It’s time to repeat the rules you had better follow as bearish market action is much different than bullish market action. We have no interest in waiting for the pundits to call a bear market as they wait until markets are down 20%. Markets are made up of thousands of stocks, a couple hundred sectors, a bunch of countries, size (large cap vs. small cap) and a ton of sub-sectors. There is never a point where 100% is in a bull or in a bear. Pay attention.
We start by telling you that in bearish markets, excuses are made by the people who stay bullish. IT’S THE ALGOS…IT’S THE BUTTON PUSHERS….IT’S THE SHORT SELLERS…MARKET IS NOT PAYING ATTENTION TO THE FUNDAMENTALS…blah blah blah.
In bearish markets, you will hear the following words: “CHEAP, OVERDONE, NOT REALITY, OVER-REACTION, VALUE, GARGANTUAN BARGAIN, IF YOU LIKED IT AT THE HIGHER PRICE, YOU WILL LOVE IT AT A LOWER PRICE, and our favorite…THE MARKET IS WRONG.
We are not stating these things to make fun of anyone. We are stating fact. We have studied not only the action of bull and bear but also the reactions. You must know that Wall Street has no interest in telling you markets are going lower. Their only interest is keeping you in. Do not have a short memory. We know it has been a long time. Rule #1…the market will do whatever it wants to do regardless what anyone thinks.
In bull markets bad news is good news and good news is excellent news. In bear markets, good news is bad news and bad news is horrible news. A great example is FEDEX from last week. Reports perceived good numbers…the stock up $6 early…finishes down big and drops $12 the next day. That does not happen in bullish markets.
In bull markets, margin is your best friend. Margin is the leverage that fuels higher prices as leverage works. In bearish markets, it is your biggest enemy as the leverage has to come off first before the real selling gets going. Margin has been at all time highs every month.
In bullish markets, prices finishes strong into the close. In bearish markets, price weakens into the close.
In bullish markets, world markets are strong with less liquid, emerging markets leading up.
In bullish markets, the 50 day moving average is ascending with pullbacks contained above this important line. Remember, the 50 day average is just price…adding up the past 50 day closes, divide by 50 and get a smoothed out line. In bearish markets, the 50 day moving average is descending with bounces contained underneath the line. Before that bearish occurrence can happen, price breaks the 50 day line. The line flattens out, rallies bounce up into the line before the line turns down and then good night.
In bullish markets, the new yearly high list is plentiful. In bearish markets, the list is weak while the new yearly low list expands markedly.
At the end of bullish markets, the number of areas and names leading contracts while the indices stay up. This is the narrowing we have been talking about over the past few months. Remember, in recent weeks, we have been telling you the only games in town were the NASDAQ/NDX/SEMIS/GROWTH and to a lesser extent, the FINANCIALS. We actually told you if they go, the market goes. This week, they went bye bye. (More later on that!)
At the end of bullish markets, the biggest losers ultimately come from the previous biggest leaders because of how over-leveraged, over-owned and over-loved they are.
Bearish markets usually have 3 phases or legs to the downside. We mentioned this on tv and radio several weeks ago. Phase 1 started at the end of January. Phase 2 looks like it started this past week. Normally, these phases last a while. The first phase down lasted an abnormal less than 2 weeks.
Near the end of bullish phases, bullish sentiment gets frothy and speculative as all our indicators spike higher. Recently, we told you some of our indicators hit numbers not seen since 1987. Just reporting the news…not predicting anything.
Which brings us to the recent actions:
January 29…after sentiment became overly bullish, after margin hit record high after record high, after a few months of the market’s leadership narrowing, the market topped. After a waterfall, the market put in a high volume reversal low. After the low, the NASDAQ/NDX/SEMIS/GROWTH got the lion share of the move back up as they went into new high ground while nothing us did, creating major negative divergences. Last Monday’s action got us thinking “uh oh!” Wednesday’s ugly reversal day off of Fed day got the fork moving. Thursday and Friday’s action stuck the fork in bringing in phase 2. (Keep in mind, 3 phases are normal but in the case of 2000-2003 and 2007-2008, there were more!)
So…they got the Financials and they now got the NASDAQ/NDX. What really worries us is the tone of the drops. Don’t blame the algos because if you are going to blame them for the downside, you have to give them the credit for all the upside and there has been a heck of an upside. As we scanned a couple thousand names this weekend as well as 200 sectors and every country around the globe, we have one area that is holding up and that is ENERGY/OILS as oil prices have broken out to the upside. GOLD is strong but gold stocks were at yearly lows going into Friday.
We know you are hearing all the whys…tariffs, debt, deficits, turnover in DC, investigations and all that crap. We do not rationalize why. Debt and deficits have been out of control for years, tariffs have been promised for a while and investigations have been going on for thousands of Dow points. We care about price first, second, third, fourth, fifth as it is price what you get paid on, not opinion and not the news.
You are going to be bombarded with the words that everything is fine, that the market has had a big run and is way overdue. That’s fine. BUT AGAIN, we care about today and we care about price and price is speaking loud and clear. In case you did not know:
Consumer staples have basically crashed. Yes, food, drugs, beverage, tobacco, household products.
Financials cracked badly this week, especially the regionals. This is real bad news for markets.
The SEMIS cracked badly this past week.
Interest rate-sensitive stuff like real estate, utilities, housing and housing-related are already in their own private bear.,
Materials have broken the Feb 9 lows.
Metals and mining have melted down. US Steel dropped 15% in the past week and 30% in the past 2-3 weeks. Wasn’t steel supposed to benefit from tariffs?
Health care has been shredded.
Industrials have broken badly.
Foreign markets have been bludgeoned. Some very important markets like the UK FTSE are at new yearly lows.
Every DOW stock is now below support and the 50 day average. The DOW and the NYSE finished at closing lows of this move down.
We can go on and on. Do not believe anyone who tells you this is all normal, that this is all garden-variety and we will just go back up. As we have been telling you, there is more time and price. As we have told you, we guarantee markets will go down even though recent news shows a strong economy.
We have no idea how the near term plays out. The near term is the trees. The forest is the big picture and the big picture is decidedly bearish. Notwithstanding some violent bounces (and we will get bounces soon as the DOW dropped 1400 points last week), markets are now in no man’s land and oversold off this recent drop, we repeat…we expect more time and price now that the last vestiges (big word) of leadership has gone by the wayside. It is also end of quarter window dressing this week into a holiday. Of course, window dressing is illegal so it doesn’t really happen. We would love to give you better news but markets do go down. We know many of you forgot. Markets do tend to condition people.
Lastly, we have used the following words a couple dozen times the past few years. We repeat them. WE CONTINUE TO BE WORRIED ABOUT ASSET BUBBLES CREATED BY CENTRAL BANKS WHO KEPT RATES AT 0% FOR 8 YEARS, PRINTED TRILLIONS OF DOLLARS AND ACTUALLY WENT NEGATIVE WITH RATES. IF WE ARE INDEED IN AN ASSET BUBBLE, WHEN IT POPS, LOOK OUT.