Every summer we put together a small collection of charts that we find though provoking.  The intent is to provide some light reading for the dock.  As always, your comments and any charts you’d like to share, are more than welcome.

 

A New Bull Market or Another Bear Market Rally

 

Conversations have been dominated by the rally in equity markets this summer. The overwhelming consensus is that we are currently experiencing a bear market rally, and that the market will be selling off soon.  Very few people think that this rally could be the start of a new bull market. While predicting what the market is going to do in the short term is very difficult, our first chart is from Fidelity’s Jurien Timmer who puts the current rally in a historical context.

 

 

Jurien highlights that six weeks ago, only 2% of stocks were trading above their 20-day moving average, and now that number is 93%. In the chart, he compares the current rally to previous bear market rallies.  Historically, bear market rallies do not go much higher than a 50% retracement (with one exception, the post-WWII bear market rally in 1946). Bottom line, if this rally continues much farther, history tells us that it is likely a new bull market.  On the other hand, if it is a bear market rally, it has likely gone as far as it will go. 

 

Summer Rallies

 

Our second chart puts this summer’s rally in context.  While it’s not the 89% rally that the market experienced in 1932, the S&P500 is up more than 10% in July and August. The last three times we had a summer rally of this magnitude was 1989, 2009, and 2020, and the S&P500 rallied another 13.5%, 16.9%, and 20.2% into the end of the year.

 

 

Mining the 90%-Up Days

 

Our third chart could also fall into the data mining camp.  Jonathan Harris highlights that the S&P500 “Up-Volume” was more than 90% for two of three days, while the index traded below it’s 200-day moving average, on August 12^th.  This has only happened 27 times since 1985. For those 27 occurrences the average return into the end of the year is 19.3% with an average interim drawdown of 5.1%.

 

 

 

 

Spending Capital and Reshoring Production

 

Throughout the pandemic we’ve written that we expect corporate margins to be modestly lower in the future to reflect: the impact of reshoring production closer to where consumption occurs, companies carrying more inventory to bolster supply chain resilience, and more redundancy to make operations more anti-fragile. While we’re not seeing lower margins, we are seeing a notable increase in the mentions of reshoring during earnings calls and capital spending looks robust.

 

 

We Will Have Another Recession

 

I can say with 100% confidence that we will have a recession.  The tricky part about recessions is determining when they will occur, in fact by the time the National Bureau of Economic Research (NBER) declares a recession in the US, it’s usually over. We may already be in recession. A recession could be on the near horizon, or it could be years out, but the bottom line is at some point we will have another recession.  The next chart is from Goldman Saks, and it highlights the sectors that have the smallest and largest earnings revisions during the last six recession dating back to the 1980s.  The takeaway for investors, is to stay diversified so they can stay invested even as we traverse the troughs in economic cycles.

 

S&P500 Recessionary Earnings Revisions

 

Bearish to the Max!

 

Finally, we’re recycling a chart from our post Panic! It’s a Bear Market. In the post highlight that the BofA Bull Bear indicator was at 0.0 in the July 2022 Global Fund Manager Survey; it was also at 0.0 in the August survey.  This is the most bearish possible reading. This indicator has been at 0.0 on the following dates: August 2002, July 2008, September 2011, September 2015, January 2016 and March of 2020.  Here are the 0.0 readings (indicated with circles) on an S&P500 price chart.  Apart, from 2008 the indicator has been a pretty prescient buy signal.

 

S&P 500

Source: Bloomberg

 

Enjoy Summer 

 

Every market is different and volatile markets are unsettling. The challenge for investors is to remain focused on their long-term objectives and to avoid panic selling. By saving and investing at a consistent rhythm across market cycles, an investor will end up buying more securities when the market is inexpensive and fewer securities when the market is expensive.

 

Enjoy your August and let me know if you’d like to have a more involved discussion.

 

Delli 416-594-8990

delli@cibc.com

 

 

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