Stocks ended the day down 1.18%, as measured by the world stock fund VT in terms of US dollars. In terms of gold, the damage was somewhat less at -0.88%. As we have been discussing, bearish factors have been accumulating. Does the technical picture support the notion that after a nine month hiatus, the bear is back?
A reasonable test is whether the trend line connecting the lows of last October and of this March has been breached. The answer … unambiguously ambiguous. In fact the market closed today visually spot on the line. So the title of this post is premature.
Then why propose it now? Because tomorrow’s close will provide the answer. If it’s lower, the supporting trend line will have been broken and the technical burden of proof will then fall to the bulls. If it closes higher, the rising trend support holds and the bounce would signal a reprieve.
For now. Regardless the case for conservatism is there. A palpable change in the market camber occurred as July gave way to August. We commented on the seasonal setup in When Will Wile E Coyote Look Down?. We will have our answer in under 24 hours.
The verdict is in … the trend line support has failed. I only wish the break was more decisive … VT closed today only a whisker below the line. Still close enough for government work. What we do know with more assurance is that the market sits on a knife edge, and that there’s no middle ground. It either bounces from here for a tradeable rally or the trap door opens. Adding an extra dimension is that the S&P, which makes up nearly half of the world stock market, hovers just above a century mark. It broke its 50 day moving average yesterday.
So we’re still a bit early in declaring the bear market back. But we have other fish to fry. The traditional safe havens, gold and Treasuries, haven’t been doing their part. The are down substantially less than stocks in dollar terms, but the contrary action we’d like to see is still MIA. In other words, this is so far about as much as a dollar rally as it is a stock decline.
While this may be small comfort to investors, it’s just what J Powell would want to see. Recall we’ve been fretting that final inflation has bottomed and is about to come bubbling back up. A sufficiently steep stock selloff on a stronger dollar is about the only thing that stands in the way. We’re hardly there yet, but if this dollar strength and corresponding asset price weakness persists, it would be good news for the CPI over the coming months. The bad news … we’d need to see an at least 20% haircut in stock prices to turn that ship around.
It’s easier to say what won’t happen. The general financial media narrative is that final inflation will slowly, grudgingly, recede into the Fed’s target range over the course of the next year or so. That won’t happen. It will bob and weave for a while, then drop rapidly, possibly even below the magic 2% line, likely on the heels of some kind of financial “crisis” or “hard landing”. I hesitate to hold up 2008 as an example, but that’s what happened then. We may have linear dreams, but don’t live in a linear world.
Today’s selloff makes the trend line break decisive. Again, the trend line support we’ve been watching is significant because it has underlined the entire bull structure since last October’s lows. It’s also global in scope, involving the entire world stock market.
We have yet to see however a convincing disconnection between stocks on one hand and gold and Treasuries on the other. Gold and bond price declines have been milder though, indicating a split … stock price declines represent a mix of actual stock value declines and a rally in the dollar. The dollar itself so far has been the strongest global asset.
Treasuries appear to be the prime mover. I’m not buying the story that it’s a sudden epiphany that the Fed will hold rates higher for longer … not only is that not news but it’s really hard to explain how it would have such an impact on ten-twenty-thirty year paper. Differences in short term Fed rate policy over the next twelve months or so just aren’t enough to dominate decades of duration.
The real driver is staggering supply. Multi-trillion-dollar deficits represent a voracious appetite for capital. Real relief will likely require both a more accommodative Fed and a serious effort to rationalize federal spending. While the Fitch rating downgrade received most of the media coverage, the latest tipping point was the Treasury announcement that preceded it indicating Treasury seeks to borrow over a trillion dollars in this quarter alone.
We could have seen a fleeting glimpse of the aforesaid disconnection today. The second wave down in stocks actually saw gold and treasuries rally. So far, so tentative, but it bears watching…
I read somewhere that traders have moved from buy-the-dips to sell-the-rallies. You don’t need somebody to tell you that though … when it’s buy-the-dips, there are no dips; when it’s sell-the-rallies, there are no rallies…
In the immediate term, a bounce in stocks is likely at any time. What to watch for … does it exceed last month’s highs? If so, the return of the bear is postponed. If not … it’s confirmed.
We now have the answer to our question. The bounce did not exceed the highs. What’s more the market has moved below the lows recorded in mid-August. Lower highs, lower lows. This confirms a bear market.
But what does it say about what comes next? Relatively little. Alas, bear markets are only confirmed ex post. A bit more downside would be consistent with the initial leg down, but a rally could easily ensue from there. We have to cast a wider net for more perspective.
In the bigger picture, I believe the trend is lower. The selloff in the stock market has yet to catch up with the record-setting selloff in the bond market. Deficit-driven Treasury supply is driving that, and although there are some signs of budgetary resistance in Congress, they won’t have much immediate effect.
Final inflation is another factor. Goods and services prices lag stock prices, so there is still quite a bit of inflation left in the pipeline. It would take a substantially deeper selloff than what we have seen so far to turn that around. On this basis, the odds are the lows won’t be seen before next year.
Shorter term, however, seasonals grow more favorable. The second half of September is traditionally a bearish stretch for stock prices. Bottoms often occur in October.