What could go right? (revised)

I've been stressing the negatives I see out there lately and so in this post I will elaborate more as to what could go right and the evidence that suggests the December low was indeed a long term bottom.

There have been technical market stats that suggest the December low was a major washout event because the low was characterized by extreme selling following by extreme buying. This type of buying "thrust" is what you often see at a major bottom. Here's a comment from sentimentrader about a week ago:

The McClellan Oscillator has gone from -70 to +70 in less than 2 weeks. This happened 10 other times since 1962. All 10 saw the S&P 500 higher a year later. Its median return was +21.9%.

Stats like the above really makes me question bearish inclinations and rightfully so, but you have to take context into consideration. Questions that need to be asked are: At what point in the economic cycle did each of these 10 occurrences take place? What were monetary conditions like (easy or tight)? Was there any sort of government/fed intervention that accompany these signals? What about the stats pre-1962?" Without any context it isn't wise to blindly put faith in any one technical indicator. In addition, the trading environment of today's market is vastly different relative to the past given the dominance of algo trading and ETFs which can exacerbate volatility and may provide false signals. In January 2001 when the Fed cut rates by 50 bps I read about a statistic that showed when the Fed slashed rates by 50 bps or more, the market was up 12 months later every time except for 1929....that stat now reads "every time except 1929, 2001 and 2007."

I digress...I said that this post was supposed to be what could go right and so here are some positive headlines that could possibly transpire. The US and China reach a trade agreement and more importantly, China announces a stimulus package to boost its economy. The Fed doesn't raise rates at all this year and significantly slows or halts QT. European authorities resume their QE. The recent drop in long term mortgage rates stimulates home buyers and the US housing market recovers. If we see these things happen, it could end the global slowdown that's being going on. Let's also keep in mind that lower energy prices acts as a tax cut globally, although it will be drag on US and CDN energy producers.

Here is an interesting thing I came across. This  "Bear market Checklist" would suggest we did not see enough greed/euphoria to suggest a bull market top is in:

(chart removed due to copyright )

One critique you can make about this checklist is that the indicators used are arbitrary and some should carry more weight than others but despite this, it does suggest the strong possibility that the recent decline in the market could be a late cycle 1987 or 1998 type correction.

The bottom line here for me is that despite some ominous signs, the bear case is not a slam dunk. In the last 3 recessions there was a major sector that blew up which created enough damage to spill over into the general economy. In 1990 it was the savings and loans crisis, in 2000 it was tech bubble bursting, in 2008 it was the MBS/housing collapse. What could be the crisis this time? Could it be the massive amount of corporate debt refinancing that is scheduled to happen during the next 3 years? What if there is no single major crisis and we just simply see the economy roll over because of a multitude of smaller factors? We'll just have to wait and see.

Regarding the current earnings season, analyst expectations have been drastically reduced and in my opinion that's more of bullish sign than a bearish one

(chart removed due to copyright)

I saw this chart posted by someone on twitter who believed it was a bearish omen, but if you look at history you will see that sharp declines like this happened near bottoms or at the very least temporary bottoms like in late 2001 (after 911). Sharply lower expectations are bullish not bearish unless you have reason to believe that the lowered expectations are not low enough and will go lower still. That's not a good risk/reward set up given that the economy is not rolling over in a major way just yet. You can see that earnings revisions only got lower than current levels during the heart of the crisis in the fall 2008. The best time to make a bearish bet is when expectations are high not low.

So, all in all there's enough evidence to suggest that the bull case could be salvaged here and that the wall of worry may be in fact be rebuilding. I 'm still not giving the bulls the benefit of the doubt here but I can't give it to the bears either.   Color me market agnostic once again. As such, I think it would be appropriate to use a more active/tactical approach to the market until the picture becomes clearer.

Call me a flip flop if you will, it would not bother me a bit. You should not be loyal to any one side of the market and be willing to change your mind quickly if warranted. I see so many "gurus" make a call and stubbornly stick by it even when it's clear they are been wrong. It's because of pride and ego. Fuck pride when it comes to the market and check your ego at the door. The market doesn't give a fuck about your pride or what you think it should be "rightfully" doing. So many bears complain about about the Fed and government propping up the markets. That's like complaining about getting body checked in hockey. This is the way it is and instead of complaining, embrace it.  You don't like it? Then don't play.

Wait for premium set ups and don't press positions in either direction when the market becomes overbought/oversold. Let's see how people's expectations evolve as the markets go up and down and act accordingly.