Since my last post we saw the market have a strong rebound as I expected which was got totally undone which was also expected. With the SPX now at the 200 DMA there could be a knee jerk bounce again but I wouldn't hold my breath. I don't expect this downdraft which began in January to be over until we see true capitulation and fear. I suspect we will ultimately get a break below the 200 DMA and all these technical and momentum types get shaken out. As I mentioned in recent posts, the bullish herd expects the yield curve to go inverted to signal the end of the bull market and that created complacency. It looks like Mr. Market plans to make fools of them or at the very least punish them with a 20% decline to get enough people to believe that the bull market is over before it resumes course.
We have to also consider the possibility that the bull market has indeed peaked and we are in the early stages of a bear market. As I said before, I didn't see all the conditions that would suggest this to be the case but who's to say that the market is going to give you everything you want to see? That is seldom the case. Major trend changes happen by surprise and that by definition means unexpectedly.
I would call myself market agnostic at this point. The bull case is not dead by any means. What we could be seeing now could be reminiscent of 1994 and 2004 which were periods when the fed was normalizing interest rates which eventually created turbulence as the market became concerned that the fed would go too far. In addition, as rates go up it makes stocks relatively less attractive as a competing asset class and it lowers intrinsic values of equities as the present value of cash flows are discounted at a higher rate and rising rates results in higher borrowing costs. On the flip side, higher rates implies an improving economy and provides higher income for savers and those are positives for stocks and so you get this tug of war action because of these pros and cons. Ultimately though, it's rising interest rates that have killed bull markets and so the more the fed hikes the greater the chance that the negatives will outweigh the positives and I think we reached that tipping point in favor of negatives. One of things I think we need to see happen for this rout to ultimately end is when the fed changes its tone and starts hinting at the end of this rate hike cycle or at least a prolonged pause which led to the end of the routs in 1994 and 2004.
The possibility of a full fledged trade war between the US and the rest of the world is also weighing on the market. As of now the tariffs being imposed by all are not significant but the concern is that things could escalate. Last year people feared that Trump would hurt the markets and they were wrong or at least premature in this fear but now it seems that Trump is purposely poking the hornets nest to create attention for himself in some sick way and it's starting to spook investors. As I said a few months ago, political risk could be something that actually matters this year. So, you have a combination of risking interest rates, rising political/trade turmoil coinciding when people have piled into ETF index funds like lemmings at a time when the market was overbought on multiple time frames 9 years into a bull market. Not good! It will take some time but I believe that the lemming stampede into to ETF index funds will get undone and we will see a lemming stampede out of them at some point this year which could crater the market.
