at $200 per ounce in no time flat!

3M, the industrial giant announced that it would be reporting better than expected numbers on strong overseas growth. China is trying to cool its economy. Brazil just reported another mega quarter of growth. Even one of the PIIGS, Ireland reported a positive growth quarter. So, things might just be turning a corner.

I would be much more positive in normal circumstances. However, there are two huge signs that this economy will be grounded for quite a few quarters to come. The first sign is Employment. The second is Housing. Neither are improving. In fact the situation might be getting worse for housing.

Until those two indicators show a sustained recovery, three of four months of positive data, this economy will remain in the doldrums, and so will the market, and so will volatility. Uncertainty is the worst thing for an investor to be facing. And, if there is one certainty about the months ahead…uncertainty is it.

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Best regards,

Kevin Raymond


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