With major indexes down 4% to 8%, I am once again getting asked whether the bull market has ended and a multiyear decline is unfolding.
I don't think so.
The New York Stock Exchange's cumulative advance/decline line (a cumulative measure of net stocks advancing) recently scored an all-time high. When bull markets end, we typically see this indicator peak months, quarters or even years before the Dow Jones Industrial Average and the S&P 500. The same can be said of the high-yield bond sector, which also just struck all-time highs. Bear markets are usually associated with restrictive monetary conditions and excessive valuations. It's very hard to argue we are seeing those right now.
This decline continues to look like a pullback, meaning less than 10% in the Dow and S&P 500. It will end when the weaker bulls give up hope and throw in the towel, something that has not happened yet, but may be close. Sometimes that takes a few weeks, other times it takes months or quarters. My 2014 forecast called for a digestive-type year like 1992, 2004 and 2007. That's what we have seen so far and it looks to continue.
Stocks are very oversold in the short-term and on their way to being oversold in the intermediate-term. However, as we saw on the way up, overbought and oversold can get more overbought and oversold until a reversal takes hold. Just watching the volatility (fear) index breach 20 should give us a hint that the decline is coming close to the end.
We have already seen volume in inverse ETFs begin to spike, indicating that investors are running for downside protection.
What's making headlines right now is the veracity of the decline in former high-flying market leaders like biotech and Internet. Those sectors led on the way down and I am keenly watching them for signs of stability and life.
Tuesday was a wildly volatile affair in those sectors, as well as in the Nasdaq, with bulls fighting to a well-deserved victory by the close. It's too early to tell if the high-fliers have peaked for good, but once the market bounces, these should rally hard.
It doesn't look the stock market has hammered in a good intermediate-term bottom yet, but the short-term is encouraging. The typical pattern would see a rally that lasts more than a day or two followed by another decline below the previous low. Tuesday was a small start.
There should be a better buying opportunity this quarter.
Investors continue to hide in consumer staples, utilities and REITs on the equity side and my favorite investment that everyone hates, long-term Treasury bonds. Since late last year, I have been positive on Treasury bonds and they have performed nicely.
I know it will be time to sell when those who scoff and laugh at the position decide that it's worth buying.
Paul Schatz is president of Heritage Capital
