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Is The Great “Bear Market” Of 2021 Finally Over?

By Lance RobertsStock MarketsOct 10, 2021 01:12AM ET
www.investing.com/analysis/is-the-great-bear-market-of-2021-finally-over-200604531
Is The Great “Bear Market” Of 2021 Finally Over?
By Lance Roberts   |  Oct 10, 2021 01:12AM ET
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In last week’s newsletter, we stated:

“It is worth noting there are two primary support levels for the S&P. The previous July lows (red dashed line) and the 200-dma. Any meaningful decline occurring in October will most likely be an excellent buying opportunity particularly when the MACD buy signal gets triggered.

"The rally back above the 100-dma on Friday was strong and sets up a retest of the 50-dma. If the market can cross that barrier we will trigger the seasonal MACD buy signal suggesting the bull market remains intact for now.

S&P 500 chart updated through Friday

S&P 500 Daily Chart
S&P 500 Daily Chart

Notably, the very short-term moving average convergence divergence (MACD) indicator (lower panel) did trigger this past week. With markets not yet back to extremely overbought territory, and sentiment still very negative, the bulls are trying to reclaim the 50-dma.

Our seasonal MACD indicator (next to the bottom panel) also triggered, but just barely. We need to see some follow-through buying action this coming week.

Money Flow Buy Signal Also Positive

The RIAPRO Money Flow indicator also triggered a buy signal, becoming more robust support for a short-term rally this past week.

SPY Daily Chart
SPY Daily Chart

So, do all these signals mean the “Great Bear Market Of 2021” is behind us?

After a harrowing 5% decline, sentiment is now highly negative, supporting a counter-trend rally in the markets. Thus, we think there is a tradeable opportunity between now and the end of the year. But, as we will discuss below, significant headwinds continue to accrue, suggesting higher volatility in the future.

I want to reiterate our conclusion from last week:

If you didn’t like the recent decline, you have too much risk in your portfolio. We suggest using any rally to the 50-dma next week to reduce risk and rebalance your portfolio accordingly.

"While the end of the year tends to be stronger, there is no guarantee such will be the case. Once the market “proves” it is back on a bullish trend, you can always increase exposures as needed. If it fails, you won’t get forced into selling.

That advice remains apropos this week as well. The biggest mistake investors make is allowing emotion to dominate their investment decision-making process. Such is why “buy and hold” investing is appealing during a bull market because it removes decisions from portfolio management.

However, as we discussed this past week in “The Best Way To Invest.”

“Buy and hold” strategies are the “best way” to invest until they aren’t.

The Debt Ceiling Non-Crisis

As discussed previously the hyperbole surrounding the debt limit was on full display, culminating with this tweet from Bernie Sanders:

Tweet
Tweet

While “Ole’ Bernie” is trying to coerce his counterparts to raise the debt limit, his statement is full of misinformation to scare individuals. As noted in our article:

“In 1980, that all changed, and seven administrations and four decades later, Government debt surged, deficits exploded, and the debt ceiling rose 78 times. (49 times under Republicans and 29 times under Democrats.)

"As Congress lifts the debt ceiling for the 79th time, the runaway spending and deficit increases continue to accelerate. The consequence of increasing debts and deficits is evident in the declining economic growth rates over the past 40-years.”

Debt-Deficits-GDP Chart
Debt-Deficits-GDP Chart

In other words, this isn’t about paying bills from the Trump Administration, but also every President before him back to Ronald Reagan. For each year that we amass more enormous debts and deficits, the interest payments increase along with the growing burden of “mandatory spending.”

The problem today, as discussed in the “Insecurity Of Social Security,”

“In the fiscal year 2019, the Federal Government spent $4.4 trillion, amounting to 21 percent of the nation’s gross domestic product (GDP). Of that $4.4 trillion, federal revenues financed only $3.5 trillion. The remaining $984 billion came from debt issuance. As the chart below shows, three major areas of spending make up most of the budget.”

Tax Dollars Spending
Tax Dollars Spending

"In 2019, 75% of all expenditures went to social welfare and interest on the debt. Those payments required $3.3 Trillion of the $3.5 Trillion (or 95%) of the total revenue collected. Given the decline in economic activity during 2020, those numbers become markedly worse. For the first time in U.S. history, the Federal Government will have to issue debt to cover the mandatory spending.

Only A Temporary Fix

Think about that for a moment. In 2021, we will spend more on our “mandatory spending” than “revenue” will cover. Such means the Government will continue to go further into debt every year just to run the country. On top of the required spending, our politicians now want to add another $5 trillion in debt for “infrastructure.”

See the problem here.

The “debt ceiling” was always a “non-crisis.” It was just political brinksmanship playing out on national television. The resolution, as expected, came last week with Senate Minority Leader, Mitch McConnell, proposing a debt limit ceiling lift to $29 trillion. Such will fund the government through December.

Headlines
Headlines

“Senate leaders reached a bipartisan agreement Wednesday to defuse the impending debt limit crisis by allowing for a short-term increase in the statutory borrowing cap while lawmakers negotiate a longer-term solution.

"Democrats said they would agree to an offer from Minority Leader Mitch McConnell that would pave the way for an increase in the debt limit into December. But the two parties still disagreed on any long-term strategy.” – Roll Call

While raising the debt ceiling may look like a victory for the Democrats, it may not be.

“While raising the debt ceiling just once is proving to be a challenge, the only thing worse would be having to vote to raise it twice

From a political perspective, the only thing less attractive than voting to raise the debt limit to $31 trillion is voting to raise it to $29 trillion and then voting a second time to raise it to $31 trillion’” – Zerohedge

Odds Increasing We’ve Seen The Highs For This Year

There are reasons to be optimistic as we head into the seasonally strong period of the year. However, while the seasonal and technical backdrop is improving short term, we should not dismiss the numerous headwinds.

  • Valuations remain elevated.
  • Inflation is proving to be sticker than expected.
  • The Fed will likely move forward with “tapering” their balance sheet purchases in November.
  • Economic growth continues to wane.
  • Corporate profit margins will shrink due to inflationary pressures.
  • Earnings estimates will get downwardly revised keeping valuations elevated.
  • Liquidity continues to contract on a global scale
  • Consumer confidence continues to slide.

While none of these independently suggest a significant correction is imminent, they will limit the market’s advance making new highs less attainable. Furthermore, given the “debt crisis” will return in December, the risk of volatility remains elevated.

Much of the mainstream media overlooks the rapid decline in liquidity that supported the market over the last year. While the “human infrastructure” bill will provide some support, the difference is the spending is spread out over 10-years versus the “checks to households” in 2020.

Fiscal-Drag
Fiscal-Drag

Furthermore, that liquidity drain is rapidly deteriorating the outlook for economic growth. Here is the latest report from the Atlanta Federal Reserve:

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 1.3percent on October 5, down from 2.3 percent on October 1.

Atlanta Fed GDPNow Estimates
Atlanta Fed GDPNow Estimates

As BCA Research shows, as we head into the last quarter of the year and 2022, the slower economic growth rates will coincide with corporations’ weaker revenue and earnings growth.

Growth Vs Earnings
Growth Vs Earnings

As noted, with valuations already elevated, a reversal in earnings growth will likely limit a stronger advance.

Portfolio Update

We discussed last week, that after taking profits in August and raising cash, we slowly started adding back into our equity holdings. The recent spike in bond yields also allowed us to increase the duration of our bond portfolio this week.

We continued that process early this week, adding additional exposures and rebalancing portfolio risk by reducing laggards.

We are now at target weight in our equities, slightly overweight in cash, and our duration is somewhat shorter than our benchmark. As noted above, while we are looking for a market recovery through year-end, we are keeping a slightly cautious positioning bias to our models. If we are wrong and the market breaks vital support levels, we will reverse our positioning.

Equity Allocation Model
Equity Allocation Model

For now, we are giving the market the benefit of the doubt. However, we are keeping our positioning on a very short leash. With valuations still elevated, the technical deterioration of the market remains a primary concern. Such was a point we made in our article from last week linked to earlier:

"On RIAPRO, we provide the sentiment and technical measures we follow. The number of oversold stocks is back towards extremes, which supports the idea of a short-term rally.”

Stocks Overbought vs Oversold
Stocks Overbought vs Oversold

However, the overall “breadth” and “participation” of the market remains highly bearish. Thus, to avoid a deeper correction, breadth must improve.

S&P 500 - Stocks Above Moving Averages
S&P 500 - Stocks Above Moving Averages

We are watching these technical measures very closely as they will dictate our next course of action.

Is The Great “Bear Market” Of 2021 Finally Over?
 

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Is The Great “Bear Market” Of 2021 Finally Over?

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Comments (4)
George Pichurov
George Pichurov Oct 15, 2021 1:56PM ET
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"There is no way this bull market ends well" Month later: "We can't wait to get long after this unheard 3% correction"
Solomon Lalani
Solomon Oct 11, 2021 11:22AM ET
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Thanks for your detailed analysis.  If someone wants to forgo the short-term market rally expectations and want to save the investment for the next impending 18 to 24 months crisis, what is a safe haven?  Gold? Cryptos?  Please share your insights on this.  Thanks
Andrew Bevan
Andrew Bevan Oct 10, 2021 9:56AM ET
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Love your clairty of mind. Sometimes I wish abstracts were slighty shorter.
Mauricio V.
Mauricio V. Oct 10, 2021 5:31AM ET
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I'm bullish on Asian markets but still bearish on american market.
 
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