We have this type of war-like event between the bulls and bears that is taking place right now, the winner of which will determine whether we see a major breakout or breakdown in the market. It pretty much boils down to this: bears are arguing that a US reccession is immanent as per the signals in the US treasury curve, weak PMIs, slow global growth and trade-war angst. Bulls are arguing that Fed rate cuts would help cure the slope of the yield curve which is more of a reflection of safe haven flows and disinflation. They would also argue that notable signs of credit stress are not there while employment and earnings trends are still generally boyant - conditions you don't see at the onset of a reccession. Bulls will argue that much of the uncertainty out there is a result of self inflicted wounds that can be undone by authorities via interest rate cuts and a resolution to the US-China trade dispute. Bulls can can also argue that the stock market is flirting with all time highs which also flies in the face of an oncoming recession.
So, who is going to win this epic battle? If the bears are right and we get a recession we are going to see the market head a lot lower. The average market decline in a recession is about 40% from the peak. If we avert a recession and global growth turns up again we going to see a major breakout and blow way past SPX 3000. If we go by the motto of this blog it would suggest that the bulls will ultimately win.
I've discussed ad nauseam how there has been a persistent disbelief in this year's rally of the stock market as per fund flows. There is no change in this notion as of today even as the market hit marginal new all time highs. This skeptical notion is also supported by the general defensive positioning by global fund managers and the anecdotal cautious tone of the financial media. There are some pockets of froth in the IPO market but you would have a tough time making the case that investors in general are giddy about the prospects of the stock market and the economy when you look at where the money is flowing to overall.
The above chart says it all. The investing public's track record is TERRIBLE when they sell en masse like now especially when they are doing it contrary to how strong the stock market has been preforming. Forget about what the experts and media pundits are saying and even your own personal views; just simply do the opposite of the public when they sell en masse - they are dumb money The current situation is similar to late 2016 when the market was making an all time time high yet the public was selling notably. If you recall, there were recession fears earlier in that year too. The market eventually broke out to the upside in a major way as global growth recovered and the investing public capitulated their negativity. It looks like things are shaping up to have a bullish resolution this time around too. You can't pinpoint exactly when that happens but such a resolution is very likely to happen before the year is over. In the meantime there will probably continue to be short term noise to both the upside and downside to keep everyone on edge and so if you try to play the upside using "tight stops" you will probably not succeed.
