Bear Market Watch (2015-09-20)

  • S&P 500 is still in Correction, but multiple indicators are pointing to increasing possibility of a Bear
  • 4 component binary indicator effectively called last 2 major tops and bottoms — rings warning at this time
  • Significant cash positions are a prudent tactical allocation for retirees and others who cannot tolerate a potentially large drawdown
  • Accepting possible opportunity cost now may be better than risking large loss to pursue gain.

[this is our letter to clients 2015/09/21]

The S&P 500 continues to look very weak, even though it has recovered from its worst levels in the last several days.

We continue to hold large cash positions (and have done so for a few months now) either for retiree or near retiree accounts that cannot tolerate a potentially large draw down, or for accounts that prefer to make tactical allocation changes between cash and stocks in the face of infrequent but potentially large price declines in the S&P 500.

We sincerely hope we are in no more than a correction, but believe by virtue of rational indicators that more may be brewing.

We would rather be safe than sorry, and are prepared to incur certain opportunity cost in lieu of capital loss by holding significant cash positions – which we expect to reinvest when the same indicators suggest the dark skies have cleared.

In an end of August letter we discussed a variety of Bull/Bear indicators — which we subsequently published on our blog titled:
Correction Yes; Bear Probably Not Soon, But Possible — Key Indicators Discussed

The last two images in this letter update the summary tables for that discussion.

The following chart introduces you to a simple set of 4 binary indicators we have found collectively to be a pretty good indicator of major market trend changes, based on monthly data. Taken together those 4 binary indicators suggest we are 75% of the way to a clear market EXIT point. The Money Flow indicator (one of the 4 binary indicators) is the 25% that is still positive

We have annotated the chart with large semi-transparent red and green dots to show how the indicators identified key major trend changes over the last 20 years.

When the bold red line in Panel #5 is at the zero level, the major market trend is expected to be DOWN. When the bold red line in Panel #5 is at 100, the major market trend is expected to be UP.

(click images to enlarge)



Main Panel:

  • Prices (black vertical bars)
  • 10-month simple moving average – same as 200-day moving average (gold)
  • continuous 10% correction level from trailing 1-year high (dashed red)
  • continuous 20% bear level from trailing 1-year high (solid red)
  • parabolic stop & reverse indicator (dotted blue) [indicator description]
  • money flow index (black line – left scale) [indicator description]

Panel #1: binary indicator:
(Price position relative to moving average)

  • if price >10-month simple moving average, then 1, else 0 (where 1 = Long)

Panel #2: binary indicator:
(Direction of leading edge or moving average)

  • if leading edge of 10-month simple moving average UP, then 1, else 0 (where 1 = Long)

Panel #3: binary indicator:
(Time limits for a trending market to make significant up or down movement)

Panel #4: binary indicator:
(Trading volume weighted tendency for closing price to be in the upper or lower part of daily price range)

  • if money flow index >50, then 1, else 0 (where 1 = Long)

Panel #5: summation of values from Panels #1 – #4:

  • if sum = 4, then 100% Long (ENTER)
  • if sum = 3, then 75% Long (or observing development)
  • if sum = 2, then 50% Long (or observing development)
  • if sum = 1, then 25% Long (or observing development)
  • if sum = 0, then 0% Long (EXIT)

Here are the same binary indicators applied to monthly, weekly and daily data presented side-by-side. Do note that the frequency of whipsaws (false or highly transient indications) for weekly and daily periods are high. The method is best suited for monthly periods, but perhaps the weekly and daily data is useful to see how the current month is developing before it ends and can be added to the monthly chart.


The weekly data is solidly negative, but the daily data is trending to positive, consistent with the recent relief rally in the S&P 500.

This overall negative picture is consistent with the other market conditions dimensions we have discussed with you before (also published in our blog 08/30/2015), and which are summarized here in these two tables as of 09/18/2015:



We are in 50% or higher cash positions in accounts that do not have the capacity to withstand up to 3 years of negative stock returns. We are not predicting three years of negative returns, but for actively retired or near retirement clients, the deleterious impact of fixed amount withdrawals on a volatile portfolio in a negative return period can be severe – the “Risk of Ruin” (outliving your assets). Conservation takes precedence over growth in those situations.


Investment funds directly referenced or based on named indexes in this article:  SPY (S&P 500), IVV (S&P 500), VOO (S&P 500), VFINX (S&P 500), OEF (S&P 100), MDY (S&P 400), IVOO (S&P 400), IJR (S&P 600), VIOO (S&P 600).

More importantly, since the S&P 500 covers more than 80% of the US stocks market-cap, and with the S&P 400 and S&P 600 cover nearly all of the market-cap; this article is about the US stock market as a whole, and virtually all of the broad-based ETFs or mutual funds available.


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