The State of the Markets:
Are we having fun yet? To be sure, the recent stock market correction has created some angst as the bears have knocked -7.55% off the DJIA, -9.63% off the S&P 500, -12.60% off the NASDAQ Composite, -12.86% from the Mid-cap index, and -15.69% from the Russell 2000 small-cap index. So, as they like to say on TV, most of the major indices are definitely in "correction territory."
However, the fact that the market corrected should not have come as a surprise to readers of this oftentimes meandering morning market missive. For example, back in July and August I began emphasizing the point that many of my favorite long-term market models were not in their happy places and that "risk was elevated."
And I am pleased to report that we did take some precautionary measures in various portfolio strategies to take both the beta and the exposure of the portfolios down a notch or two.
However, it is important to remember whilst patting one's self on the back that taking defensive measures is only half the battle! The next trick is to identify when the coast is clear and to attempt to benefit from the pullback.
Which brings us to the title of this week's macro market missive: How Low Can It Go?
Obviously, this is a tricky subject. And to review, I don't run portfolios based on my view or make market calls. No, on that note, I prefer to stick to the weight of the evidence from my major market models. However, experience has taught me that it can be tough to pull the trigger when the indicators tell you to take action - especially during emotional markets. Thus, having some sort of clue as to how far the bears could take things during times like these can help one prepare.
So this morning, I thought it would be good to review the history of cyclical bear market declines in various environments.
The History of Bear Attacks
To be clear, I don't know that we are currently in a cyclical, or what I like to call a "mini," bear market. And I do not see any evidence that the current secular bull is ending. However, I will admit that there is a decent chance that there may be some additional downside to endure. And as such, I'd like to get a feel for how much more selling to prepare for.
So here goes. If let's look back at all the bear markets since 1900. Ned Davis Research tells me that there have been 36 bear markets to review. And so that we are all on the same page, a cyclical bear market is defined here as either a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days.
Looking at the bear markets as a whole, the average decline has been -30.6% and the median has been -26.0%.
However, both the economic and secular backdrop at the time bears occurred makes an BIG difference!
For example, during secular bear phases (secular trends tend to last many years and contain multiple cyclical bulls and bears), of which there have 22 cases, the average decline has been -36.3%.
But, during the 14 secular bull markets that have occurred since 1900, the average decline of a "cyclical bear" is -21.8% and the median is -19.0%.
Currently, I believe the stock market is in the midst of a secular bull phase, which began on March 9, 2009. So, we can take solace in the fact that bear markets that occur during a secular bull are much shorter and shallower than average.
In addition, we can look at the damage the bears are able to inflict given the economic environment. I.E. Whether or not the U.S. economy is in recession. NDR's computers tell us that since 1960, the bear markets that occurred in association with a recession in the U.S., have produced an average decline of -30.5%.
But when the bears attacked without the U.S. being in recession, the 10 declines averaged -22.9%.
More recently, the last two cyclical bears occurred without an accompanying recession. In 2011, the fear over Greece and the U.S. debt downgrade produced a decline of -16.8% on the DJIA. And in 2015/16, the fear over China created a decline of -14.5%.
So, given that the Dow is currently down -7.6% and the S&P is off -9.6%, recent history suggest that the decline is at least half over. Assuming the current dance to the downside turns into a cyclical bear, that is.
The key here is that if you have cash put aside and the bears do take hold here, one strategy would be to start deploying capital into any further downside action.
Moving On... Now let's turn to the weekly review of my favorite indicators and market models...
I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the primary cycle.
The Bottom Line:
Once I've reviewed the big picture, I then turn to the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.
The Bottom Line:
Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.
The Bottom Line:
We also focus each week on the "early warning" board, which is designed to indicate when traders might start to "go the other way" -- for a trade.
The Bottom Line:
Now let's move on to the market's "environmental factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.
The Bottom Line:
Quality means doing it right when no one is looking. - Henry Ford
Here is the current positioning of the portfolio and our member ratings:
Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.
Positions Can Change
Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.
At the time of publication, the editors hold long positions in the following securities mentioned: SSO, QLD, XLK, XLY, XLV, AAPL, MSFT, AMZN, TGT, ABT, BA, WM, V - Note that positions may change at any time.
About the Portfolio:
The latest upgrade to the Daily Decision service went live on Monday, July 9. The new, state-of-the-art portfolio employs a modern, hedge fund style approach incorporating multiple methodologies, multiple strategies, and multiple time-frames. The portfolio is comprised of three parts:
The Aggressive Risk-Managed Growth portion is made up of five trading strategies and accounts for 50% of the portfolio. The Market Leadership portion makes up 20% of the portfolio. And the Top Guns Stocks portion (10 of our favorite stocks) will make up the final 30% of the portfolio.
All three of our strategies are run in a single Marketfy model - the model is currently labeled as the LEADERS model. The goal is to make the service simpler to follow by putting everything in one place.
Wishing You All The Best in Your Investing Endeavors!
The Front Range Trading Team
NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.