Nobody can tell you when a 10% stock market pullback is imminent. That has not stopped many from issuing erroneous prognostications over the last 31 months. By the same token, no individual can predict when a correction will morph into a 20% bearish sell-off. Yet Marc Faber (”Dr. Doom”) has routinely served up enormously frightful comments in a perpetually compliant media.
While it may be impossible to forecast with certainty, it is possible to increase one’s chances of success. One can always avoid a big loss by taking a big gain, small gain or small loss. Another might employ fundamental analysis to buy traditionally undervalued assets and/or to sell traditionally overvalued assets. Still others might simply let long-standing moving averages (a.k.a. “trendlines”) dictate when to participate and when to stand down.
I use a wide variety of data (e.g., economic, historical, contrarian, geopolitical, fundamental, technical, etc.) when making asset purchase decisions for money management clients. In the end, though, when the markets decide that I am wrong about a particular selection, I cut bait so that I may successfully fish another day.
Looking at stocks at this moment in time, the evidence suggests an extraordinary disconnect. Vanguard Europe (VGK), SPDR Dow Jones Industrials (DIA) and SPDR High Yield Bond (JNK) all hit fresh 52-week highs on Thursday (5/8/2014). The breadth of riskier assets that are forging ahead might suggest to participants that a “risk-on” attitude will continue to be quite profitable.
In the same vein, however, iShares Investment Grade Bond (LQD), SPDR Dividend (SDY) as well as PowerShares Low Volatility (SPLV) are also hitting new 52-week peaks. Moreover, 10-year Treasury bond yields are near their lows of 2014 (2.60%) after falling from 3.03% at the end of 2013. Some signals make the waters even murkier. Leading trouble-makers of the 2007-2009 financial collapse have dropped below long-term trendlines, including SPDR KBW Bank (KBE) and SPDR S&P Homebuilders (XHB).
Do potentially harmful new downtrends end at the doorsteps of a few financial sub-sectors? Hardly. We also see a breakdown in the high-flying sub-segments from the 2000-2002 bear. Internet stocks via First Trust Internet (FDN) as well as biotech biggies via SPDR S&P Biotech (XBI) have also crossed below respective 200-day trendlines.
Unfortunately, the depreciation is not restricted to stock areas that we might associate with previous bear markets. The small-cap and micro-cap classes are signaling their own downtrends on extreme levels of fundamental overvaluation. Both iShares Russell 2000 (IWM) as well as iShares MicroCap (IWC) have dipped beneath their long-term moving averages. Not to be outgunned, SPDR Retail (XRT) is struggling with a downtrend of its own; fears that wage growth has been too anemic to support lofty consumption expectations may be at work.