Was March the End of a Bear Market Rather Than the Beginning of One?

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Key Points

  • Odds Now Favor New Highs for the S&P 500…
  • ...But Will Leadership be Different From the Past?
  • Intermarket Relationships Point to Cyclical Leadership Persistaning in the Near-Term
  • Reflation Assets See Positive Performance Expand Across Time Frames
  • The Next Pause / Pullback Will Likely Be the Key to the Story From Here

Action Plan

In the spirit of full disclosure, this week’s note largely serves as a set-up piece. The main market ETFs are all currently overbought after making dramatic rallies from the March 23rd lows. The strength has been largely driven by a rotation into the more cyclical areas of the market as investors appear to be pricing in the prospects for better economic growth globally (after record amounts of fiscal and monetary stimulus).

Given these overbought conditions, which extend to the cyclical groups that have been strong of late, we feel that the structure of the next oversold condition (whether reached via a pullback or a consolidation) will go a long way in determining if the market is establishing new leadership. In the pages below, we highlight how the case can be made that a bear market (small caps) or consolidation actually began in 2018 and how the March low may have been the end of said bear and not its beginning. In our view the next pullback will the key to developing a strategic plan for the balance of the year.

We highlight the key themes that we are continuing to watch for signs that this is the case. Namely, there is a group of cyclical assets that are flashing signs that the rotation may be more than a reversion to the mean. At the same time, weakness in the long end of the treasury curve in conjunction with strength in commodities speak to the fact that investors see global growth as improving (or maybe just becoming less bad). Finally, weakness in the dollar can serve as confirmation of the rotation and a better growth outlook should it persist.


Last week, we laid out the bull case and the bear case as we see them in the market currently. We noted that the bear case largely hinged on the economy and that thesis was dealt a major blow on Friday when it was reported that the economy added 2.5 million jobs in the month of May vs consensus estimates for a loss of 7.5 million jobs. That is not a type-o. The consensus view was off by 10 million jobs.

In our work, we have highlighted the key levels for the SPDR S&P 500 ETF at which we can make an assessment of the likely path going forward. The most recent mark was $311 which was leaped on the heels of that better than expected jobs report. This sets the stage for the trend higher to continue and opens the door to an attack of the February highs. Note that the Nasdaq QQQ Trust (QQQ) reached a new all-time high on Friday. In the near-term, SPY is overbought based on our indicator. Given this dynamic it makes sense to identify key levels to the downside that we want to see hold in order to keep the bulls in control of the market. The first important area is between $300 and $310, below that $285 - $295 become important. Holding these zones of support would keep the uptrend from the March 23rd lows in place, making a launch to the February highs the most likely outcome.

The recent strength has been on the back of the so-called cyclical areas of the market. These are assets that stand to benefit as economic growth improves. The chart below is one that we have used over the past few weeks to monitor if this theme continues to gain traction and that certainly appears to be the case currently. Looking at the blended average of 3, 6 and 12-month returns, we can see that many of these assets are now positive (note that the average is not equally weighted). This is a sign that strength may be more than simple mean reversion.

It is becoming increasingly likely that, should the equity market continue to move higher, it will be with a different leadership structure than what was in place over the past two years. It is not out of the realm of possibility that the March lows marked the end of a bear-market / consolidation that began in 2018, especially for small cap equities.

The key lies in the structure of the market’s next pullback. Should the support levels which we highlight above hold while the SPY becomes oversold, we can assess the leadership structure in the equity space at that time. If the cyclical areas of the market continue their recent bout of outperformance while key levels hold, the time may be right to adjust strategic positioning in that direction. Given the overbought nature of the main equity ETFs, we may be close to having an answer as a pullback from current levels can’t be ruled out

As always, we will look for confirming data points in other asset classes. So far, they are speaking to the rotation theme which we have been discussing. Starting with fixed income, the biggest story of the past two weeks has been the sell-off in the long end of the treasury curve. Recall last week we began to highlight our preference for shortening the maturities of treasuries used in a diversified portfolio. Using the iShares 20+ Year Treasury Bond ETF (TLT) as a proxy for the long end of the curve, we can see that the fund has fallen below our long-term trend line and has become oversold. Should the fund fail to mount a recovery from current levels ($150 being key support), more fuel would be added to the case for an equity rally led by cyclical areas of the market. Notice that the current bullish run for the fund began from the lows that were set in late 2018.

Looking at the commodity complex, we can see that the Invesco DB Commodity ETF (DBC) made its high in....you guessed it, 2018. While the fund remains an underperformer, relative to equities, the case can be made that an important bottom has been put in place. With the fund now overbought, we look to the next pullback to tell us if the trend is changing or about to resume to the downside.

Going hand in hand with this theme is the action in Gold. The SPDR Gold Trust, on which we have been bullish for nearly a year, has pulled back to test the lower bound of a recent consolidation and is now oversold. A failure to use this oversold position to mount an attack on the high near $165 would be another signal that the rotation trade has staying power.

Finally, we can look to the dollar as a confirming datapoint. As global growth prospects began to dim in 2018, the dollar went on a strong bull run. The Invesco DB US Dollar Bullish ETF (UUP) bottomed near $23 in January 2018 and rallied to nearly $29 in March of this year. The fund has subsequently pulled back and is now testing support at the $26 level. Should this support fail to hold, there would be a stronger case to be made for the cyclical rotation continuing to play out.

*The charts in this week’s note come from the Chaikin Analytics platform which show our overbought / oversold indicator. This indicator is one of the key data points for many of the themes that I wrote about today.

Dan Russo, CMT
Chief Market Strategist


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