Just the other day, we stated here, “All the signs are coming together. The fear, the outflows, the new tools to hedge, the focus on bonds and stability, the ETF story and the sentiment indicators. Each and every one of these elements is pointing toward the end of volatility – not the beginning.

I am sorry – bear markets do not begin with everyone already expecting a bear market. They don’t begin with everyone already aware of all the Black Swans. They don’t begin with the crowd already buying the “safe” item, in this case perceived as bonds.

They start when no one expects them, when everyone expects upside, when the crowd is bullish and bonds are foolish ‘if you are looking for real growth in assets.’ ”

The last few days have seen a nice bounce – in some cases almost taking back the losses for the first half of the month.

Sentiment remains down – good. Selling of funds continues in the crowd – good. Shoveling of cash into money market accounts earning pennies – good. Gigantic cash levels remaining idle in bank accounts – good – but also one of the primary culprits in our “paltry GDP growth rate” and “slowest recovery on record.”


We shall see how this bounce works out. Ideally, I would have liked to see more volume on the three up days than we saw on selling days. That is not a must have for this bounce to turn into a low – but it is preferred. The footprints in the sand one would like to see from here, though we should know by now, nothing happens perfectly, would be as follows:

Two to three days of pause – maybe even covering up to half of the distance covered during the bounce.

Ideally, they happen on even lighter volume hinting that those who wanted to leave, have basically left.

I call it the “come to Jesus” part of every long-term low. That is where people fall on their knees and pray, “Dear Jesus, if you will just let the market bounce back a little bit, I swear I will sell all of my stocks and never invest in the market again.”

Then, from a-picture-is-worth-a-thousand-words point of view, you want to see that few days of mild setback followed by a new rally to higher highs that the top of the bounce.

The Big Boys

I often mention the idea that we should consider what Warren is doing while everyone panics. He has indeed been busy – buying.

Wouldn’t you know it, as ugly as it is, he is buying energy – ouch – and farming equipment maker Deere….in two sectors which have been clobbered of late to put it lightly.

I would have described it in another manner but I am told children read this note to their parents when they hide under the covers, too scared to look at their account balances.

Thanks kids : )

Reality Check Repeated

Only because I have a strong hunch that in time this data will have meant something important when viewed back from a few years hence, I have kept in the latest bull and bear readings in the sentiment world.

“Today, everyone is once again scared of stocks (see sentiment charts below) – they hate stocks. They are simply too dangerous – at about 14 times earnings, many less so. However, the safe stuff – bonds – which cannot mathematically repeat their last 30 years which built that comfort, are now priced at over 50 times earnings and loved.”

By the way, when I say sentiment is “terrible” – remember that is a good….for long-term investors….and those brave enough to step into the storm while others run for the hills in very costly fear.

The two charts above show the bull and bear readings in the most recent surveys last week. The first chart shows the bull reading. Less than 1 in 5 are bullish on stocks in the AAII survey – same for advisors.

I have matched a red dot at previous lows in this reading. The red line overlay you see streaming up the chart is the SP500 average. Note where the red dots lie in the pattern of the S&P index.

Same again for the second chart – only this is for the level of bears. Nearly 1 in 2 are now outright bearish – the rest of the 100% are in the correction camp. In other words, 4 out of 5 see a correction or are outright bearish.

I am sorry – whether or not it feels ugly, scary or dark – this is not the picture one sees at the beginning of bear markets. At least not since the early 80’s when I started in the business.

What Now?

I would love to think that the short-term pain is all over…that the selling waves have been completed. I suspect though we need to stabilize our thinking around the idea that there may indeed be a bit more work to do.

After all, there are already fewer bulls than seen at the last two bear market lows of the last 15 years. However, there are still more “correction camp” guys which can be converted to outright bears.

I am not at all trying to scare anyone – nor am I suggesting some dark squall on the horizon. I am merely making sure we keep our thinking on stable ground. Recognize this as a window of time – which may have more work to do – and which will permit a steady, patient accumulation of long-term values.

One more thing – there is no perfect pathway through the mess.

I would close with this thought:

Lengthier, steeper rallies take place from sell-offs which deeply ingrain fear levels and scary emotions. Those rallies coming off of quick insertions of pain and then even quicker releases, tend to fail more often than not.

Like I always say, medicine never tastes good but it heals what ails us over time.

We need to think like Warren – use red ink to your advantage, stay patient, think long-term and ignore the news cycle.

News is designed to scare you – don’t buy it.

One More Thing…

As a support to the comment above about not buying the news cycle, here is a small overview from Calafia – good stuff:

“As I’ve been noting for quite some time, it remains the case that swap spreads are very low despite the elevated level of corporate credit spreads. This is a significant non-confirmation of the distress in the HY sector. Although the market is extremely pessimistic about the prospects for the oil patch, and quite concerned about the health of speculative bonds in general, the bond market as a whole exhibits little if any systemic risk and generally healthy liquidity conditions. Swap spreads were good leading indicators of the distress in prior recessions, but this time around it’s very different. At the very least, this suggests that the market’s level of panic is exaggerated – that the underlying fundamentals are not as bad as the panic would suggest.” (see chart below)