Great Bear Forest

The Bear Skulks…

skulk – (verb)  1. to lie or keep in hiding, as for some evil reason.

The broad US equity market has been in a declining trend, and it has failed to establish a new high for almost nine months.  Since it’s peak on May 21st of last year, the broader market has now failed to sustain rallies on nine consecutive attempts, establishing a typical bear market pattern of lower highs and lower lows.

The US equity market has again pulled back just short of reaching the technical requirement for a “bear market”.  On February 11th, the NYSE Composite Index closed at a new fifty two (52) week low of 9,029.88, a “whisker” above a bear market’s 20% decline and a closing low of 8,991.73.

The broader market has rallied yet again, with three consecutive strong sessions.  Should investors be buying this bounce?

We think not.

NYSE Composite Version 3

The last three consecutive days of higher prices have not yet been supported by the increased trading volume characteristic of a “sustainable” rally.  In fact, for the broad market, the chart of the NYSE Composite Index and the Price Volume Oscillator (“PVO”) shown above indicates trading volume during this latest rally continues to decline, and declining volume is clear evidence of a lack of investor conviction.

Trading volume validates market movement and, of late, the direction of the PVO have been negatively correlated, or inverse, to the movement of the NYSE Composite Index.  This negative correlation indicates an investor bias toward bearish sentiment, and is not the “normal” or “typical” positive volume correlation characteristic of bull markets.

Strong resistance to the rally exists at 9,601.42 and 9,632.70.  Absent strong volume, this rally is likely to fizzle out over the next few sessions as the NYSE Composite Index approaches the resistance.

Central banks around the world are out of bullets, and several, in a sign of desperation, have embarked on the most significant policy mistake (negative interest rates) since the Great Depression.  Negative macro and micro-economic data trends worldwide has become more pervasive.  US corporate earnings are down 4% thus far, year over year.  Future negative events such as a Venezuelan debt default, additional currency devaluations, bankruptcies in the energy and mining sectors, or even major bank and sovereign debt rating downgrades are more possible than ever.  The occurrence of events such as these would provide the catalysts to move the worldwide equity markets sharply lower.

We know the “bear” is among us.  We can smell him, we can hear him, but he has not yet shown himself to us.

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