Reader Ganesh writes, “It looks like SPY broke the 200 SMA today. Any thoughts on that. Are we still in bear market scenario?” I responded to Ganesh, “Excellent question, Ganesh… I will certainly review everything over the weekend!” And, so, let’s begin.
First, are we in an inflationary or deflationary economic scenario? To do that, we look at the prices of commodities, symbols like GSP, GSG and DBC work here. While commodities bottomed on January 20 of this year, after declining from their top back in April of ’11, they have been on a deflationary trajectory for nearly 5 years. Even since bottoming in January, they have yet to confirm that they are actually now in a Bullish mode. It’s too early to actually tell yet. A deflationary economic scenario typically begets falling interest rates… so, what do bonds say?
Second, High-Yield Corporate Bonds, previously referred to as junk bonds, topped out back in May of ’13. Concerns for corporations being able to meet their debt obligations have driven prices down in a Bear Market to where they bottomed on 2/11, just one month ago. Watching how they chart right now, as with commodities above, they have not confirmed that they are in a Bullish mode yet either.
Third, emerging market govt debt, with the commodities these nations so often depend upon for their source of revenue to service their debt, have been in decline right along with commodities for some years. As with commodity prices, their bonds have been rallying since 1/20, but, unlike commodities, they have actually climbed above their 200 day moving average line… but, they have managed to do so a number of times on their long way down, and so, the meaning of this rally above the 200-day may be no more meaningful than the last 3 times they have done so in the past 14 months!
Fourth, investment grade US corporate bonds have enjoyed a nice resurgence since 2/17, after they had peaked and been declining since 2/2 one year ago. The rally in investment grade corporates is looking like the real deal, like it could be leading to a true reversal of Bear fortunes, into a Bull!
Fifth, US Treasuries had been in a flight to safety mode for capital, beginning with our stock top of last Summer… in June. That flight took off in earnest after the beginning of this new year, as stocks began to plunge. That flight stopped with 2/11, and as the other more risky investments started to take off, capital has come out of treasuries; but not to any extent that it could be said that they are in any way now in a Bear Market of their own… not by a long shot yet.
Sixth, a look at International Govt bonds of countries other than emerging markets… same kind of picture, they being considered something of a higher grade, were being flooded with capital right as this new year started, but that flow has reversed, again since 2/11. Capital has been coming out, presumably to seek higher returns in riskier investments.They had actually been in a Bear of their own since the end of January last year, and they have yet to satisfactorily break their bearish trend, and it may even be resuming.
Seventh, so what are the stock markets of the other truly large economies of the world doing, like China, Japan, and the EU, before we look at our domestic market indexes? China, as our markets did, turned upward after 2/11. And, while their price progress has been nice, they are so far from challenging their own 200-day down-trending moving average line. It can be said to be no more than a Bear Market rally… that bear beginning after their peaks of April, May and June of last year. Japan topped in April, June and August last year, and have been in a steep Bear decline since. Bottoming out on 2/11, as we did, they’ve been on a bit of a tear, but by no means are they posing any threat to their own down-trending 200-day, and have barely cleared their 50-day. It looks like a Bear Market rally, and nothing more. Going to Europe, whether with individual country ETFs, or all Europe type ETFs, they topped out in April, May and June as well, and have been in a bear market since. Bottoming in either January, or as with most others, in February, they have been rallying well, too. Some are even looking to pose a challenge to their own respective down-trending Bearish 200-day moving averages, but most are not even close, like China and Japan. In short, all the world’s bourses are truly still in a Bear Market, well off their highs, and not even close to actually demonstrating a true reversal, or transition, to a Bull Market. That leaves our market indexes here in the U.S.
Eighth, the U.S. stock market indexes… VXF, Vanguard Extended Mkt, just a Bear Market rally. ITOT, the S&P 1500, just now at resistance and attempting to contact its down-trending 200-day. IWV, the Russell 3000, the same. IVY, the Dow Jones Total Mkt index, the same. VTI, Vanguard Total mkt., also just about to challenge its 200-day. The NASDAQ 100, or QQQ, trying to do the same. IVV, for the S&P 500, has just closed above its down-trending 200-day! IWB, for the Russell 1000, has not. SPY, the ETF Ganesh wrote about, and emulating the S&P 500, as does IVV, also closed just above its 200-day moving average line, as Ganesh noted in his question to me. The DIA for the ETF for the 30 Dow Jones Industrials also closed above its 200-day! It’s getting interesting now!
Ninth, A really good test would be a look at the 10 S&P Sectors of the market. 1.) XLB, Materials closed above its 200-day today. 2.) XLU, Utilities, typically considered a flight to safety, has been on a tear since mid-December, and is actually indicative more for the Bearish case! 3.) IYR, Real Estate, rallying since 2/11, as well; it is above its 200-day, but has done so at least 3 other times within the past year since it commenced a Bear after peaking 1/28 of ’15. 4.) XLE, Energy, nothing more than a Bear Market rally, so far. 5.) XLI, the Industrials, like the Dow 30, has closed above its 200-day, and been there for most of the past 2 weeks, but did so also back mid-Nov to early-Dec, and didn’t hold then. 6.) XLP, Consumer Staples, a true flight to safety idea, and has really been in favor since 1/20, which actually makes a case for the Bears, as does the Utilities rise. 7.) Of significance, XLY, Consumer Discretionary, closed above its 200-day today. That should be considered rather meaningful, I would think. 8.) XLK, Technology. This has been the strong sector pretty much all along thru all of the past year, by not dumping as just about everything else had. 9.) XLF, the Financials, cannot be said to be doing anything more than a Bear market rally at this point, like Energy. Finally, 10.) XLV, Healthcare has been in a funk since topping out last July, and looks to be engaged in nothing more than a Bear Market rally, too. Of greater importance would be their analysts’ consensus of forward-looking earnings estimate lines for examination.
Tenth, analysts’ estimates for some 37 market sectors, shows recent estimate increases in 8 of them and cuts ongoing within the 29 others. Hmmmm. Or, how about the estimates for the major indexes? The S&P 100, having an avg market cap of $193 billion… big companies, has seen their estimates cut since peaking on 12/18 by 6.9%. But, in all fairness, the cuts have stopped, and the line has gone flat since 2/29. Will it turn up? An equal-weighted S&P 500, having an average market cap of $51 billion, which closed right at its 200-day line, has been seeing estimate cuts since peaking 12/28 by now 8.67%! This is a very serious matter, as I have been stating for quite some time. With prices rising, and estimates lowering, the P/E on the estimate is now a whoppin’ 19.75! The S&P 400, Mid-Cap Index has firms of an average $6.3 billion in size. Its EPS estimate line stopped rising back on 8/3 of ’15, and has been cut continually by 10.54%. It has been knocking on its 200-day line for the entire past week, without success in breaking thru. The S&P 600 Small-Cap Index, having an average size of just $1.4 billion has known estimate cuts since 10/26/15, and they amount to a net 17.39% decline. It bumped up against its 200-day line back in November and December, and is not challenging it now. They just keep getting worse… Let’s look at the Russell 2000. These also average about $1.4 billion in size, but the EPS line topped out 8/3, and has been dropping since by, get this now… 24.26%!!! The price has kissed its 200-day back on 11/30, and has not posed any threat to it since. In each of these instances, except for the OEX, S&P 100, the EPS lines are still falling. The OEX has only gone flat. Finally, I have a similar capability of charting an EPS line for all of the nearly 8,000 issues at hand here, and it peaked on 11/4, and has been in steady decline since, lopping off an 20%. It’s price line has not been able to mount a challenge on its 200-day since it fell thru it back on 8/6!
So, let’s look at the SPY… that’s all Ganesh really asked about, and I’ve already written more 1,500 words… and lost everybody! It closed above its 200-day, as it did many times from 10/23 thru 12/30. Today’s close, by itself, with little other supporting evidences to be found hardly anywhere else, does not constitute a change of the outlook from being Bearish, back to Bullish.
In fact, the fundamentals, on their face, everywhere argue for a decline, and, honestly, so do all the technicals, at this point, since they are all now quite extended, saying market risk would seem to be very high. I’ve covered all the fundamentals, but OIL here, and when I next write briefly, I will comment on oil and the ‘baker’s dozen’ of technical indicators, and what they are saying as of this weekend.
Here’s to your successful investing!
Harold F Crowell