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SocGen Tries To Predict When The Next US Bear Market Starts
This is the longest bull market in US equity history dating back to 1945. The six year run-up in the S&P500 since March 2009 has been truly remarkable, having only been exceeded in price performance terms by the 1929 and 1999 bull markets. It is now also more than 800 days since we experienced even a 10% correction. While such strength and resilience is typically applauded, such exceptional markets rarely end well.
Andrew Lapthorne and the SocGen Quant Strategy team try to forecast its demise...
- So we’re going to try predict the next US equity bear market, a foolish exercise that we admit is more likely to lay us open to ridicule (just ask the ECRI!). We’ll most probably be wrong, but the outcome is not the whole point of the exercise. Rather we hope to build a framework into which we can plug a whole range of macro and fundamental variables to work out their bear market relevance. We hope ultimately to use such a model to rank the importance of the ongoing data series and eventually to plug the resulting probability into some of our asset allocation models.
- Based on six probit models developed in this report, we calculate the average (median) probability of having a bear market in Q2 2015 at about 18.4% (median = 17.5%). We find the key data series we should pay special attention are: term structure spread, senior loan officer surveys, the S&P 500 profit margin, and various style returns such as the return based on Piotroski scores.
Forecasting bear markets
What is the chance of the S&P 500 entering a bear market in 2015? Forecasting, as we all know, is something to be avoided, the future is always unknown. But providing a forecast is not the same as assessing potential risks, which is something we should be doing on an ongoing basis and knowing where we are today is a hard enough and worthwhile task in itself. We have already spent a great deal of time trying to assign a probability of the market going up or down in the near future using price data in the form of returns and volatility1, but here we are attempting to provide a directional probability of a more extreme market move based on some commonly used fundamental and macro data.
Each day we get bombarded by new information. We get hundreds of new economic data points every week and endless amounts of corporate news flow, which may require some kind of narrative to inform our view. For the large part many of us employ a heuristic approach to the art of prediction; we plot charts, we run regressions, and we apply rules of thumb. But here we are going to attempt something a little bit more systematic and scientific? The idea behind this note is not just to predict bear markets in the US, though we will certainly try, but to create a framework into which we can plug some of these endless streams of data in order to demonstrate their relevance in helping us to predict the coming of a bear market.
Can, we ask, develop a more formulaic interpretation of the data?
Now, we are not deluded as to the impossibility of this task. Indeed we have ourselves seen and chuckled at numerous economic models over the years that have predicted either something that never happened or the blindingly obvious. To see the dangers of misforecasting something nasty like a recession, you only need to witness the lambasting the Economic Cycle Research Institute (ECRI) took when it predicted a 2012 recession that failed to materialise. We sympathise, but we also emphasise that our purpose is not to simply assess the likely probability of a bear market, but also to fit the data we pore over every day into its rightful slot in a predictive framework.
Dating the bear/bull market cycle
Assuming the current bull market in the S&P 500 started in March 2009, this bull market is now six years old, making it the longest bull market period in post war history.
Over this period the index has risen by over 200%, making it the third strongest six year run since the year 1900. Famously, the two others (1929 and 1999) did not end well.
This has also been one of the longest periods not to see even a 10% correction; the current run without a 10% correction has now extended beyond 800 trading days, longer even than in 1987, but still some way off the 1200 days of 2003-2007 – and the amazing 1800 days that led up to the 2000 crash.
The point here is that rarely do such strong periods of performance end well, as the lack of pullbacks tend to lead to excess risk taking and leverage. Avoiding the end of such frothy periods in equities then becomes paramount.
A model for predicting bear markets
Before we can analyze bear market cycles in detail, we need to measure and date them in a systematic way. To do this we can use either of two common approaches. The first is based on a dating algorithm developed by Bry and Boschan (1971), and the second uses a statistical modeling technique known as ‘regime switching’. We provide an overview of each of these in the appendix in the back of this publication.
For the purpose of this report, we have adopted the first approach, which gives us our time series of bull and bear market cycle, which we show below. These results also helped to produce the first chart above.
We are going to create six probit models. A probit model is a statistical technique that generates the probability of a bear market given a set of observable indicators (a.k.a. covariates). Essentially it looks for variables that have historically tended to correlate with the occurrence of a bear market. This type of model serves two purposes. First, it provides an insight on calculating the probability of a bear market. Second, it focuses attention on those indicators that can predict the coming of a bear market and disregards those that do not.
Six models – three macro, three equity focused
Three of our six models are based on macro indicators while the other three are based on fundamental equity data. Two of the macro models have a forecasting horizon of 12 months; while the other has a shorter time horizon of just 3 months. The three fundamental models provide a more contemporaneous probability of a bear market and are largely to be used as conformation signals, i.e. does the data we are see today indicate that we are actually in a bear market.
* * *
Conclusion
Adding all this together, we can say our models put the average (median) probability of seeing a bear market in Q2 2015 at about 18.4% (median = 17.5%). Although the suggested probability is not very high, we still need to remain cautious. Market valuations are stretched and the run-up in equity markets since Q2 2009 has been one of the most rapid. US macro surprises have also been very negative so far this year and of course the next bear market may be triggered by a shock outside the scope of the variables used in building the models.
This leads to another key message of this report. Besides generating a bear market probability forecast, the models have helped us to identify a set of macro and fundamental variables that we should monitor with a view to anticipating the coming of a bear market. Some of the key signals that are worth paying special attention to are:
- Flattening of the yield curve
- Increasing oil prices
- Decreasing industrial production
- Widening of junk spreads
- Strengthening of U.S. dollar
- Pickup in inflation
- Shrinking S&P 500 profit margin
- Tightening of loan standard to small firms
- Decrease in load demand from large/middle-market firms
- Increasing S&P 500 leverage
- Increase in various style returns
By systematically monitoring these signals, we can reduce the chance that the next bear market will catch us by surprise and possibly incorporate these probabilities into a systematic market forecasting strategy. These signals should not be a surprise anybody since all of them are popular Wall Street measures, and our contribution is to build a framework into which we can assign weights and importance to all this noise. The work is ongoing...
Source: SocGen
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Ummm, looks like we're due for one last week.
Very simple the moment the market goes Bear, it is the end of the FIAT system , thats right capote , done
When terrorists finally realise who is the real enemy and someone blows up the Fed?
What do you mean?
Terrorists and the Fed have the same ideology and goals. Just different methodologies.
Don't hold your breath. I have a bad feeling this beast has plenty of life left in it. The masters will just keep feeding poor souls into its flames and this bitch will keep rolling. That said, I hope you're right.
In order to break the longest streak without a 10% correction, the market can still go up for 1000 days.
I agree, although I must admit I never thought they could kick the can that far in the past. That being said maybe this is the inflection point they have been trying to acheive to lay waste to everyone again.
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That is a hard one. They're both so classy.
how many bull markets have existed during a depression?
*note: you cannot include socialism governments
We can just sell Canadian citizens till the deficits are gone!!
Itll be easy. They are passive, polite, self righteous about their govts honor to protect them and even with chains a ball gag and a butt plug courtesy of their govt (crown corporation).....they still think they are free!! The perfect neocon slaves. Dont get me wrong...most everywhere else is the same....but the people at least know it.
http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-20/latest/rsc-1985-c-...
From an American wanting to share his glee of owned-ership with his fellow norte americanos.
RIPS
Andrew Lapthorne and the SocGen Quant Strategy Team- should keep their resumes updated...
When you make your predictions based on a clean market, make sure the players aren't wallowing in the mud....
This is all code for "we won't admit that we know when it will happen because we don't know the Rothschilds (wink, wink), but come to us small investor. We'll protect your ass*"
*which is further code for "bring the lube, muppet. Or actually, don't. We prefer no lube."
Remember? It's different this time!
the probability of a market collapse is exactly equal to the probability that the centrals will stop using QE to buy stock index futures.
So their models are based on variables from PREVIOUS cycles?
And in how many of these other cycles did fed funds sit at ZERO for years?
Nothing compares to what is going on now. Term spread? In other cycles the curve flattened with both short and long rates RISING. The curve led the economy. In this cycle the economy is leading the curve and the flattening is happening with long rates FALLING.
There has be a similair case......
Think the Nikkei...........
I have every confidence they will be able to pull out in time. Just like everyone else.
I know plenty of fathers that thought they could pull-out in time, hence now they are fathers.
Easy Socgen, when the next bear market arrives, you wont have a market ever again. This bitch is toast, stop trying to predict and enjoy what you have.
Priced in. BTFD, bitchez!
Before you can have a bear market, you need a market.
Well said sir!
RIPS
When the false flag is ready to go.
(I keep saying this, but why not, there's not much downside to it.)
But maybe too many people are buying into the September meme, so who knows, it might have already started this month.
Wow X 1000 up. Couldn't have put it better myself. And I take particular delight in verbally abusing such sick fucking parasitic cunts like yellen and the Kenyan cum sucking black faggot cock jockey
A Bull Market?!?! Are you smoking what the long legged mack daddy in the jihadi house is tokin?
Let me be as clear as shine.
-A bull market doesn't require the pig cunt yellen counterfeiting trillions
-A bull market doesn't require the pig cunt's plunge protection team every time the market loses 1%
-A bull market doesn't require the pig cunt yellen's zero to negative interest rates
-A bull market doesn't go up because companies are buying their own useless stock
-A bull market doesn't ride on the coat tails of Apple
Bull Market my fucking ass. Sounds like a fucking bear market that has been bought and bought again by the cunt of cunts - the ill-bred, slimy as snail shit, yellen.
Clearly, but you don't have to sugarcoat it on my account.
Or spice it up for you?
Russian Bear will commence world Bear market when ready to push button. Meanwhile have a shot of vodka and chill out.
The bear market actually began in October of 2014.
WTF are they talkin about!? There little manipulated fuckin stock shit!? Are they crazy!? The whole fuckin world economy is collapsing and these freaks are sitting behind their psychopathic polished desks as if the world doesn't exist. We live the law of the jungle with too much fraud creating too much debt by too many banksters who have access to too much money with too much leverage …
… and little by little they went insane … WORLD ECONOMY COLLAPSING!!! - HEADLINES http://forum.prisonplanet.com/index.php?topic=247239.0
My father, dead now, told me a story about his time in the air force during WWII at 18 yrs old when sent to India. On a very long hot boring, talking days here, train journey, a troop train, they passed hundreds of miles of farmland.suddenly a shout starting at the front of the slow moving train would work its way to the rear and minutes later a deafening fusilade would start that rocked the train. Every single gun on that train was unleashed on some fucking poor farmer with his cow, whether kids there or not, and they were blown to smithereens. I asked if he regretted it later. This was his answer. I saw thousands die. We would bet cigarettes on whether some dying derelict would last until we finished eating dinner, as he lay in rhe gutter. Or how many got dismembered as another train left the station. You just saw that much death you didn't care. Would I do it now, no, would I do in the same circumstances, yes, probably. Son, it's human nature, the only difference was that then there could be no possible consequenses. And that is when it's the most dangerous. When the first consequences start to happen for bad investment decisions, that is when the market turns. Those consequences are happening now. Even if glossed over hidden or papered over. But they are happening. Like stepping in a pool of blood whilst watching the stars, you only realize when you slide and fall. When you see what it is, terror strikes and then panic. I see pools of blood everywhere. And growing. Eventually enough people star gazing will step in a pool too. That's when I will be far far away. Until then, you are like the farmer and his cow. They will take everything because no consequences for them. And that cunt yellen and the MSM's job is to keep you gazing at stars.
I dont need no stinkin mathmatical models, just look at how it all unfolded the last few times..
I predict September 2016
why is that the day Obama abdicates?
yup...
bear market starts whenever Banksters are done positioning for it.
If you want to talk secular cycles, the S&P is topping out in inflation-adjusted terms with its previous high back in August of 2000. That is one hell of an air pocket! http://www.macrotrends.net/chart/1359/s-p-500-secular-market-cycles
what is bear market?....I have been flipping car loans to leverage buy stocks....10% profit a week. When that stops working....I will take a loan from Germany, Denmark or Japan where they pay me to take the money and buy Japanese stocks that BOJ has guaranteed would go up...FOREVER.
What...me worry!
You got yer bulls, and you got yer bears, and you got yer Yellens. This is a Yellen market. It's gonna be flat as a pancake through the end of the year, or as close as she can make it. It might be a "bear" in that it will close down about one percent from opening in January, or She might decide to boost the indices that one percent so it's not *officially* a bear. Anything plus or minus one percent is a Yellen market, and odds are that's what we will have through 2015.
I BTFD. Why are stocks down? Should I have BTFATH instead?
It's like trying to predict the chances of rain when the military is pointing a big freaking HAARP weapon at the ionosphere.
MEMORANDUM
It will rain when we say it will rain. The market will be allowed to decline when we say it may decline. Anyone who didn't get the memo was meant to not get the memo.
cc: Plunge Protection Team, Fed Trading Desk, GS, Chase, IMF, Draghi, BOJ
Ask Martin. The one who was in a jail cell. 7-10 year cycle. When US banks can't reach a stress test, the banks need to buy more CDO and eliminate competition. The less banks you have, the easier to hide fraud. That's why bullets will fly and bankers will dance.
Ask Martin. The one who was in a jail cell. 7-10 year cycle. When US banks can't reach a stress test, the banks need to buy more CDO and eliminate competition. The less banks you have, the easier to hide fraud. That's why bullets will fly and bankers will dance.
Ask Martin. The one who was in a jail cell. 7-10 year cycle. When US banks can't reach a stress test, the banks need to buy more CDO and eliminate competition. The less banks you have, the easier to hide fraud. That's why bullets will fly and bankers will dance.
Glenn McCoy is on fire.
Time to clean cashe. Sorry for repeat post.