From Peak Fear to Long Rally

Mike Williams | 22nd September 2020

The Good News?

Sentiment is plummeting and market chop is pushing people into bonds again as outflows from equity continue.

The data above shows a rapid fall in the number of stocks above their 50-day moving average.

So, while we’re not at the historic lows of early April we are closing in on the same general region in the readings.

These indicators set the stage for fears overtaking logic.

And yes, the short-term trader part of the marketplace is steadily giving up. Have a look at the Fear and Greed Index data below:

Racing Forward?

We should all know by now that the tough part of climbing the constant mountain present in markets is the idea of back-tracking to various "base camps" along the pathway.

That behaviour always stinks up the joint, messes with mindsets, and jerks knees, so to speak.

The market demands patience and time to navigate the process.

And here we are in the teeth of that base camp process again.

This too shall pass:

Symmetry

The chart above is a one-year snapshot of the S&P 500.

The annual summer swoon we expected in August has arrived in September instead.

And as we said, the front-runners would get hit first.

This is perfectly normal.

So is the media moving from supporting all tech to no tech, and now suggesting how foolish it was to own tech at all.

It’s laughable.

The red lines above are an outline of the range this likely ends within - give or take a few points.

Note the two green lines as well. Markets tend to move in a symmetric form over time. These patterns are often called the ABCD patters.

Suffice to say the “AB” leg from the early April lows to the early September highs suggests a “CD” leg (parallel up) of the same distance once the lows are set and sentiment ends in the tank again.

This choppy corrective window should surely do the trick for the patient investor.

Deep-Seeded Fears

The data above is an updated chart from mid-summer when we had just set a record for the number of weeks with more bears than bulls. It had, at the time, surpassed the consecutive highs seen back in the early 1990s recession - three decades ago - with the Dow Jones in the 2,500 range or so.

With data from last week, we are now exceeding that record by a very wide margin, suggesting just how deeply-seeded the angst and fear is in the markets today.

And fear this deep has a long and consistent history of taking an exceptionally long time to burn away.

Even the fund managers are ratcheting away their "risk exposure" in near-record time:

Fund managers are not alone in their stampede out the door.

Mark Hulbert tracks advisor newsletters (often referred to as timing newsletters). He creates a range of 0 -100 and then averages all the recommended levels of exposure to equities.

The lower the % reading, the more contrary bullish it becomes.

In just two weeks, we have seen this data plummet to just 15%.

Another week or so of this and we will see them nearly off the train entirely.

Bonds vs Stocks

So, how’s the pricing structure working these days?

The US 10-year bond: 145+ times earnings (P/E)
The German 10-year bond: N/A - you pay them to get less than your money back in a decade
The Japanese 10-year bond: A P/E in excess of 15,000
The UK 10-year bond: A P/E above 575
The French 10-year bond: see the German bond above

Now, if you can catch your breath after reading that list of staggeringly large P/E's, note the latest on S&P earnings for 2021. Refintiv data suggests a 2021 earnings level of roughly $164 for the 500.

Based on today's selling levels, this drops the S&P 500 into a forward P/E multiple of roughly 19.85.

Notice any difference as a long-term investor?

That, my friends, is what you call a fear-trade.

No logic required.

It is our job to withstand the assured storms ahead, pray for corrections and be disciplined in our planning for client goals.

Patience and time, folks, patience and time.