Posts Tagged Treasury bond yields

2019…And the Plot Thickens

“Get your facts first, then you can distort them as you please.” Mark Twain

“There cannot be a crisis next week, my schedule is already full.” Henry Kissinger

According to the Chinese calendar, 2019 is going to be a Pig year and since it is a water animal, it can be as murky and confusing as a mud pile, or as clear as Lake Tahoe. Today, I will attempt to turn the murkiness of the current market conditions into a clearer picture. My goal is to share relevant facts without distorting them, and make useful and actionable forecasts…so, let’s start.

Quick Wrap Up of 2018

Last year presented a typical case of a late cycle, a nowhere to hide scenario for most investors. Major asset classes, like stocks, bonds, commodities and precious metals, either lost money, or at best stayed even. In hind sight, had you bought a 1-year CD in Jan 2018, you would have beaten most professional money managers.

The usual suspects are trade wars with China, FED tightening, the Brexit mess and fears around a maturing economic and market bull cycle.

While this is true for the US, which seemed to have decoupled from the rest of the world, the global picture is bleaker. Industrial countries like Germany, Austria and Japan have posted negative economic growth numbers towards the year end, Australia’s real estate bubble had burst, emerging market stocks lost over 30% from peak to trough, and political uncertainty had been elevated.

As a result, even though year-end numbers don’t look too dreadful, we saw two waterfall declines during the year, the latter pushing major indexes to a bear territory. This downtrend, as usual, hit the winners of the previous cycle’s big winners the most, and those who argued President Trump was good for stocks, remained quiet for the big part of 2018.

A Roadmap for 2019

For the reasons mentioned above, the risk aversion levels have been elevated, and as a result, yields dropped, helping fixed income valuations recover. A case in point can be the 1-year high valuation of a popular investment grade corporate bond Exchange Traded Fund, symbol LQD.

But if risk aversion levels are elevated, what is the cause of the recent rally in the stock market? Two potential reasons:

1 – Technical: It isn’t unusual for initial panic selling to follow a bounce back, but only to retest the initial lows after.

2 – Fundamental: FED chairman Jerome Powell’s words on a “patient” FED has triggered the oversold rally.

Is it sustainable? Highly unlikely. Why?

Because even with a patient FED, the monetary base is still in Quantitative Tightening mode, not only in the US, but in more than 50% of the central banks across the globe.

From a technical view, in similar cases of 2000 and 2015, a bear market rally followed the initial waterfall decline, then a retest of the initial lows, and the resumption of the next bull cycle after capitulation. If we are experiencing anything like the years mentioned above, it wouldn’t be surprising to see more volatility for the next 6 months, and a recovery to follow after.

The Economy and Market Implications

The most recent Economist issue (Jan 26th-Feb 1st) cover probably says it all: Slowbalisation. Currently, the US economy is doing just fine, but the future is pointing to a slower growth. Here, we need to be clear with our terminology. Slow growth doesn’t mean a recession, recession doesn’t mean a depression, and depression doesn’t mean a crisis (don’t want to upset Henry Kissinger). The US economy seems to be far from a recession, but Leading Economic Indicators (LEI) signal for a slower growth. The US Q4 Gross Domestic Product (GDP) growth rate will likely be announced around 2.7%, much lower than the 3.4% in Q3.

I have looked up past periods of extremely low unemployment, and in all cases (1953, 1957, 1970 and 2000) a recession had followed. When I look at current valuations and sentiment, I liken it to the conditions of 2000, which was followed by a recession in 2001.

According to the IMF and OECD, global economy is expected to grow at a rate of 3.5% in 2019, isn’t that great? Not really. Global economy almost never experiences a recession in its most technical sense, which is negative growth two quarters in a row. The only exception to this since World War II was in 2008. According to OECD definitions, global growth rates below 3% is considered recessionary. The IMF is much stricter and conservative in this matter. But when we include the World Bank estimates as well, we can conclude that a global economic recession is not likely in 2019. According to Ray Dalio, the manager of the largest hedge fund in the world, 2020 will be when the rubber will hit the road, and he may very well be proven right.

So, one might ask, if unemployment, sentiment, valuations and stock market action remind us of past periods which were followed by a recession, why is this time expected to be different? Maybe it won’t be, but one tailwind for the US economy is credit conditions. The US is a debt driven consumer economy and as long as there is room for more borrowing, and the cost of carrying loans hasn’t started hurting new purchases, one lesson I have learned from being a market participant for many years, is to never discount the US consumer’s appetite for consumption. The recent rise in oil prices have improved corporate loan quality (these are highly leveraged businesses and they make a huge impact on the web of corporate financing) and the spillover effect is the improved loan quality.

Due to rising risk aversion, a shift from stocks to bonds, and fears of an economic slow-down, 10 year treasury yield unexpectedly dropped form 3.2% to 2.7%. Lower yields relieve the FED from its highly anticipated rate increases this year, and allow it to be more patient as Jerome Powell puts it. Another data point that makes me question the probability of rate increases, is the low inflation rate of around 2%. After years of quantitative easing, low unemployment, rising wages and economic growth, one would surely expect higher inflation. So, why not this time? Because most likely, the name of this uncharted territory is called the Amazon Effect. Each time the price of a particular good goes up, someone somewhere steps up to the plate and provides it at a cheaper cost online. The jury is still out in this discussion but automation and globalization have been a huge weight on inflation and even after 10 years after the 2008 debacle, deflation is still more of a serious threat to economies than inflation.

It would be a sin to not talk about China when discussing the global economy. I have already mentioned the problems Germany and Japan are in, but the biggest contributor to global economic growth has lately been producing forward looking indicators (PMI) pointing to a contraction in growth as well.

One bright star in this gloomy sky, has surprisingly been the UK, but I believe it is due to production that is pulled forward as a preparation for the Brexit approaching fast (or not…who knows?).

As market volatility rises and global economy starts looking gloomier, safe heavens like gold, Japanese Yen and Swiss Franc may benefit and so by definition, dollar may fall, which also may make non-dollar denominated investments more attractive, i.e. international stocks and bonds.


If this downside correction will look anything like past similar cases, valuations and investor sentiment need to drop a lot more before setting the conditions for the next bull cycle, and it is fair to expect a retest of the lows within the first half of the year and a recovery in the second. So, it’s probably wise to start the year defensive, and to switch and switch gears in the second half. In US sectors, chose non-cyclical and defensive areas like consumer staples, utilities and health care during the first half and switch to more cyclical sectors like tech, consumer discretionary and financials in the second. All of the information above are educated guesses, and your personal goals and risk profiles have to be added to the mix. So, what ever you do, tread carefully and consult with a professional.

Thanks for reading my commentary and as always, you can reach me at for questions and comments.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , , , , , , , , ,

Leave a comment

It’s Official: Correction is Here



“Nature abhors a hero. For one thing, he violates the law of conservation of energy. For another, how can it be the survival of the fittest when the fittest keeps putting himself in situations where he is most likely to be creamed?” – Solomon Short (David Gerrold’s alter ego, a Star Trek writer)


The late September, early October market highs in stocks, may be this year’s all-time high in stock values. This is not due to the US economy doing poorly, or companies reporting dismal results. The stock market is forward looking, and so with rising input, financing and labor costs, along with a slowing down of global trade, European Union troubled with Brexit and Italy, China still on controlled slow down mode, equity investors are having a hard time finding bright spots. One thing is for sure, that the volatility is back and major indexes have touched the correction territory.

It’s a military tactic to know what not to do before everything else, because most importantly, you have to be alive to win battles and wars, and small mistakes can be deadly. In this market environment: don’t try be a hero. Unless you’re a thrill seeker, do not try to time a bottom and get in a concentrated position, because that low may be proven to be not low enough.

General Outlook

The US economy is currently doing well with a 3.5% GDP growth, but the World economy is pointing to a contraction in a year or two. The latest OECD Euro Area Composite Leading Indicator is at 99.6, and anything below 100 signals future negative growth. The US has been the lonely figure on the dance floor and usually when that happens, either the music stops, or more people join the dance. It seems like the former to play out coming into 2020. Or alternatively, growth may slow down to a 2% rate.

In the developed world, unemployment rates are below what would historically create inflation, and the US inflation rate is at 2.1%. Lower inflation rate is attributed to lower commodity prices, technological advancements and globalization, but the signs of a rising inflation have started to appear. This will be truer in the US, especially if the US dollar has peaked and commodities have bottomed.

The US bond prices are in a bear market with yields at current levels. The FED is no longer deemed accommodating, but rather on a neutral position. Combined, this puts pressure on stock prices as relative valuations become less attractive.

A recession in the next 6-12 months is a low probability, but is this good enough? Stocks tend to lead the economy by 6-12 months, so to say that the economy will survive next year may not be a compelling argument for equity investors.

In short, stock investors are confused about the future of corporate earnings. They haven’t given up on stocks yet, but there are serious questions and this doubt creates a tug of war. President Trump’s unwarranted comments on FED actions, and his tariff wars are only making things worse.

For those looking for a silver lining, here is a decent one: stocks typically climb a wall of worry. A case in point, in 1968, Martin Luther King Jr. and J.F. Kennedy were assassinated, USSR invaded Czechoslovakia, there were riots across the country, and the S&P 500 Index had risen 7%. The absence of worry, overly confident investors and frenzy usually is a better indicator of a waterfall decline. When investor worry about a bear market in stocks, that is usually a cause of volatility, but not a full out bear, especially during a time of strong economic growth. As mentioned before, this doesn’t mean go out and try to catch a falling knife, but rather adjust your portfolios for a volatile environment until the dust settles, which may take a few months.

More Warning Signs

There are other concerns for equity investors. The growth sector leaders have also been the leader of weakness, while defensive sectors have shown stronger resistance. This is a typical risk off move. The question is its sustainability. From here, the market usually either sees opportunities in growth areas and this trend reverses itself, or it turns into a bear market.

Rising bond yields, which since 2008 have been associated with a strengthening economy, started to spook stock investors. Globally yields are still low, there is still plenty of liquidity, so one might be skeptical of this analysis. The point I am trying to make, is that higher yields create a double whammy. Higher financing costs and rising relative valuations may have come to a point of hurting stocks.

Usually in a rising rate environment, bank stocks offer a place to hide, as a steepening yield curve translates into higher bank profits. Unfortunately, not this time, not so far. Global worries have been pressuring the long end of the yield curve while FED rates have been pushing up the short end, creating a flatter yield curve, and as a result hurting bank stocks.

Year End Rally and Elections

One action to look forward to in an annual cycle, is the year-end rally. Especially after the mid-term elections, the expectation of political certainty and a stimulus package push stock prices up. This year, the stimulus package, in the form of tax cuts, have already been priced in. In addition, the chance of political uncertainty with a divided government, is also a probable outcome. So, we may see a rather muted Santa Claus this year, if at all.


This is an easy one: tariffs are bad, period. It raises costs for everyone, and hurts economies. If you don’t believe me, ask the people it was supposed to help, like Ford and Harley Davidson. They are forced to lay off workers or go offshore as a result of higher input prices. This, if insisted, can wipe off all the benefits of tax cuts, and we would be stuck with a historic budget deficit with no upside. China is the second largest economy in the world, and the US exports to China is a little less than exports to Germany, UK and France combined. But more importantly, tariffs hurt business confidence, which may lower future capital expenditures, a key driver of economic activity.

Stock Buybacks and Capital Investments

A big supporter of stock prices has been corporate buy backs. How big you say? $560 billion big in the last 12 months trailing June 2018, an all-time high (Source: S&P Capital IQ). The question is, can or will it continue? For reasons shared above, corporations may put a halt to this, or slow it down. With the uncertainty created by tariffs, lower CEO confidence may elevate risk aversion and cash positions.

On the Plus Side

The good news is, a lot of this is already baked in the cake. The question is, how much more bad news is in the pipeline? Usually bear markets follow extreme optimism. Volatility index at 25, and when Nasdaq records daily 4% losses, that’s a hard one to argue for. The recent price action to the downside may be a process of shaking loose ends, creating better valuations and attracting new buyers. Let’s not forget; the FED may not be accommodating, but it is not restrictive either. Its neutral position is accompanied by still  easy central bank policies in Japan, UK and Europe. In addition, the credit conditions index, which is probably the most important factor in a debt driven economy, is not signaling capitulation to a level of a looming recession.

The US economy may extend its growth past 2019. The notion that this has been the longest expansion, is looking at the wrong side of the equation, as it also has been the slowest. The longest GDP growth period in the US was during 1991-2001, 120 months of straight growth. The current cycle is 113 months old, but much more importantly: the aggregate GDP growth during the longest cycle, was 42.6%. The current cycle GDP growth is 22.3%. So, there is still a lot of room to grow for a tie breaker.


Recessions start because of over investment and dropping demand as a result. Bear markets in equities lead recessions by a few quarters, and usually start with very few buyers left to invest. Both conditions occur during extreme optimism. Currently, we lack this ingredient to call for a full-on bear around the corner. But even still, for the reasons outlined above, equity prices may need to go through a re-balancing phase and create even more pessimism before igniting the next thrust to new highs. Until then, there is nothing wrong with playing defense.

Thanks for reading my commentary and as always, you can reach me at for questions and comments.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , , , , ,

Leave a comment

Oil Falls, Dollar Rises, Stocks Get Confused

“Reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.”  George Soros.

As we come close to the end of a volatile year in stocks, one sudden an unexpected development (for some surely it was expected) slowed down the pace of a typical Santa Claus rally, it caused a shallow pull back, and raised a lot of questions. Crude oil price’s sharp decline caught many investors off guard and the confusion increased volatility.

Meanwhile, the dollar’s rise is also raising eye brows and questions (this is especially entertaining as I remember reading and listening the experts arguing over a crash in dollar’s value during the years following 2009). These two macro level trends create their winners and losers, and their impact is so huge, I wanted to clear some of the confusion and discuss pros and cons of each of them.

Also in this market update, as promised, I will go back to the list of indicators outlined in the previous market update, to help us objectively monitor the direction of the markets.

I picked the above George Soros quote because more often than not, the stock market makes no sense, at least in the short term. Eventually, things settle down but markets can and do stay irrational longer than investors can remain solvent. The reaction to the oil and the dollar price movements is no different, confirming Soros’ conviction.


Let’s start with oil. Oil is a commodity, which means its price is determined by the global supply and demand, and once set, it’s the same price everywhere you go. So the crude prices fell because there is a glut of it, exceeding the demand. The US is now the largest oil producer along with the Saudis. Shale oil and fracking technologies opened up global reserves twice the size of crude. This is so significant that it’s worth a pause here: the world’s known crude oil reserves are 1.7 trillion barrels, while shale oil reserves are 3.3 trillion barrels, of which 2.6 trillion is in the US. In other words, the US has more shale oil than the rest of the world has crude! How about that?

On the demand front, the Chinese economic growth rate of 8-9% is starting to look like a thing of the past. The world is adjusting to a growth rate of 6-7% in China, which implies less demand for oil. Europe is also not doing so well, neither is Japan, so there is lower demand for oil. Also, here is something for those who would like me to be a more creative. Over the past couple of years, Putin’s Russia has grown to be a more bold, wealthy and aggressive country, not shying away from threatening Europeans of cutting off their natural gas. The drop in oil prices is an enormously effective economic sanction policy as Russia heavily relies on energy exports. So one can speculate: Is Putin being “put in his place”? Clearly, the Russian elite are shaken, which is the only force that can pose a threat to him.

So how do these developments affect you or your investments? Why is the stock market falling along with oil prices? Stocks are falling, because the market is confused and tending toward disequilibrium. The stock market is pricing the scenario in which the falling oil price is due to a slowing down world economy. Partially this is correct, but it doesn’t factor in the benefits of lower oil prices, such as more money in consumers’ pockets, lower input prices and inflation, lower interest rates and less pressure on the FED to increase rates. So in net, it is good for the US consumer, an economy which relies 70% on consumer expenditures. So it should be a good thing for the stocks, also right? Yes and once this is realized, it will be a tail wind for stocks.


The US dollar’s uptrend can also be explained by the supply and demand to it. Everywhere you look whether it is China, Japan or Europe, you’ll find accommodating central banks opening their can of quantitative easing packages. They do this to stimulate economic growth, keep rates low, turn cash into thrash, escape deflation trap etc. Rings a bell? As the whole world is drinking the FED’s cool aid, FED is (finally) saying enough is enough. This divergence in central bank policies will raise interest rates in the US, make its securities more attractive, bring foreign investors and push the dollar up.

Just like falling oil prices, rising dollar is also a net gain event. Yes it makes exports more expensive and less competitive, but import prices go down, helps keep rates lower, taking the pressure off of the FED to increase rates, encourages bringing production back to the US, improving the consumers’ purchasing power. A stronger dollar by definition means relatively cheaper Euro, Yen and Yuan, which gives Europe, Japan and China a competitive advantage over the US in the global markets, hence the “currency wars” being back in the headlines. This advantage may translate into better performance overseas in 2015, which for diversified investors is welcome news as in 2014, international stocks have lagged significantly.

Naturally, these moves create winners and losers; for instance, companies that heavily rely on exports may find their margins squeezed, while energy stocks may  feel the heat but overall, a net gain for the US consumer, is a net gain for the US economy and the investor. As for the losers, my biggest concern is a contagion created by troubled Russian banks and a banking crisis in Europe. For now, this is a low probability event, but almost all financial crises seem to be so, prior to becoming obvious.

Let’s now move on to the market watch indicators, but first refresh our memories, my select list is:

Investor and trader sentiment, technical readings and seasonality, valuations, breadth, cash ratios, volatility, economic indicators and demographics, FED, political risks, interest and inflation rates.

Since we have been discussing currency, interest rates and central banks, let’s follow the theme and take a look at FED’s policy.


March of 2015 will mark the end of the sixth year of the US equity bull market, which has been driven by FED’s policies. Now that the monthly bond buying program is officially over, can this tip the scale so much that bears get their day under the sun? I don’t think so. The US economy is growing moderately, the inflation rate is below the 2% target, and wage growth is still lagging and exposing the recovery’s Achilles’ heel. The FED doesn’t want to slow down the housing recovery, so while raising short term rates, it will aim keeping long term rates the same (flattening the yield curve), and keep mortgage rates low. In other words, just because FED has stopped the bond purchasing program, doesn’t mean it is out of the accommodating game all together, and if the last six years have thought us anything, it’s this ; DON’T FIGHT THE FED. So long as the FED is not tightening, which will be driven most likely by inflation rate peaking its head above the 2% target, its policies will be a positive for the market.

Economic Indicators and Demographics

To summarize, this can be said: the US economy is growing moderately and demographics are favorable. Today (12.23.14) third quarter 2014 gross domestic product growth rate came in at 5%, which is the fastest growth since the third quarter of 2003. So it is extremely difficult to argue in favor of a recession. As for demographics, the largest age group in the US is millennials, or generation Y; those born (roughly) between 1980 and 2000. The significance of this is that these folks are stepping in to their highest spending years in 2015 (please note that these figures are reported differently by different analysts, so there is some room for subjectivity here). The US economy will have a tailwind as a result of this for the next 15 years. Granted, some of the effects will be offset by the mega baby boomers retiring trend, but in net, this is a positive. So, two out of ten indicators are so far, favorable.

Let’s leave it here for now and pick up where we’ve left off in the next market letter. In it, I will also dust off my crystal ball and include 2015 projections.

I wish you all Happy Holidays and a great New Year.



The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , ,

Leave a comment

Lower Energy Prices, Lower Yields, Macro Factors in Play

Central Bank stimulus programs and dropping oil prices have been the dominant macro factors affecting the capital markets.

As the European Central Bank is launching its quantitative easing program, China is joining the stimulus party with lower interest rates, and Japan is continuing with Abenomics’ easy policies.

Simultaneously, in spite of the falling oil prices, OPEC isn’t lowering production.

In this environment of lower yields and energy prices around the globe, winners and losers emerge.

Countries that rely on exports and production, like Germany and China, are benefiting from low energy prices.

On the other hand, countries that rely on energy exports, like Russia and OPEC countries, see their profits being squeezed.

In the US, the unexpected result is the sustained low yields in bonds. 

As many anticipated a rise in interest rates, stimulus packages around the globe are keeping yields down, and US bond yields are affected by this.

Rates in the US are still expected to rise in 2015, but may be not as much, and not so fast.

Stronger dollar makes it more expensive for US export goods, while keeping inflation in check with lowered import prices.

These trends are likely to continue in 2015, and so their effects…

, , , , , ,

Leave a comment

Most Hated Bull Still Running

“You know how advice is. You only want it if it agrees with what you wanted to do anyway.”  John Steinback, Author (1902-1968)

Recently, I’ve got invited to a Rotary Club to share my thoughts on current economic and market conditions. I chose instead, a topic more interesting and not as dry for many, and talked about the findings of a relatively new field of study called Behavioral Finance. It is a hybrid of psychology and economics and aims to understand how people make financial and consumption decisions.

The main premise of this field is that we are not rational beings, and in fact quite predictably irrational. A good book on this topic is called “Predictably Irrational” by Dan Ariely. We are wired and conditioned to work really hard on avoiding cognitive dissonance, a mental state of stress when faced with conflicting information and a decision has to be made. So we’d rather look for information that supports our current opinions, pre-existing biases and choices, which behavioral finance calls “confirmation bias”. Having my thoughts around the topic, the opening quote by John Steinback caught my attention. I allowed myself to fall victim to confirmation bias and picked a quote on confirmation bias.

The bull market run in stocks, which started on March 2009 is now 5 years and 8 months old. Many call this the most hated bull market in history, and there is some truth to it. Usually investors love bull markets, this is when you see your investments grow, but why the hate?

The stock market correction and Global Financial Crisis that started in 2007 was so big, so deep and so wide spread, it wiped out many investors hard earned savings and/or cost them their jobs. From peak to trough, the S&P 500 index lost 56%, meaning if you had 100 dollars in Oct 2007, you had 44 left in March 2009. This trauma caused investors, both professional and individual, build such strong negative associations with the market, that they are having hard time adjusting to its 3 fold or 200% growth from the bottom.

From the get go, it was a lonely bull. During its first two months, a 50% knee jerk reaction jump caused many people to question its sustainability. A popular term at the time to describe it was “a sucker’s rally.”

Since then we had a dozen or so pull backs and corrections, and each time there were those who argued that this has been a rally stimulated by FED’s quantitative easing policy and a new bubble has been formed. Since we have just experienced what happens when we have a bubble in our hands, it is/was time to play it safe…and so goes the argument today just like yesterday.

The losses of 2007-2008 caused many to stay out of stocks all together or with less than usual allocation towards. This can be seen with striking numbers among millennials. Those who are between the ages of 14 and 34, are not interested in equity investing, in fact, investing in general. This lack of interest spills over to buying a home or a car and the popular trend among this age group is renting rather than ownership. They saw the consequences of being at the wrong place at the wrong time and they don’t want to fall victim to their parents’ mistakes. This attitude puts them in the spectator seat of a bull market that would have other-wise helped with growing their assets.

To be fair, the $1.2 trillion dollars of student loans hanging over their shoulders isn’t helping the situation, and of course there is always someone out there claiming fame after a pull back with a sign waiving “I told you so”.

At this juncture, approaching its 6th year anniversary, we need to answer whether we are close to the end of a short term bull market, or the beginnings of a long term bull. The difference between the two are the length and breadth (how wide spread) of the trend. The shorter term (cyclical) trends last somewhere around 3 to 5 years. Examples since the tech bubble burst are 2002-2007 bull followed by the 2007-2009 bear and 2009-present bull. The longer term (secular) markets last 10-15-20 years, like the 1982-2000 bull and 1966-1982 bear. Of course, there can and most likely will be cyclical bears and bulls within secular bears and bulls, only to last shorter, if they face against the longer trend.

If the bull market will prove to be a cyclical one, the end, by definition, can’t be too far in the distance. If however, we’re in the beginnings of a longer term trend, then even with 10-15-20 percent pullbacks and corrections, like the 2010 and 2011 16% and 19% corrections respectively, the bull can run for another decade or so.

The unfortunate reality is that we can only accurately know the answer to these types of questions after the fact. But that doesn’t preclude us from taking a calculated guess, and while doing so, we should always keep John Steinback in our minds and avoid confirmation bias.

Without looking for information confirming our hatred and death wish of this current uptrend, or our love and wishes of long and prosperous life, objectively how can we tell where we are right now?

We luckily have historical guidelines on our side to make and attempt to judge our coordinates. Here are some of the 10 indicators to watch:

1) Investor and trader sentiment

2) Valuations

3) Breadth

4) Cash ratios

5) Volatility index

6) Technical readings and seasonality

7) Economic indicators, demographics

8) FED Policy

9) Political risks, domestic and foreign

10) Interest and inflation rates

This list, of course can be broadened until cows come home but believe me, if you can make an objective analysis of these indicators, you will be ahead of many of your competitors.

When I look at these indicators, I see a mixed picture. In my next newsletter, I will get in to a deeper analysis of individual readings, but for now, this much I can say: stretched sentiment, valuations, cash ratios and technical, accompanied by high margin balances, are headwinds for the stock market.

On the other hand, seasonality, mainly post mid-term election period, low interest rates, low volatility, accommodative FED, low inflation rates, relatively calm politics and most importantly a growing economy are tailwinds.

This mixed picture, at least for now, is still in favor of a continuing bull market and a stronger argument for a secular trend. Once again, we can only have definitive answers in hind sight, but a 60/40 chance in favor of a secular trend versus a cyclical term makes more sense to me.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

In my next newsletter, I will elaborate more on this topic with more details on the above indicators.

, , , , , ,

Leave a comment


Fighting cognitive dissonance and confirmation bias in market analysis.

Pragmatic Capitalism

Just another site

The Reformed Broker

An Irreverent and Insightful Blog about Wall Street

The Big Picture

Fighting cognitive dissonance and confirmation bias in market analysis.