It was a scary week. The headlines are full of the observation that it was the worst week for the U.S. stock market in 2 1/2 years.
Okay. But does that fact by itself mean anything as far as whether this is just the brief pullback from an overbought condition our short-term indicators told us and you to expect?
Or does the week’s big plunge mean it’s the beginning of something worse?
By itself it tells us nothing.
For instance, that previous worst week took place in the middle of 2012, as circled in blue on the next chart. It took place within what turned out to be only an 8.9% pullback by the Dow, another of those times when the market did not see even a normal 10% correction.
That last worst week took place in the middle of a decline, and saw the Dow lose 451 points for the week. The following Monday it closed up 135 points, and with some minor volatility was up 85 points for the week.
However, the scary decline was not over. Two weeks later it was back down 336 points, and dropped fractionally beneath the long-term 200-day m.a. in the process.
But that was the end of the pullback. The following week it was up 435 points, the week after that 212 points. The bull market had resumed.
Does that mean that scenario will repeat?
No. Day to day, or week to week volatility does not indicate what will follow in either direction. We depend on our short-term indicators for short-term expectations, and our intermediate and longer-term indicators for upcoming periods beyond the short-term.
U.S. investors also fled to safe haven bonds this week.
I have been periodically writing about U.S. Treasury bonds all year. Most recently U.S. Treasury Bonds Are Outperforming S&P 500
That could certainly be seen this week. While the S&P 500 plunged 3.5% for the week, the 20-year bond etf TLT closed up another 4.3%.
However, it was not new with this week.
Bonds have defied the expectations of the experts all year, rallying in spite of the Fed eliminating its massive QE bond-buying program, and more recently in spite of expectations that the economy is improving enough that the Fed will begin raising interest rates this year (bonds move opposite to interest rates).
The catalyst has been global investors, buying U.S. treasury bonds as a safe haven in the face of the problems in their own economies, stock and bond markets.
But this week, U.S. investors joined the move to bonds as their own market plunged on concerns that the crash in the price of oil will continue to have a domino negative effect on important global economies that will spill over on the U.S.economy.
Bonds are spiked up to a somewhat overbought condition. Does that mean anything for the price of oil or the stock market next week?
1990’s type bull market and continuing secular bear are compatible.
I often receive e-mails that indicate the writer didn’t thoroughly read an article or commentary before jumping on the keyboard to respond.
I received an e-mail (from a non-subscriber) this morning that I am compelled to comment on since there may be others thinking the same way based on two recent article titles.
As you know, my newspaper column last week Are We in Another 1990s Style Super Bull Market– referred to similarities so far and the possibility that the bull market that began in 2009 could turn out to be like the 1990’s super bull, which lasted nine years.
My column this weekend Congress has Guaranteed the Secular Bear Market is Not Overrefers to reasons to believe the secular bear market that began in 2000 is not over, that another downturn lies ahead, with the most likely time-frame being 2017.
The e-mailer said, “You present the case for a new secular bull market and then a week later argue the secular bear isn’t done. You’re simply covering your ass in both directions and will probably republish the correct call at a later date to prove your wisdom.”
In fact, the two columns do not contradict each other, but were planned in advance to be presented sequentially to tie the two situations together.
My analysis and article about the secular bear market not being over very specifically referred to 2017 as being the year likely to see the next serious downturn that keeps the secular bear alive.
My analysis and article about the possibility of being in a persistent bull market like the 1990′s, points out that the current cyclical bull market is now entering its 7th year and how in the 1990′s in the 7th year that bull market had three more years to run. If the current market entering its 7th year also has three more years to run, 2014 + 3 equals 2017.
Same conclusions, possible continuing bull market, but within the context of the secular bear not being over, and 2017 being the year both types of analysis point to.
Readers of my books and blog know my penchant for warning about scams and frauds that separate so many people, including trusting investors, from their savings. The most recent: Don’t Let Greed Lure You Into Scams!
Shane Ferro has an interesting article on the subject on Business Insider this morning. Some excerpts:
“Here’s a pro tip: Buying unsecured notes advertised in your church’s weekly leaflet is probably not a good idea. Another tip: If some guy encourages you to invest in his one-man distressed-real-estate fund returning 8-10% while warning you that the stock market is too risky, run away, far away.”
“The SEC alleges that David Fleet’s company, Cornerstone, fraudulently sold $16.75 million worth of unsecured notes, mostly to retirees, some of which were “advertised … in one or more church-affiliated publications, for his real-estate business between 1997 and 2010. The vast majority were sold between 2006 and 2010. As you may have guessed, 2006 through 2010 wasn’t a great time to invest in the real-estate business, and things went south. Instead of letting his investors know, the SEC says Fleet borrowed more and more, while continuing to maintain that the business was profitable.”
“After that, Cornerstone reduced interest payments to 1% (from 8-10%), and prohibited investors from withdrawing their principal. Eventually the company filed for bankruptcy.”
To read my weekend newspaper column click here: Congress has Guaranteed the Secular Bear Market is Not Over
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Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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