Bear Market

Here's what markets do when they break critical support: they re-test lows. That sets up an eventual target for this decline of 670, which would be a re-test of the March 2009 lows. Bulls have to answer this question: once the 200-week MA is broken, why shouldn't this market re-test the recent low? If it's "different this time," what makes it different from every other era and market? It might be a good time to recall that index funds are only "safe" in the sense that they aggregate the risk of all stocks in the index. A market that declines 40% will take index funds down 40%. There is nothing "safe" about long-equity funds that track a market heading down. Nobody knows what will happen tomorrow, much less 30 days from now or three months from now, but as of this snapshot of the market, the evidence of a Bear market decline is rather substantial, and the technical evidence of a Bull market is rather thin. As the saying goes, keep it simple.

The question that I have been asked more today than almost any other time in the past month has been "Is This The Time To Start Buying Back In?".  With the recent rally off of very oversold conditions in July and August, a reflex rally has been in the offing.   Also, with this being the end of the month, we are seeing portfolio window dressing for mutual funds. However, a brief review of our technical indicators is in order to determine where we are in this current market environment and what the potential "risk" versus "reward" of being fully invested currently is. 

According to the Fed, the BUY AND HOLD is dead. 

Since Zero Hedge updates over the next sevearal few hours will be sparse, please use this opportunity to share your transitory outlooks on current events, life, google trending topics, and pretty much anything else.

The week is finally over, and the numbers are in: after narrowly avoiding the "bear market" two weeks ago when we dipped by 19.63%, or about two ticks away from the dreaded 20% correction, the subsequent dead cat bounce fabricated in no small part courtesy of Europe's unprecedented intervention in all markets, both bond and stock, has ended, and we are back to being under 2% away from reentering a Bear Market (and closing at the Lows of the Day). That however will not be the end of the world: as the chart below shows America will actually be the last major market to enter join the Bear party, so little shame there. As the second chart from Rosenberg today shows all the developed countries plus all the BRICs are already there. We expect an ongoing selloff into the last week of August (no need to remind what happens then), at which point the market may get a surprise or two. In the meantime, we depart with Rosie's words: "the US economy is slipping into recession, Europe is as well, and HP served up a reminder that this earnings season has not been the slam-dunk positive reporting period posted in the prior eight quarters. But disciplined investors who took our advice should not be feeling much pain at all." Who laughs last again?

In a wonderful piece of financial engineering, the Federal Reserve has reduced the duration of the recent bear market to 36 hours.

When looking at these 3 charts – banking, emerging markets, and China – it is hard to make the case that we are NOT in a bear market already.

Last night it was the world growth dynamo (China), now it's Europe's growth dynamo (Germany): DAX (and STOXX) both enter bear market territory (20% correction) following the Shanghai Composite. The entire world is on its way to the 25% correction we said is inevitable before QE3 is started.

That is all.

This isn’t the time to hope.  This is the time to take some action to protect yourself and your money.

It is no secret that CLSA's Russell Napier has not been a fan of QE2. As he pointed out in his recent prominent note, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." Since as of now we still don't know when and if there even will be a package, here is Napier once again, interviewed by the FT's Long View, presenting his updated views on the economy. His outlook, which we agree with entirely, is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards, is not pleasant for the bulls: 400 (or somewhere in that vicinity). And that will be the true generational buying bottom.

The “RISK OFF” trade could deliver a huge flight to safety for Treasury bonds. Is shorting short dated bond puts the best play?

The most important piece of news announced last week was the Fed’s release of the schedule for its second round of QE 2 bond buying. All told, the Fed intends to buy $105 billion worth of bonds through January 11, 2011. The purchases will occur practically every other day and are broken down into $6-8 billion increments. Now, the Fed has made it clear that it intends to prop stocks up at ANY cost.

Timberrrrr. The market sold off today as a result of tech companies posting earnings that failed to titillate the street, China raising their interest rates to try to stave off an asset bubble that soon may be only a prick away from popping, and the rent still being too damn high.

Many skeptics enjoy pointing out that the fear and loathing toward stocks as exhibited by the seemingly endless mutual funds outflows, now in the 18th consecutive week, is nothing but a contrarian play, and when the masses are stepping out is when the smart money should invest. Under other circumstances we would totally agree. However, in this case, we make the argument that it is in fact these "contrarians" (with the assistance of the Fed, the Primary Dealers, and the HFT scalpers) who have ramped the market in advance of this move for many months now, anticipating an inflow which never comes. In other words, the true contrarian move is to fade the market here. Why? Because as the below chart from ICI shows, stocks have experienced the biggest short-term equity return upswing in history on the smallest net amount of positive inflows also in history. The argument would go that the entire upswing is nothing but an engineered push on nothing but momentum, and QE, and that fair values are far, far lower. Once GDP passes below zero, and once S&P EPS forecasts are revised to +/- 60, as the double dip unwinds, and applying an appropriate multiple of 10-12x, the market will be far more credible, and will see far more inflows when it is at 600-700. For now, however, nobody is foolish enough to enter. And those buying on hopes that Joe Sixpack will finally put in his two remaining cents in Amazon will continue to be disappointed, entrusting their entire risk capital to the like of the Federal Reserve, Goldman and Getco.