Market Commentary March 2016

Welcome to Spring: the earth is greening up, Daylight Savings time has resumed, and the markets appear to be on the rebound.  None of this is unexpected at this point.  However, there are still significant headwinds.  And while we’ve had a nice bounce off of the January lows, the S&P 500 has only just now (as of March 18th) gone positive for the year.  As of March 18th, the S&P 500 is up 0.80%.  The Russell 2000 (Small Cap Index) is still down -3.01% (Morningstar.com data). 

We’re always amazed at how the financial media over-hypes the current short-term cycle.  When the year started, you would have thought the world was coming to an end.  Now the attitude seems to be, “oh, that was nothing.”  But what we are always asking ourselves is:  “what has changed?”  And since the beginning of the year, not much has. 

An illustration of this: currently, as of March 18th, 2016, the S&P 500 is at the same place it was in mid-November of 2014.  That is 16 months without growth in the market.  There have been plenty of ups and downs, but ultimately very little progress.  In our perspective, this it is to be expected at the beginning of a long-term bear market cycle (see chart in our February newsletter). 

Our current outlook is that we are indeed in a bear market.  This type of market cycle will often include nice rebounds, like right now, before continuing lower.  If we look back at the last two bear markets of 2001 and 2008, these “countertrend” rallies included bear market rebounds between approximately 7% and 22% before continuing lower (Morningstar.com price data).  The current countertrend rally (shown with the blue arrows on the chart below) is up just under 14%.  So we’ve seen an “average” retracement so far.

SPXWeeklyMar2016Chart (above) is of the S&P 500 from July 2007 to March 2016

The crossover of the 10mo/20mo is becoming a popular metric for calling a mid-term bear market.  We showed a variation of that same concept in our October 2015 newsletter with the 10wk/50wk moving average crossover.  It re-affirms our view that the current bear market is just beginning.

In our opinion, international markets are much further into a bear territory than the US markets.  As an investment class, we’ve been avoiding international holdings since October of 2014 (with a slight and brief return in the summer of 2016).  We see little chance of returning to it in the near future (i.e., the next 2 – 4 months).  But of course, anything is possible.  If an impressive amount of strength comes back, then we’d take a closer look at this asset class.

Back in the US: corporate buy-back season is something we hadn’t given much thought to until recently.  Then another trader showed us that over the past year or so, each time the market dropped, it generally occurred in a window where companies could no longer buy-back their stock in a set period before their earnings announcements.  That blackout season starts this week for some of those large companies who have been buying back their own stock to keep their stock price UP.  But since the average investor seems to be staying on the sidelines these days, when the buying stops, prices start to go down.  So that is something we’ll be keeping a closer eye on in the coming weeks.