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Friday, August 21, 2015

Daily update 8/21 McClellan on 20% bear market definition


I had to back the chart out a bit to see where the support levels SPX stopped at came from.  The breadth came in at -83%.  The down volume today was almost 94% of total volume.  That is some heavy selling.  New highs were 10 while new lows spiked up to 619.  The elephants were running for the exits today.

That was some move.  I think it is safe to say the market is oversold now.

The TRIN closed at 3 today.  That is often good for a bounce.  The down volume over 90% is also often good for a bounce.  SPX  stopped at a potential support area.  This seems like a reasonable place to stage a bounce.  Since SPX closed on its low a gap up is likely to retest the low.  Just because we are oversold at support it does not mean we will bounce.  At this point I have no way of telling if the selling is exhausted yet or not.  Oversold markets can become more oversold.  This market is broken.  Any rally from here is likely to be a selling op. 

I have searched far and wide and I have to say there is no method that is 100% accurate in signaling a new bear market.  However, I have found several early warning signs that occur infrequently.  They are all signaling now.  After this massive sell off we now have 346 of 500 (69%) SPX stocks down 20% or more from their 52 week high.  Needless to say the technical damage is severe and even if this is just a short lived correction the market will need some time to repair itself.  We have not seen this kind of damage since the mini crash in 2011.  The sell off is global in nature.  Combined with the sell off in commodities it looks very much like a global recession is here.  I don't see how the U.S. can avoid getting dragged down into recession as weak as we are already.  I believe we have started a bear market. There are several ways to help confirm that opinion, but it will take time and more downside for them to occur.  This market has been falling apart stock by stock for months.  This is typically how longer lasting down moves start out.  The last few days the high flyers have gotten crushed.  In the end they get them all. 

I have always thought the 20% definition of a bear market is one of the stupidest things Wall Street says.  I thought these thoughts from McClellan summed it up much better then I did on the 401k/IRA blog.

Final Thought: I get asked a lot by media types whether the decline I see coming is going to be a “bear market” or just a “correction”. These people have fully bought into the myth that “10% is correction, and 20% is a bear market”.  We even hear TV announcers saying things like “XYZ (stock) is now officially in bear market territory”.  

This 10%/20% distinction is one of the silliest and most useless pieces of market “wisdom” that Wall Street has ever created.  Every decline that has gone down 20% has first passed through 10%. So a person who sees the 10% number and says it is just a correction is about like the guy who jumps off of a 20-story building, and as he passes the 10th floor is heard to say “so far so good”. The magnitude of a drop so far does not tell you what to do next, which is the only thing that is important.  

So let me make an effort to set things right. A “correction” is any price movement which is against the prevailing trend direction, and the magnitude is immaterial. If the trend is downward, then you can have an upward “correction” against that trend. A bear market is when the trend is downward for a sustained period. The direction of the trend is far less dependent on the magnitude of how far prices go, and more dependent on other factors.

Let me cite a great example: In August-September 1998, there was a price drop that amounted to 20% for the SP500 over a period of just 6 weeks. Was that a “bear market”? Of course not. But it was a dip worth missing (which we did, by the way). So the use of these silly 10% and 20% thresholds is a practice which everyone should abandon.  And anyone who ever utters the phrase “officially in bear market territory” ought to have to put $5 in the fine jar.

©2015, McClellan Financial Publications, Inc.

McClellan has been steadfastly bullish for years and is just now expecting a significant down move.

Updated the market and sector status pages.  Have a great weekend.

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