I Smell A Bear I have been telling my students for over a year now about how this current BULL MARKET will eventually come to an end at some point in time. No BULL market lasts forever. The Bear eventually wakes up and wreaks havoc on portfolios. Last time the Bear ravaged through portfolios to the tune of 53%. John Bogle of Vanguard Funds would tell you that it is no big deal. Index investing is the way to go. Riding passively through the thick and thin of the market over the years almost always beats active management. He has a good point. Passive investing is a lot easier than active management. And in the long run, it turns out OK. But, as a passive investor you have to be willing to accept 50% plus sell-offs every so often. Smart investors hedge their portfolios when they smell trouble in the air. Lately, these big selloffs have been about seven years apart. We had a huge sell-off in 2001 and again in 2008. Under this timing scenario, the next one is not due until 2015. Wait a minute! 2015 is just around the corner! There is definitely a feeling of Fall in the market air this year. The S&P 500 has climbed from 666 to a high of 2019. It has more than tripled. The S&P 500 is now down 5.6% from its September 19th high. That is a percentage drop of 5.6% and stocks are beginning to fall like autumn leaves. A 5.6% drop in the S&P 500 is well within normal volatility in the market, but we need to look at the facts once again this week to see if it is time run for cover. I have been warning about U.S. Small-Cap stocks for quite some time now. They are now down 13.2% from their mid-September high. This is getting to the outer edge of normal volatility and is considered correction territory. We need to definitely look into this further. This is not good. Emerging Markets are now down 11.9% from their recent high. Again, this is still within the normal range of volatility, but is very troublesome nonetheless. Even more disturbing is a 13% drop in the EAFE (European Index). In fact, this is the one that has many investors chewing their nails the most right now. I have been warning about Europe for quite some time. Lets take a closer look at the events of the past week. The S&P 500 had its worst weak of the year. It was also its most volatile week. Every day was a gain or loss of 200 points or more. No fun, I know! The good news is that the FED is not going to be in any hurry to raise interest rates. The bad news is that markets are now testing KEY technical support levels. Bonds were the big winner this past week as money gushed into them, seeking a safe harbor. The ten year yield is now trading at a 52-week low of 2.31%. Maybe its time to refinance that mortgage? Brazil was also a bright spot, as the pro-business candidate came out of nowhere to force a run-off against the incumbent. The market down there loved it. Brazil is now facing an India-like moment soon. So far, every major election in the world has gone to the pro-business candidates. It appears that the socialism experiment is coming to an end, at least in countries where voters have a voice. The S&P 500 is still in positive territory for the year. Looking at the 3 year chart, the uptrend is still in place, but the market has fallen below its 200-day moving average. The S&P 500 has closed below its 200 day moving average several times during the 68 month old bull market, however. While a break below it would not be good, it is still not enough evidence reason to run for the hills. The Russell 2000 (U.S. Small-cap) index is now tracing out a very UGLY rollover pattern. The next level of support is clear down around 850. That is scary! Remember, I have said that the Small-Caps could lead the market into the next bear market. Right now, this appears to be the case. The S&P 500 has closed below its 200 day moving average several times during the 68 month old bull market, however. While a break below it would not be good, it is still not enough evidence reason to run for the hills. The Russell 2000 (U.S. Small-cap) index is now tracing out a very UGLY rollover pattern. The next level of support is clear down around 850. That is scary! Remember, I have said repeatedly over the last several weeks that the Small-Caps could lead the market into the next bear market. Right now, this appears to be the case. So, are we officially in a bear market? Not yet. But as every camper will tell you, you can smell a bear coming (at least thats what they say) and its odor is in the air for the first time in five years.
Posted on: Tue, 14 Oct 2014 15:01:12 +0000
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