The equity markets continue to climb off of a “V” shaped bounce on December 24th. Since that low on Christmas Eve, the markets continue to climb, although not yet recovering from the pre-bear high that occurred in early October.
The Bond Market Begs to Differ
On the February 23rd edition of Jerry Tuma’s Smart Money Radio, Jerry continued to urge caution about the current market. Yes, this has been an impressive rally off of the Christmas Eve low, and we possibly can thank the “Plunge Protection Team” headed by the Treasury Secretary Steve Mnuchin for saving the market from a further descent. Jerry says that the Fed, having backed away from talk of rate increases and Quantitative Tightening, has caused investors to breathe a sigh of relief. But the Fed has not reversed course on monetary policy. Absent that, the rest of the fundamentals point toward a slowing economy, especially overseas, which could resume the bear later this year.
Jerry finds an important indicator in the behavior of the bond market. The bond market is five times larger in capital than the equity markets and is the haven of mostly institutional investors, unlike the stock markets where the “rabble” of the general public largely trades. Jerry says that the bond market is where the more sober, analytical evaluations reign, and the bond market has not rallied in the new year like the equity markets have. The bond market is not impressed with the Fed’s more conciliatory tone.
Jerry says that he trusts the more level headed discernment of the bond market and right now, which seems to indicate that an exuberant rally is not warranted.
The role of the 200 day moving average
One classic flashing light indicating that a bear market is in progress is when the 200 day moving average is significantly breached to the downside. This happened this past fall, but now the market has rallied back up over the 200 day average. Keep an eye on that average, and if the market turns back down later this year, when it punches back downward through the 200 day average, we could be back into Mama Bear territory, if not Daddy Bear if it coincides with a recession.
Market excesses still not purged
In the meantime the excesses that characterize the prelude to bear markets, namely overvaluation and high margin debt are still not purged. As Jerry put it, “this is a Daddy Bear waiting to happen”. If the economy sours and corporate earnings weaken, the selling could return and accelerate with margin calls.
Get Jerry’s Special Report
In his latest Special Report, Jerry describes the scenarios characteristic of bear markets, the Baby Bear (a correction), a Mama Bear and the Daddy Bear.
Contact Cornerstone Financial Services to receive the Special Report and also to arrange for a complimentary portfolio consultation.
You can also listen to the details of the latest edition of Jerry Tuma’s Smart Money Radio on 660 The Answer in Dallas-Fort Worth.