Yesterday, the WSJ quite casually announced the “ending [of] the longest Nasdaq bear market since the financial crisis”, by rallying the last few percentage points across the magical 20% percent decline line in the sand that by some textbook definition divides good and evil. Ahhhh to be twenty again. Unfortunately, I couldn’t find anything in the report that supplies weighty factual support of why the neverending buy-the-dip bull party should be on again.
A lesson an old lab buddy of mine had to learn the hard way is that just because something is in print, does not mean that it’s true. At the danger of being a party pooper, I want to raise some points of why I think popping corks and calling this bear market over is premature at this point.
Show me the money
What really drives a new long-term bull trend? Have you ever asked yourself that question? The answer is simple … money. LOTS of money. For an uptrend to be sustainable you need to see signs the really big boys are starting to see light again on the horizon, and start buying the heck out of it.
In his autobiography, 20th century financier Bernard Baruch referred to this as the “giants of finance regaining basic confidence in the country’s future”. Simply, great stocks under accumulation, near historically high prices. Why? Because that’s where they’re found when they’re being bought en masse. Have you seen that? How much of it? And in what type of issues?
Bull markets are addicted to institutional capital, like a junkie to the needle (a crude but adept analogy). Institutional money needs to be pressure-pumped into high-quality issues to lead the market. That is not the only thing that you will be able to observe, but it will be there every time. It is probably the most important one.
If this rally is to persist, what is really leading it right now? What will be leading it in the future, if we embrace the claim that the growth-heavy NASDAQ is “back into bull territory”? We’ve come up >21% over 37 trading days from the supposed NASDAQ June bottom, but who is really pushing this rally? I’m having a hard time finding signs of large amounts of money re-entering the market, no real money anyhow that could lift this market into a new durable and long-term uptrend … at least not enough.
Of course, there are some higher-quality issues at historically high prices attracting buying power. Behold Enphase Energy (ENPH) fighting steadfast against the bear. But what else? I can count the worthwhile issues on the fingers of one hand – there really is not much to see, barring the odd illiquid issue and many micro-caps (e.g. biotech without earnings records) outperforming.
“No fair weather signals” as the famous investor Gerald Loeb remarked at such times. When the bear starts roaring again, I expect that the baby bulls will leave with their tail between their legs. Then, unfortunately, these few better-behaving stocks will most likely roll over in the dust like so many of their colleagues, at least for the time that the bears are still in charge.
Why then is this market rallying? Those groups of stocks that are being bought steadily against a declining market over the last few weeks and months, are dominated by value plays and classical late-cycle and defensive sectors. Money rotates between commodities & energy, consumer staples, healthcare, telecomm, utilities, and high-earnings stability stocks – a clear sign of large fund managers hiding from being whipped to death during the much-debated economic turmoil and expected market volatility.
Popular indices such as the S&P 500 encompass a number of such industries, helping the major indices hang higher by a thread. Look at the Renaissance ETF (IPO) for a squint under the hood of how some of the last two year’s best growth names and new growth issues are doing these days.
“Do as I say, not as I do”
Bear market bottoms are characterized by overly-bearish sentiment. We certainly see that, judging from regular investor sentiment (recent AAII survey ~39% bears & ~30% bulls) to investment newsletter vernacular surveys (>40% bears & <30% bulls).
However, when it comes to money, you need to look at what people actually do, rather than what they say they will do. If I may borrow a poker analogy, searching for sentiment extremes in a major bear market such as this requires you to look at what people are willing to bet chips on, not the loud banter of opinions that fills the room.
In this so far 9-week rally, the NAAIM exposure of managed client money to equities shot from a recent low of only 20% to over 70%. This is anything but fear – this is sitting on the edge of your chair to get in again. The ‘Fed Put’ – decade-long Fed-induced liquidity injections into markets and monetary policy that was more of a free money party for years – has conditioned people to immediately expect a rebound in equities when the indices are showing weakness.
As recently as July 28, Cathie Wood’s ARKK fund has received regular inflows – avid fanboys and smartphone traders forking over their hard-earned money and what’s left of stimulus money to a growth fund that has by now declined by 70% from its February 2021 top and 68% from the beginning of the bear in November 2021.
Would you put money in a property that is half the price of what it was a year ago, just based on that information? That’s a 50% decline per year, dropping hard. What if you buy it now, and in a year from now it will be a quarter of the price? On July 6, ARKK had one of its highest money flows into the fund since its price top in February 2021 …
The stocks that rallied most as part of this rally, expressed in percentage-gain on high trading volumes, were down-beaten growth stocks – with almost all of their prices 60-80% off recent Highs and but a shadow of their previous glory. NET for example, a tech leader of the previous bull market, has racked up a respectable 100% gain thus far in this Jun-Aug rally from the bottom … does that make it a promising prospect right now? It is still 66% off Highs, jammed below heavy overhead supply.
This can be spotted all across the market. Undoubtedly, a lot of (institutional) short covering was involved. But this was also a lot of people buying into what they believe are good bargains. People to whom I’ve got a “mountain property with prime beach access” to sell. Just a joke, but you get the gist – this is bottom-fishing, if I’ve ever seen any.
People who are truly bearish are afraid to start positions, ground down by months of seeing their precious ‘it’s-cheap-now-is-the-best-time-to-buy‘ stocks consistently head lower, and their account balance with them. They become frustrated, doubtful, resigned – they do not put more money to work. In all honesty – does the recent revival of meme stocks a couple of days ago shout out to you that the buy-the-dip esquires have fallen off their horses yet?
Implied volatility of the S&P 500 (the VIX, the “fear gauge”) has not exceeded ~39ish during this bear. A great Labor day-, Halloween- or even Christmas period gift would be the VIX and/or options volume ratios to show multi-month -year bearish extremes later this fall or winter. This would signify people acting on their bearish opinions, putting money where their mouth is, not just expressing them. I’d like to see some capitulation selling, spiking fear, people believing that the worst is still to come.
I know this sounds mean, but such extremes are historically associated with market bottoms. So far selling has been relatively orderly – no panic, no over-leveraged funds blowing up, no forced selling, nothing really abnormal. Given that the NASDAQ Composite index has so far received a ~35% haircut from top to bottom and thus declined more than 81% of all bear markets since its inception, there is surprisingly little actual anxiety in the markets.
Why are you in the markets?
These were a few of the many reasons why I do not see this rally turning into a greener pasture soon. In the environment that we find ourselves in, it stands to reason to assume that there is a considerable amount of open short positions in need to be covered during a bear relief rally, such as the current one. Adding to that is a random group of bottom-fishers who are told by some or other holy technical indicator that “now is prime time” to start buying again. The result is a nice relief rally, which can be violent. Enough to drive a good bounce? Sure. Enough to start a new bull market? An emphatic ‘No’ from me.
This bear rally does not have the firepower behind it to sustain anything more than a temporary relief, and one that is likely to find its end very soon, as we are approaching down-trendlines, long-term moving averages and overhead selling pressure zones.
Any single one of these points appearing by themselves would make me ponder. We do not need to see any one of the items I discussed to improve or abate, respectively – the market couldn’t care less about my thoughts. All of them combined (and the many more bearish factors that the salient speculator will have unearthed in their analysis) however, do paint a very clear picture – a picture where the champagne stays in the fridge for a little longer.
To put it in the simplest terms possible, a bull market is when one can make money on the long side for a meaningful period of time. Bull markets shouldn’t be defined by an arbitrary black and white threshold such as a 20% rally from the bottom. In the dotcom bear market, the NASDAQ rally from Sep 2001 into Jan 2002 raced up 51.5% over 17 weeks, more than 2.5 times that threshold. After that, the NASDAQ took another 10 months nosedive, shaving off another 47% until the actual bottom was in. So much for the idea of a 20% rally being a new bull market.
If there is a desire to use technical analysis to define bear and bull markets, I suggest looking deeper in the toolbox. In my opinion, using an arbitrary 20% rally to define a bull market is at best naive, and at worst might potentially mislead amateurs to expose themselves to a hostile market environment they are not equipped to handle. By their own stats, the WSJ has a digital monthly audience of more than 60 million unique readers.
I make the following case: To an amateur reader that lacks the time and means of judging the ‘spirits’ of the stock market, the difference between bull and bear markets should be reported based on whether:
- the potential rewards for being in equities outweigh the risks (often magnified by lack of risk control of most market participants), and
- the odds of gaining these rewards outweigh the odds of realizing these very risks
Why are you in the markets? I’m in this for the large moves in the best stocks, the doubles and triples, and I will only throw my spear at these beasts when I know the odds of me piercing them straight in the heart are high. I’m not interested in the small 5-10% moves here and there, especially when the likelihood of getting such small gains is low. Hence, I shall not be joining the round dance and the current Kumbaya chant quite yet….
