Looks like the 3 consecutive months of average 2% declines is upon us...yield curve looks OK, but 200 day MA in play...new bear market or not?
First things first, the 200 DMA is my preferred catalyst for defensive action. I don't really think it matters which trigger is used as no single trigger can be the best for all times but they can be effective which is the priority as I see it. Here effective is simply defined as avoiding the full brunt of a large decline. Aside from my belief in its effectiveness, the 200 DMA is simple to explain and understand.
As far as 2% declines for three months in a row (I know this as originating with Ken Fisher, feel free to comment if you know otherwise), this is reliable insomuch as true bear markets start slowly giving many months to get out as was the case in both 2000 and late 2007 into 2008. Fast declines, or panics typically retrace quickly and are better bought than sold for someone who is a trader.
On April 1st the SPX was at 1363, May 1st 1345, June 1st 1320, July 1st 1300 and now it is at 1292. By my math that does not literally invoke the 2% rule but it is clear sign of a slow rollover. Anything can happen of course but it looks like a rollover which I would use as more of a confirmation of the 200 DMA. In practice this could mean selling two stocks to get started with defensive action instead of one.
As far as the yield curve, I believe in heeding the inverted yield curve for initially reducing financial sector exposure even before a 200 DMA inversion. Currently the curve is very steep but I continue to believe US banks stink so we are still light there with no plans of loading anytime soon. One complicating factor with the yield curve now is that fed rates have been at zero for a couple of years which is IMO distorting the rest of the curve in some manner. My suspicion of the yield curve is not problematic because I am not ignoring an inversion, I simply feel the steepness is artificial which is supported by how poorly the financial sector has done.
As I mentioned in the comments of yesterday's post, I believe the GDP is warning of a recession sooner than most of the experts think. Two quarters below 2% is bad, period. It does not have to mean recession but I think it does even if I don't know how soon. This will influence the type of defensive action I might take in the face of a 200 DMA breach.
It does not make sense to try to sell now before any indicator is triggered because (repeated for emphasis) there may not be a recession. It makes more sense to heed a trigger in the market for defensive action because in addition to it being objective and simple, stocks will turn down before the next recession, whenever that is, as a function of normal market behavior; capital markets turn down before the economy. Also if somehow there was a recession but stocks did not go down there would be no reason to sell.
As far as a "new" bear market, I believe the 200 DMA will tell us the answer, what is more important than guessing correctly is (also repeated for emphasis) having some sort of objective strategy for defensive action that gives a reasonable chance to avoid the full brunt of a large decline. I put the word new in quotes in that previous sentence because it is quite obvious to me that we are still in the same macro economic event as 2008. The crisis from 80 years ago took more than a decade to sort out so the worst crisis since that one could take just as long.
On a more humorous note; although I'm sure it came out wrong, Harry Reid had the quote of the crisis yesterday: the only compromise is mine.