So much for the imminent bear market. Like the picture above, the bear I was sure to be coming has been given a shiner and told to go hibernate again!
So where does that leave us?
I am still of the opinion that this market is being falsely held up and the headwinds in the market are still very real.
Despite an upbeat jobs report last week, corporate earnings and factory orders remain weak. Added to this, the supposed deal on capping oil production by OPEC has failed to materialize.
I believe what happens next is Joe Public is encouraged to buy the high, expecting the trend to continue. The little guy is always trapped in this manner; this emotional human response has always applied in all markets.
So what has led to this impressive recovery in the markets?
First of all, there is a phrase that states “never fight the Fed”. The Fed has come out in support of the markets and in fact has become not only the US savior since 2008, but the Fed is becoming the world’s central bank.
Yellen has admitted that everyone is lobbying the Fed to surrender its domestic policy objectives for international ones. Scarily, this is precisely what took place in 1927 before the great depression.
She pointed to the slowdown in China and depressed commodity prices, but Europe is the real basket case with the looming UK vote to exit or stay in the EU, which has been termed the “BREXIT”. The vote takes place on June 23rd, so expect some fireworks.
Also, this week there was a leaked document regarding the IMF looking to possibly threaten Germany over its unwillingness to offer workable debt relief to Greece. In the document it stated:
“Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say ‘The IMF is not on board’? or to pick the debt relief that we think that Greece needs in order to keep us on board?”
Leaving Greece high and dry again would be much worse than last year’s market volatility around this same situation.
But the real doozie was last week, in prepared remarks she stated that “caution is especially warranted” when it comes to raising interest rates. This has put most Fed watchers off from expecting any possible rate hike as they expect nothing before September. However, the fact remains, political risk in Europe (and the US) is tremendous and Yellen cannot prevent that simply with interest rates.
The Bear Market Filter:
As I have stated before, no indicator or chart pattern is 100% right all the time, and in the case of my bear market filter, it has been cancelled twice in the space of 6 months. In the history of the S&P 500 going back almost 70 years, this has happened only two other times, in 1956 and in 1995. More often than not a trigger of this filter leads to a significant decline beyond a mere correction.
However, whenever the market has had a bear market filter cancelled twice over the space of a few months it is telling me the market is directionless and is just consolidating for either a breakdown or breakout. I will continue to monitor the situation but my bias remains for a breakdown in the coming months.
So bottom line, I remain a bear on the sidelines, as in my humble opinion it’s not a question of if, but when. And when it does happen you don’t want to be in it, as in a crowded hall, the exit doors are small!
However, patience is required, as at the time of this writing I am obviously early in my prediction. I’ll update next month.