Market Direction and Stock Trends

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Where is the Market Going?
By: John Mauldin | October 19, 2018

I’m getting more questions at my speeches and in my inbox about whether I think we are entering into a bear market? The honest answer is I don’t know. My particular management system doesn’t really care as we have triggers that will move us out of the market or back into a market based upon various indicators that my underlying managers use. I trust their systems and I sleep at night, not worried about what my portfolio or the portfolio of my clients are doing.

But the question is still reasonable. And it allows a teaching moment. First, looking back in history, there are essentially two types of bear markets: those that happen in a recession and those that don’t. Bear markets that happen accompanied by a recession generally are deeper and the recovery is much longer. Those that happen simply because the market had gone “too far, too fast” and seemingly needed a correction tend to be “V” shaped recoveries. Think 1987 or 1998.

Looking at the economy today, and absent a trigger from Italy/Europe or China (or worse, shooting ourselves in the foot with our China tariff policy) or some Black Swan, there is no true reason for a long-term bear market. The economy is in relatively good shape, and I don’t see a reason for a recession to begin anytime soon, absent some trigger event.

That means if we did have a bear market correction, I would actually expect it to be “V” shaped and a very tradable exercise.
The market itself is showing signs of weakness. My friend Dave Wright points out that even during the large upward movement on Monday, the stocks on the NYSE made more new lows than it made new highs. That is not a healthy market. Dennis Gartman gives us this following graph:



Again, this is not the sign of a healthy market. All that being said, much of the correction came in the tech sector, especially the S&P. I’m not going to show a chart here, but if you had taken the technology stocks out of the S&P 500, we would’ve been in a downward market for quite some time. Technology clearly led the way in recent times.

It is very possible that we get into a “sector rotation” market and that we churn sideways for quite some time. It is just as possible that we see what normally bearish David Tice thinks will happen: That we are actually in danger of a market melt-up, which can happen for all manner of reasons. Let me give you a potential. Right now, the market and most commentators believe that Democrats will take the House in the midterm elections a few weeks from now. What happens if they don’t? Could we see the same type of bullishness in the markets and sentiment that developed after Trump was elected?

I know my Democratic friends want to ignore it, but so many sentiment indicators are at all-time highs, and they’ve been getting that way since Trump was elected. Don’t ask me to tell you the reason or discuss politics with you, I’m simply looking at the facts. And I think we all agree that sentiment does drive markets. But we need to remember that sentiment can turn on a dime.

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