Bear Normal Market Type: Market Update September 1st, 2022 By, RJ Hixson

rj headhsot flowersIf you would like to read this article in a downloadable pdf format, click here.

Part I: The World Market Model

For three months in a row, one symbol in the above table has been green. The US Dollar. That has a major impact on the entire model and, in fact, on the entire global economy. Last month, we had a lot more yellow symbols while this month, we have only a handful. The predominance of red and brown symbols tells us that bearishness has returned to the global markets.

1116 MU Chart1

The highlights from the table above this month are few and mild:

  • Europe is a sea of red with just one country market slightly less bearish (brown) in Greece.
  • Market sectors are almost uniformly brown and red. Homebuilders and networking are barely positive while energy and O&G exploration have moderately positive scores.
  • The most talked about sectors have only one positive symbol—hemp.
  • Currencies are all negative against the USD.
  • China/India and China are the only positive scores in Asia.
  • US market segments and the other Americas’ markets are all in negative territory.

Side Note: The model does not track the Ruble but one of our readers suggested looking at a chart. Just eyeing the RUBUSD chart says it would be green if not dark green. Though it fell precipitously immediately after Russia invaded Ukraine. The Ruble more than recovered and is now about 25% higher against the Dollar than at the beginning of the year. RUBEUR is up even more—about 40% from January 1st. I’m not sure about trading it (if that’s even possible right now), but it’s interesting for the big picture perspective. What do you make of that?

Commodities shifted some colors but had an overall weakening trend. The only green commodity is natural gas (UNG is a US-based natural gas-based fund. Natural gas prices outside the US are much higher.) and oil is weakly positive—the only yellow score.

1116 MU Chart2

Real estate is much weaker than last month.

Bonds are still earning negative Market SQN scores but Treasury products have been earning fewer negative scores in the last two months.

We have seen a very weak Top 15 list in the last few months but this seems to be the weakest so far with only four green symbols. USD, energy and commodity related funds are areas on the list.

The bottom list is weaker too. It has a number of precious metal-related funds and a smattering of other foci.

At the end of June, the model database had 89% of the symbols in bearish territory. Last month, that decreased to 72% but now it’s up to 92%. Less than 1% of the symbols have bullish scores and 8% are in the neutral zone. It has to get better, right? At some point, it will. But, also allow for the possibility of the scores staying bearish for some time.

Part II: The Big Picture

What are some of the primary factors affecting the big picture right now?

  • In July, the head of the private bank that controls the US currency, known as the Fed, plainly said that it would continue to increase interest rates until inflation is under control. The common thinking is that higher interest rates are “bad” for the economy and for corporate profits which means lower stock prices.
  • The Fed will be selling billions of assets each month, pulling liquidity out of the markets. The selling process is being referred to as QT (quantitative tightening) as opposed to the recent years of QE (quantitative easing). What happens when you decrease an input in a process?
  • The price of oil has been declining for several months now.
  • China’s economy continues to have disruptions from Covid lockdowns which ripple out to the global economy. It also has major challenges in its huge property development sector.
  • USD is back at a two-decade high relative to other currencies.

Part III: The Current Stock Market Type Is Bear Normal

Equities were in a six-month downtrend into June. Then, recovered about half of that decline in June-July but started falling again in August. Our longer-term Market SQN periods have remained bearish but the 50-day score has stayed sideways for the last few months. The 25-day score was Bull last month but in the past two weeks, has been moving too fast to settle on a market type. In less than 10 days, it has moved from Strong Bull to Bear. Let’s just say, short-term, the Market SQN score is indeterminate or in rapid flux.

200 days – Bear (Last month, it was Bear)

100 days – Bear (Bear last month)

50 days – Sideways (Sideways last month)

25 days – Indeterminate (Bull last month)

You can see the June-July green bars recovery and then the last three weeks of red bars on the right side of the S&P weekly chart:

1116 MU Chart3

The Market SQN chart shows the score never went higher than the Bear/Sideways line. The score is just on the edge of the Strong Bear zone and if the current decline continues for a few more days, we’ll be back into it.

1116 MU Chart4

Volatility continued to decline in August but may have leveled out in the last two weeks. We’ll see if it stays Normal or goes back to Volatile. Increasing volatility correlates with market prices decreasing. Keep an eye on volatility.

1116 MU Chart5

Major US equity indices all continue to sit in double-digit loss territory for the year. 2022 losses range from -13% to -24%.

1116 MU Chart6

Part IV: Van’s Four-Star Inflation-Deflation Model

The model has had “interesting” results for the last three months running:

1116 MU Chart7 1

For August, the model provided a split decision. Over the last few years, Van’s concern was that gold may have become an ineffective inflation hedge with the emergence of BTC so he added BTC to the model and produced two scores. Recently, however, BTC and gold have been moving in concert – both down which indicates a deflationary influence. So, the +.5/-.5 scores indicate a rough balance between the inflationary forces and the deflationary forces in the economy this month.

Part V: Tracking the Dollar

USD is back at its recent high of 109. The Dollar Index’s strength in the last few weeks pretty closely matches the weakness in the Euro (the biggest USD Index component) which is now below USD parity.

1116 MU Chart8 1

If USD stays in its current trading range, it would retreat from the current “resistance” level and might drop a few percent. If it continues higher, where might it go? The longer-term chart below says it would not be surprising if it visited its 2001 high of 120. What are the chances? What are the consequences?

1116 MU Chart9 1

Conclusion

Markets look very weak the world over while the USD looks pretty strong. There are a host of “negative factors” and just a handful of positive ones affecting equities. On an historic basis, volatility is in the normal range though, for this year, it has “felt” higher than normal after quiet conditions for so long.

What’s next? Predicting what’s next is a losing game but being prepared for various scenarios based on useful beliefs would be helpful.

Jeremy Grantham has developed a set of beliefs built around similar market situations from the last century. He posted an article yesterday outlining the technical and fundamental factors aligning right now which may make the coming quarters in the stock market very painful for bulls and longer-term investors. This is not a suddenly new insight from Grantham. He has held a long running theory that we have been in a “superbubble” that this year entered the initial stages of bursting. He considers a superbubble bursting special as the market reacts with great speed and scale in multi sigma rarity.

The market rally of June/July remains consistent with his primary scenario. You can read his analysis for yourself at https://www.gmo.com/americas/research-library/entering-the-superbubbles-final-act/

Is Grantham right? We don’t know. In fact, he doesn’t know. He’s done extensive analysis, has developed his beliefs, and is prepared for an “epic” finale to the bull market. He also acknowledges in the article that while today’s price pattern closely parallels previous market patterns, that similarity could be broken at any point. Regardless, Grantham is prepared.

Whatever comes next, are you prepared? Do you have systems or at least strategies for: the rally if it were to resume, sideways action if the market enters a congestion zone, or a continued bear market if prices keep dropping? If so, great. Follow your rules. The shorter-term traders I know are loving the conditions this year.

If you are unprepared for at least three market direction scenarios, what basic plans can you make now for those scenarios, especially in case the market starts moving quickly?

We’ll see what September brings and cover it in next month’s update.

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