Pre-Central Planning Flashback: These Are The Five Old Normal Market Bottom Indicators

Tyler Durden's picture

The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.

From Convergex:

Five ‘Ring My Bell’ Indicators for a Market Bottom 

With the Federal Reserve backing away from its bond-buying program, fundamentals matter again – what we call the ‘Old Normal’ approach to asset allocation and market/economic analysis.  The 6-7% leg down for U.S. stocks since the beginning of the year may not be much fun, but when you start with full valuations and add a dose of bad economic news combined with lackluster earnings, it should be no surprise.  Don’t look for Friday’s Jobs Number or Chair Janet Yellen’s testimony to Congress next week to bail out this market – that’s so 2013.  Instead, dust off the Old Normal playbook for signs of a bottom: track the VIX, long rates, oil prices, gold and money flows.

Bells may not be the oldest musical instruments known to man, but they are among the most solemn.  According to the archaeological record flutes and other wind instruments go back some 40,000 years, with some of the oldest examples unearthed in what is now southern Germany.  Bells are comparatively much younger.  The earliest examples are Neolithic Chinese and about 5,000 years old.  Despite their relative new-boy status, bells are closely associated with religion, from eastern mysticism to Roman Catholic and other Christian faiths in the west.

Even Wall Street recognizes the special status of the instrument with its own aphorism: “They don’t ring a bell at the top or the bottom.”  Turning points in capital markets are hard to spot, as they are an alchemy of human psychology, market dynamics, and news flow.  They are a mystery, and being able to recognize them requires tremendous foresight.  And lot of luck.  No wonder it’s a bell in the old saying.  “They don’t play a clarinet at the top or the bottom” just doesn’t feel right.

Turns out the bells were ringing in early/mid-January, because equity markets around the world have been in a swoon since then.  The pullbacks range from modest – 6 to 7% for the S&P 500 and the EAFE developed market index – to more noticeable, like the 11% decline for the MSCI Emerging Markets index.  Given equity markets’ sterling performance in 2013, a pullback of these magnitudes seems reasonable. 

Still, market corrections seldom waft into the room like a lavender-scented spring breeze.  Rather, they tend to feel like a nasty draft through a haunted house, cackling and creaking included.  And so the current pullback feels ominous, with its combination of emerging markets concerns and news of a still-too-slow U.S. economy.  Throw in a new Fed Chair in Janet Yellen and the U.S. central bank’s seeming commitment to walk away from Quantitative Easing regardless of market conditions and you’ve got the recipe for the market’s current ails.  All courtesy of that eerie damp draft…

What seems different about this pullback is that we can’t expect policymakers to fix it for us – not for a while, anyway.  The Fed’s decision to cut the QE bond-buying program at last week’s meeting seemed tone-deaf in the face of worries over China’s financial system.  Congress may find a way to cut a debt limit agreement, just as they did with the budget.  But there is no appetite for stimulus program to accelerate U.S. economic growth.  Essentially, the training wheels are off for global economy and capital markets.  If we coast off into traffic, central banks may intervene.  But as long as all we get are some scraped knees, we are clearly on our own. 
Since it won’t be policymaker headlines to reverse the current downward trend in risk asset prices, we have to go back to the pre-2008 playbook for some ideas of when the bells may toll and signal a near term bottom in values.  Here are five such signals, and a brief discussion of each:

1.       The CBOE VIX Index.  If you want a signal to buy the open tomorrow, look no further than the VIX.  With a close of 21.44 today, that is a one year high for the “Fear Index”.  Buy when others are fearful, right?

Not so fast, Captain America…  Remember that the last year was still under the sway of central bank policy and therefore exhibited very low price volatility.  So a one year high doesn’t count. 

Rather, consider that the 30 year average for the VIX is 20, and the standard deviation is about 6.  That means 26 is the first stop on the VIX’s move higher (and it will likely go higher) before you can consider it a reliable “Buy” signal. 

2.       Gold Prices.  Thus far in 2014, gold prices have done exactly what they should – move independently of financial assets.  The yellow metal is up 4.5% year to date. 

To signal a bottom in risk assets, however, gold is going to have to start going down.  Think back to 2008, when it went from $975 in February to $718 in October as the financial crisis took its toll.  That’s because when investors feel real pain, they sell everything.  We aren’t there yet, so look for a few days when gold declines right alongside stocks.

3.       Oil Prices.  Crude oil prices have been remarkably resilient, starting the year at $98.42 and closing yesterday at $96.70.  A piece of that strength is clearly Japan’s continued use of petroleum products rather than nuclear power, as well as the cold weather in the U.S.  Still, if China were really imploding, would oil really be over $90/barrel?  It seems unlikely.  We therefore put oil prices in the same bucket as gold – until they start having a few bad days, don’t tell me all the bad news is baked into financial asset prices.

4.       Treasury Yields.  What a difference one month makes.  At the end of last year, bonds were about as popular as the Hollandaise sauce on a cruise ship afflicted with mass food poising.  Fast forward a month, and the largest exchange traded funds in the fixed income space are up over 1.5% even as equities falter.  The claim that the old “60/40” mix of stocks/bonds in a portfolio is dead is, well, dead.  Diversification still works.
Still, the safety trade back into bonds does signal something more ominous: lousy growth in the back half of 2014 and the increased chance of a shallow (but noticeable) global recession later this year.  Look for 10 year Treasury yields to bottom at 2.5%, but any further decline means risk assets will get that next move lower. 

5.       Money flows.  The largest shocker of 2014 is that U.S. listed ETF money flows are negative, to the tune of $15.4 billion in outflows.  These have been so routinely positive for years now that any story about a “Bottom” for equities needs to explain why (and when) investors will start to be net buyers again.  To put a finer point on this, since the beginning of the year investors have redeemed almost $28 billion of AUM in just 5 ETFs: SPY, EEM, IWM, VWO, and QQQ. 
In short, we would like to see these flows flatten out and start to reverse. 

Will be get the sun, the moon, and the stars to align with these five points?  Probably not.  The world’s not that simple.  What does seem clear is that markets will remain volatile for some time.  That’s Old Normal price action.  It may take some getting used to, but ultimately that’s how capital markets are supposed to work.

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Cacete de Ouro's picture

The Fed is controlled via the FRBNY which is controlled by the New York money center banks and affiliated law firms which are in turn controlled by the City of London Banks and old European families. Period. End of Story

The Dunce's picture

Wall Street and the City of London, baby!  They got us all by the balls.  Word to your mother.

Honey Badger's picture

This downturn has been orderly. When it gets panicky, buy the dip expecting old yeller to bail yer ass out.

jcaz's picture

lol- you go with that.....  This is the most telegraphed correction in history-  they've been testing the water for a month,  smart money has left the building.....   They'll yank 10% more out of these pigs just so Janet can flex.....

Cognitive Dissonance's picture

I have come to the inescapable conclusion that markets have always been rigged and manipulated and it was just the propaganda that got better at hiding the fact. Thus the article's trip down memory lane on when "indicators" actually mattered or were good at 'indicating' something.

<Time for Yellen to call Goebbels back from the grave.>

CrashisOptimistic's picture

"So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders?"


How about you stop pretending there is a market of any sort in any asset and accept that the world has begun disintegration and it is NEVER going back to normalcy.

So. . . farmland.  Fuck gold.  Fuck stocks.  Fuck bonds.  All of them involve playing in an arena where the only rules are . . . you lose.


LetThemEatRand's picture

They've got farmland controlled too.   Ask Monsanto and all of the nice corporations who control the water rights and relish the latest droughts/water excesses that destroy crops and cause the few remaining small farmers to sell out to BigAg.  There will be no market in any of the things you mentioned until the Fed and its owners are dethroned.

Carl Popper's picture

Buy some old pastureland in states where water rights still come with the land, southeastern states and arkansas and louisiana

Put a tree farm on it for lumbar or nuts (black walnut requires no attention)

Or fruit trees. Blackberries, etc.

There are still many ways to farm independently. Avoid commodity crops

Poor Grogman's picture

Trees look good, but just try to insure them against fire, and come harvest time in 20 years or so you might be wishing you had chosen something more marketable.

Sure there are probably some exceptions just choose wisely.

Frank -THE COIN -'s picture

This article is right on time. Also yesterday @SayWhatAgain, pointed out that he looks intraday at the Up/down volume Ratio. And that there was serious selling. I had'nt looked at it in many years until he made that point. It really,really helped me out today. Thanks for the info SWA.

rubearish10's picture

Ah, remember when you would hear headlines of "FED injects liquidity through repos" or "FED cuts discount rate"?? What can they do now to rescue in case of an emergency?? Oh yeah, wait until the March meeting and perhaps untaper? Really? There's no Plan B and now the eveidence is being revealed in the marketplace. It's about frekin' time!

kaiserhoff's picture

WTF?  Who is even thinking about a market bottom here?

And why the trend towards interesting titles followed by meaningless, wandering, thumb sucking pieces that say nothing?

madbraz's picture

"Look for the 10 year to bottom at 2.5%" - yeah, right. More like 1.5%.

Goldilocks's picture

The 5th Dimension Age of Aquarius 1969 (3:49)

onelight's picture

Thanks for that blast from new age-y past...I saw them when very young at the old Circle Star Theater in Ca many years ago, toward the end of their touring...this piece was from another planet, but in tune with that part of their times...they had a broader repertoire, but that piece was hilarious...and Marilyn McCoo was the hotness

Ned Zeppelin's picture

If the Fed wishes to retain any credibility, which is critically important to its "jawboning" power, they need to stay on target with the taper.

It reminds me of Greenspan's lockstep increase of interest rates at a .25 rate at each FOMC meeting. At the time i thought it was pretty clear he needed to do that so as to have "room for action" should the situation deteriorate. Of course the tinkering with rates over time triggered much worse problems, but these clowns (and they are arrogant clowns) never learn to leave the markets alone.

So expect some tightening, simply because the Fed knows it needs room to move at some point. This time, the tighteningis not in rates, but in "officially announced" volume of QE, which is not the same as actual volumes of QE, which are not disclosed and which are far higher, of course.

If I am wrong Mr. Hilsenrath, who took the unusual step of showing upon Morning Joe this week to explain what was going on (he explained nothing - shocker) please chime in.

Carl Popper's picture

Cmon baby.

Ten percent more down and I am in.

Janet will rescue me.

Muppet's picture

"...the Fed's lack of vacalty..."   Lost me with that word.   Stumped.

Professorlocknload's picture

This is what a real bottom looks like. 

Poor Grogman's picture

"Essentially, the training wheels are off for global economy and capital markets"

Yes, now everything must be switched to full remote control!

ben_bernanke's picture

"Not so fast, Captain America…  Remember that the last year was still under the sway of central bank policy and therefore exhibited very low price volatility.  So a one year high doesn’t count. 

Rather, consider that the 30 year average for the VIX is 20, and the standard deviation is about 6.  That means 26 is the first stop on the VIX’s move higher (and it will likely go higher) before you can consider it a reliable “Buy” signal. "

This statement is extremely ignorant. The VIX never closed above 24 in 8 of the last 20 years during the secular bull market years (1992-1997 & 2004-2007). We're in a period of below average volatility where the VIX will poke up to 20 and collapse, just as it did again today. The actual average during those years was 14.31, NOT 20.

Tyler gets it dead wrong. As always. This guy is utterly clueless.

Bruno de Landevoisin's picture

Note to the Federal Reserve:


Dear Janet;      February 4th, 2014


If I may be so forward, I felt compelled to pass on a quick note from a most concerned permanent resident of the United States of America.


Purposely degrading this Nation's hard earned reserve currency status, that was so honorably delivered to you by previous generations who built this great country from the ground up through their virtuous and industrious blood, sweat and tears, only to then implement a disgracefully lamentable monetary policy which deliberately steals from future unborn generations in order to facilitate living standards beyond our means, so as to maintain an unearned, undeserved and unprincipled culture of grotesque mass over-consumption, can only be characterized as a deplorable unconscionable abomination of Biblical proportion.......



Respectfully yours,


Le Baron Bruno Camille Soucanye de Landevoisn