Where I Think We Are in the Market Cycle

Social media is a wonderful thing sometimes. Of course, there are the downfalls with the spreading of rumors and false stories, but it is also a means of keeping in touch with people that you might not get to see on a daily basis. One thing I personally like about social media is being able to stay in touch with my friends and family that are in Indiana and Ohio while I live in Florida now.

Something that has happened in the last few weeks is that a number of friends and family members have asked me what I think about the market. They know what I do and that I have been in the investment publishing industry for a long time now and value my opinion.

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The other day I posted something on Facebook about the recent drop and how it had been a historic decline. There were a number of comments from different people from all walks of life. My old roommate from college stated that he thought it was a great buying opportunity. He’s an active investor and works in IT for a living. Another friend that is in the investment industry postulated that the market would be right back up to where it was before by the end of the year. Yet another friend in the insurance business stated that it was just a paper loss at this point and that the market would recover.

A few people posted that it was scary or depressing to look at. But not a single person said anything about selling or that they had sold or made changes to their portfolios. My cousin called me because of the post and she wanted to know what I thought she should do with her 401k.

I responded back to my old roommate that I wasn’t buying anything new just yet and that I was waiting for a few positive signals. I suggested to my cousin that she keep making contributions to her 401k, but I suggested she change her allocations, not because of market conditions, but because she had too much in equities for someone our age.

I am a little concerned that none of the people that responded are making changes to their portfolios. Sure, now that the market is down 30% in five weeks, it isn’t necessarily time to be cautious—that time was months ago when the market was incredibly overbought and sentiment was extremely optimistic.

As for the predictions that it will bounce back, yeah I think we will see a bounce, but I think this is the first leg of a bearish market that will take time to play out. If the current bear market is like the last two, we will see three significant legs to the downside with short bounces in between.

Looking at the chart of the 2000-2002 bear market, we see a sharp downturn from August 2000 through March 2001 and then a bounce for about 10 weeks that saw the S&P gain just over 20%.

The second leg down happened from May ‘01 through September ’01 and then we had another bounce from September ’01 through March ’02. That bounce was good for 24%. From March ’02 through the low in October, the S&P dropped another 34%. The market would eventually start moving higher from that low after retesting it in March ’03.

There was a similar pattern in the bear market from 2007-2009. There were three legs down that were interrupted by short bounces in the 15%-30% range. The first down leg was from October ’07 through March ’08. From that low to the high in May, the S&P bounced 14.6%.

The second down leg from May ’08 through November ’08 was a brutal one and the S&P dropped 48%. From mid-November’s low through early January, the S&P jumped 27.4%. The final down leg from January’s high through the March low was 29.4%.

I might be wrong, but I think this current downswing is only the first down leg. Will we see a similar pattern with three down legs interrupted by short rallies in the 15% t0 30% range? Time will tell us whether that is the case or not, but I intend to keep an eye on a similar development.

For the first time in two and a half weeks, I sent out a new bullish recommendation to my newsletter subscribers today. This stock looks as if it has already hit its low and I expect it to rally for the next few months. In addition to watching the stock, I will be watching the overall market for clues about possible turns.

If we turn higher from here and rally for a few months, I will be watching for potential signs that we are topping out. If the S&P is at potential resistance points, the 52-week or the 104-week moving average, I will look to lock in profits and/or look at adding some bearish positions to hedge the bullish positions.

When I have spoken with or messaged with my friends and family members, I have told them the same thing I have been telling the readers here—caution is warranted. I don’t see us just bouncing back from the economic damage this virus is causing, at least not for some time.

Some of the answers will come from how long it takes to get things under control in our own country. The longer it takes to get things under control, the longer it will take the economy to recover. Even if we get things under control in the next month or two, it will not fix the economy immediately. I see it taking at least through the end of the year and possibly into 2021 for earnings to start rebounding.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.