Recession and Bear Market Viewpoints

Seeking Alpha had an interesting viewpoint titled “No Time For Complacency: This is a Bear Market.” While you may not agree, it’s a good read and it brings up ideas and thoughts, some of which I have discussed before. Here’s an excerpt:

This article is a follow-up to an article from two weeks ago that I wrote because I felt so strongly that we were due for a bounce. Well, while the bounce may not be 100% over, it is done for all intents and purposes. I am not suggesting that we are about to go into free-fall again (yet), but long investors shouldn’t feel as though that cash is burning a hole in their pocket. Further, those who missed punting vulnerable stocks now have a second chance to prune their portfolios of companies particularly susceptible to profit-margin erosion or lack of access to capital. I expect that the market will create an interim range that consolidates this move down since October before reaccelerating in the Spring and ultimately making lows this Fall (S&P; 500 1170 area).

To be bullish here, I think that one would have to believe:

1. Fed Funds cuts and fiscal stimulus will prove effective
2. Analyst estimates are now reasonable
3. Technical analysis is for the birds

The policy responses from our government have been highly inappropriate at best and potentially extremely dangerous. The Federal Reserve, in trying to help the banks by lowering FF, looks desperate and reactionary. It runs the risk of alienating our “outside investors”, devaluing our currency, raising inflation prospects and hurting our senior citizens who live off of their savings.

Some might argue that we will have a refi boom with the lower mortgage rates. Good luck to those who NEED to refinance, because your loan appraiser may want to see you kick in some equity (the “cash-in” refi). The fiscal stimulus package is barely a finger in the dike and smells of politics. Recipients may pay down some of their debt or build savings: It is very unlikely to do much more than cause a temporary blip in spending at best. Keep your eyes on the dollar/yen and dollar/euro relationships as well as the 10yr Treasury (absolute yield, relationship to short-term rates and to corporate bonds) to monitor the risks of these policies.

Finally, the primary trend is now bearish until proven otherwise. All of the major markets domestically (and most globally) are in decline. The long-term moving averages have rolled over and are falling. The former leaders of the market and the safe havens due to their lack of domestic exposure (hah!) haven’t proven to offer much shelter from the storm. This bounce is only a bounce in my opinion. Volume hasn’t been particularly strong and no leadership has emerged. The greatest strength has come from the beaten-down Consumer Discretionary and Financial sectors, but they haven’t broken their downtrends. One of the technical tools that I use is Fibonacci analysis. If you aren’t familiar with this concept, I suggest that you learn more. I have found it to be extremely useful in terms of identifying entry and exit points.

I would expect that the S&P; 500 struggles to get through 1410-1420 over the next few months, though it could rally as high as 1455 and still be a bear market. I envision the trading range to essentially be 1310-1390. It is implausible to think that such a big mess, rooted in our society’s desire for instant gratification, could be fixed so “instantly”. Sorry, this is going to take a long time to fix and will result in at least a 1yr bear market (hopefully just one year).

So, after a very brief stay in the bull camp, I am switching back to the team that I continue to think will win this year in a big way. While I am not sounding the alarm at this time, I have started to put on some of my favorite short ideas again and have moved my net exposure via cash and ETFs to slightly negative.

If you’re of the opinion that there should be more government responses and programs, take a look at the video below, which features a recent interview with Professor Bob Shiller:


About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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