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Bye Bye Bear

6/30/2023

 
The longest bear market in 74 years is over.Out With The Bear Market?
​Midway through the month, the S&P 500 finally exited out of the longest bear market since 1948.

​That doesn’t mean it’s reached new highs, only that the benchmark index closed up more than 20% off the low it hit last October, entering the classic definition of bull market territory – or at least the definition of some market participants. 

As If On Cue…

Retail profit-takers and institutional algorithms moved in. So for the back half of the month, the major indices huffed and puffed but pretty much ran in place. Investors and machines looked for what hadn’t participated in the rally YTD; they sold the leaders and bought the laggards. Translation: the average stock – for the most part – gained ground on the big mega-cap names in June.

Speaking of Big Mega-Cap Names…

Not everybody is onboard with the whole bull market pivot - precisely because most of the S&P 500’s rise this year can be attributed to 7 high-flying stocks: Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet (Google), and Tesla. In fact, more than a hundred stocks in the index remain lower today than they were when the market hit bottom in October. And not just piddling stocks but household names like Bank of America, Disney, and UnitedHealth. In fact, the blue-chip Dow index is up just 2% for the year.

All of which leads some – like Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors in New York – to caution: “It is certainly possible for this rally to evolve into a full-fledged bull market, [but] historical precedent suggests it is far from a foregone conclusion."

That ‘historical precedent’ includes the Great Recession, when the S&P 500 hit its low on Nov 20, 2008 then advanced by more than 20% off that low into early January, 2009 only to turn around and set an even lower low in March, 2009.

Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, believes a new bull market will not begin until the index clears its prior high from January 2022, and until then, "it’s a bull run in a bear market."

Still, There Are Reasons To Be Optimistic.
​
  • Upward revision in first-quarter GDP. Recent data showed the economy grew faster than previously estimated, thanks to robust consumer spending.
  • Persistent labor market strength. U.S. weekly jobless claims posted the biggest drop in 20 months, helping the economy to defy predictions of a recession.
  • Fedspeak no longer throwing haymakers. Fed Chair Powell said recently that he expects it will take “a good while" for low inflation to return to the Fed’s 2% target. And he signaled that two more rate hikes are likely baked in. Importantly, the market took the comments largely in stride.
  • Big banks are good to go. And last but not least, the country’s biggest lenders just passed the Federal Reserve’s annual stress test with flying colors.

Soft Landing?

A ‘soft landing’ scenario is now almost universally embraced by the investing community. But as Senior Markets Commentator Mike Santoli pointed out on CNBC, “Even if you get a soft landing, you’ve still got to land. So things are going to slow around the edges.”

And For What It’s Worth…

For the first time ever, the U.S. Department of Agriculture has given its stamp of approval for the sale of chicken grown directly from cells extracted from an animal’s body. As NPR notes, for all of human history, eating meat has meant slaughtering animals. But scientists behind cultivated meat say that's no longer necessary.

Two companies are already in production: GOOD Meat, a division of Eat Just, Inc., and UPSIDE Foods (the latter growing its meat in large stainless steel tanks resembling a brewery). But they’ll soon have competition; more than 150 companies focused on producing cultivated meat and seafood have raised more than $2.8 billion dollars in investments.

Rollout will begin with select Michelin-starred restaurants and celebrity chefs. It will be a while before it reaches grocery shelves.

As expected, there is pushback from the meat industry (barnyard lobby?), sensing their livelihood at stake. If they have their way, this stuff may never be called ‘chicken.’

Here’s hoping this labeling skirmish doesn’t trickle down into the humor that sustains us as a great society. Nobody wants to hear, “Why did the coagulated cultured meat product cross the road?”

​_____
​As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
 
Best always,
David

_____
* WHAT DOES PROTECTION LOOK LIKE? 

At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
 
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models (it has still managed to outperform the S&P 500 over the long run).

Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.

Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the new Zen Knuckle combined with a couple of the above. 
 
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown. 

Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years. 
 
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).

See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.


Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.

Read more on the Investopedia page for Stop-Loss Orders.

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    David Alan Carter, author of the books:
    The 12% Solution
    Stock Market Cash Trigger

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