If we were witnessing a real trial-by-jury (which, at the end of the day, is actually what the market is), I think it’d be safe to say that bears and bulls both have pretty solid evidence to put forth in their favor. Yes, there have been sub-industries that have done well and that we have covered here on The Chart Report, whether it’s Insurance, Gold, Aerospace, Semiconductors (and here), etc. And Sectors that have been awful, such as Energy ($XLE) or Basic Materials ($XLB) The lists go on in both directions. Heck, even Bonds bulls are having a great 2019. But what we are really talking about here are broad market indices. As we know, they’ve really gone nowhere in quite some time.
Dow close: 26486
Dow close: 26164
Thanks for playing
— Helene Meisler (@hmeisler) October 8, 2019
BAYCREST: “The SPX has essentially been flat over the last one, two, six, twelve, and eighteen months. This has been a frustrating environment for those stubbornly in the bullish or bearish camp, but has also allowed both sides to be ‘right’ at some point.”
— Carl Quintanilla (@carlquintanilla) October 8, 2019
Frank Cappelleri sums it up quite well with his views on two widely-used breadth indicators.
— Frank Cappelleri (@FrankCappelleri) October 8, 2019
So, what’s the deal? Should we be bearish with stocks like Taiwan Semiconductor ($TSM) and Lennar ($LEN) rallying to new highs? Semiconductors ($SMH) are generally considered to be a “leading” indicator among analysts. And Homebuilders ($XHB)? Is the market signalling that we are on the verge of a recession with these types of stocks showing such relative strength?
$TSM Taiwan Semi
inside day on Friday pic.twitter.com/MgVw0s6fng
— Christian Fromhertz (@cfromhertz) September 30, 2019
Lennar, Pulte and NVR are all at new highs today.
— Eddy Elfenbein (@EddyElfenbein) October 1, 2019
As of the end of September, the Monthly MACD on the S&P 500 ($SPX) was holding above the zero line, as Damon Race points out.
$SPX Monthly. Not over yet, but important to cut through noise and note that on a longer term time frame bullish MACD cross above zero line is holding. RSI cleared divergence w/a successful retest. Above Aug open. Time frame continuity to the upside comes back>prior high. pic.twitter.com/blgEMFJzos
— Damon Race, CMT (@kalibercap) September 25, 2019
J.C. Parets asks, “What if Europe actually beings to participate?” Would this be a bearish sign for global equities?
— J.C. Parets (@allstarcharts) September 20, 2019
Many bulls also point to the fact that, if we were to see an economic recession or bear market (the two are not necessarily intertwined), it would seemingly be the most well-anticipated market contraction of all time. The point here is, if you are a believer in the old saying “The market looks to cause the most amount of pain to the most amount of people”, then it’s somewhat hard to buy into the doom and gloom that is being spewed across every financial (and non-financial) media outlet.
Extreme levels of negative sentiment.
Highly defensive positioning and high levels of cash as shown by the latest BAML survey.
If this is a long term "top" everyone got it right.
Could be a first time for everything I suppose.
— OmahaCharts, CMT (@omahacharts) August 29, 2019
And every time we’ve seen a spike in fear, the market has rallied.
One of my Core Flow models shows how fear has quickly spiked on every small pullback this year (mass panic-selling each time).
— Macro Charts (@MacroCharts) October 7, 2019
On top of all this, what if we are already in a cyclical bear market that is correcting through time and not necessarily price (i.e. a massive, 2008-like tsunami of selling)? Also a possibility.
As a recap, bulls have the fact that, when all is said and done, we are still in a long-term uptrend. Monthly charts look fine. Further, are investors running for cover if areas like Semiconductors and Homebuilders are outperforming? Hard to believe so. European equities are the closest to upside participation they’ve been since 2014. And finally, in what market environment has there been this much sentimental “fear” in which we actually got a bear market? Hard to see it happening, but as some have pointed out, there’s a first time for everything.
It’s a strong case.
Bears…what ya got?* (Here are a few areas touched on previously.)
Something that many technicians have pointed to throughout 2019 is the fact that Transportation ($DJT) stocks have not confirmed new highs with the S&P 500. And this is also another subject that has been covered here on The Chart Report. While interpretations on Dow Theory are left open to personal opinion, I don’t think we want to see stocks like Union Pacific ($UNP) or FedEx ($FDX) in downtrends.
Dow Jones Transportation Average diverging from the S&P. Transports underperformance has been a bearish indicator over the past 12 months. pic.twitter.com/KvOAAG5BJW
— The Bear Traps Report (@BearTrapsReport) September 19, 2019
Maybe we should be buying Gold – and their Mining ($GDX) counterparts – instead of stocks? After all, Gold ($GLD) is emerging from a multi-year base and very likely to outperform equities.
— Michael Kahn, CMT (@mnkahn) July 18, 2019
There’s also the uptick in defensive equity positing that we have seen, as Real Estate ($XLRE) , Utilities ($XLU) , and select Consumer Staples ($XLP) names haven been the strongest. Growth is dead.
The story of US Equities over the trailing 12-mo's:
7 remaining sectors bunched around benchmark return +/- 5% pic.twitter.com/Ic127fdJQ0
— Steven Strazza (@sstrazza) September 5, 2019
Lowered expectations of returns on equities is also a common theme among the macro crowd.
— Jesse Colombo (@TheBubbleBubble) January 16, 2019
We are clearly in the 9th inning, according to many analysts. Heck, we may be in the 10th inning. That’s how far overdue we are for a massive bear market. There are a plethora of economic indicators that have been signalling a correction in equities, and this composite is a good example of their readings.
Historically, when my US macro composite peaks in the 90th percentile & turns lower, things start to get ugly for equities around 4M later on avg. The latest signal triggered in July which therefore targets November for a major correction. The clock is ticking for this old bull. pic.twitter.com/tWFTJKR4N6
— Julien Bittel, CFA (@BittelJulien) September 19, 2019
There are very large bearish divergences in many indices, including the S&P 500.
— Callum Thomas (@Callum_Thomas) October 6, 2019
Breadth is somewhat anemic.
Very concerning drop in the number of stocks above their 200 day moving average.
Bearish action pic.twitter.com/WM12tlkpKm
— Gavin McMaster (@OptiontradinIQ) October 8, 2019
Bonds are beginning to outperform stocks, according to Paul Ciana. How can that be bullish for equities?
— Abigail Doolittle (@TheChartress) September 26, 2019
Either way you look at it, there is a lot of evidence that both sides of the aisle can use in their favor. The noise is louder than ever, and traders and investors alike continue to attempt to decipher headline after headline. Frustrations also grow, as those who have latched themselves to indexing in the major indices have seen their accounts plateau over the last 18+ months. Bulls remain positive, pointing to the strength in “risk-on” areas of the market, including Semiconductors and Homebuilders. Monthly charts are still constructive and the BTFD regime is on a John Wooden-like winning streak. So, until that ends, why would you overthink it? “Not so fast!”, bears claim. “We have our evidence, too!” And they do. Transports have been lagging, which is a big deal for Dow Theorists. Gold is beginning to outperform equities. And further, Defensive positioning in the market has many clamoring that Growth is clearly dead. And then there’s the macro indicators. And why fixed income fund inflows so massive? Would be want to be seeing that capital put to work in stocks if the market is to chug higher?
It’s a tough market out there. And both sides feel really good about their outlook.