To The Moon

This is the question on everyone's mind these days. Many financial gurus are giving out predictions onsocial media that the worst is yet to come causing more uncertainties to investing long term. 

Should we sell everything now and buy on low? Start to dollar cost average at each week or every month? How about waiting out for a U-turn sign before taking action?

Let's look at some news and historical data today before making a decision or rather, stay put and do nothing.

With the stock market on one of its worst losing streaks in decades amid a relentless selloff that has pushed the S&P 500 nearly 20% below its record highs last October, recession risks are rising—but history shows that not all bear markets lead to long-term downturns and stocks can often rebound over this year as anticipated.

The last bear market was in March 2020, when coronavirus pandemic lockdowns sent the U.S. economy into a recession, but that downturn was uncharacteristically brief compared to others in the past (the bear market between 2007 and 2009 lasted for 546 days).

“No two bear markets are exactly alike,” notes Bespoke Investment Group, pointing out that 8 out of 14 prior bear markets since World War II have preceded recessions, while the other 6 did not.

Once the S&P 500 does hit the 20% threshold, stocks typically fall by another 12% and it takes the index an average of 95 days to hit the end of a bear market, according to Bespoke data.

In more than half of the 14 bear markets since 1945, the S&P 500 hit a low point within two months of initially falling below the 20% threshold—and forward returns were largely positive, Bespoke points out, with the index rising an average of 7% and nearly 18%, respectively, over 6- and 12-month periods.

Some interesting information:

- Great Depression bear market lasted 1,001 days

- Dot Com bear market lasted 924 days

- 1973 bear market lasted 630 days

- Great Financial Crisis bear market last 511 days

- 2022 bear market ONLY lasted 280 days

🚨 The Bad News

If the U.S. economy can avoid falling into a recession, then stocks would be in a better position going forward: Bear markets that occur before a recession are more prolonged (lasting 449 days compared to 198 days with no recession) with steeper losses (an average decline of 35% compared to 28%), according to Bespoke.

Expect capitulation and bull traps some warn

What to watch out for!

The S&P 500 has only posted a losing streak of seven weeks or more three times—in 1970, 1980 and 2001, according to Nationwide’s chief of investment research, Mark Hackett. “Unfortunately, the index was negative over the next 12 months each time,” he says. The index could tank by between 11% and 24% if the economy falls into a recession in the near-term future, major Wall Street firms have warned.

“Persistent inflation, another Fed policy mistake and recession fears have unnerved investors,” with the S&P 500 briefly falling into bear market territory, says Edward Moya, senior market analyst for Oanda. The widespread selling will likely “only accelerate” as investors will remain wary until the Fed “starts to show signs that they are worried about financial conditions and that they may stop tightening so aggressively.”

Bungee jump to mid $2000? 😅

🚨 The Good News

The bottom is over narrative. 

Last week FOMC delivered a stance on their focus on inflation lowering and about resilience of the American banking system and having the necessary tools for protecting the banks if needed. 

Later there were some contradictory statement from Yellen appearing before the House about the banking crisis which pushed the market lower right after FOMC, which she flipped 180 on Friday after seeing the market tanked. 

Seasonality shows April is the best month 🤑

Recent MACD cross on the daily. This has been good for at least a couple weeks of upside since the October lows.

Using this very simple 200D SMA envelope signal to remove bias. Until price closes below the bottom of this envelope, history suggests the markets have bottomed.

🚨 The Ugly News

It’s still early to determine the outcome of the banking crisis and things can get fluid when financial stress is afoot. But amid warnings of a banking crisis, a credit-fomented recession, pivoting central banks and stagflation, the best strategy so far — particularly in stocks — has been to sit still.

The S&P 500 just capped its second straight up week, and while Treasuries have dealt body blows to short sellers, holding on through the worst volatility in four decades would’ve reaped sizable profits.

It is critically important to understand what markets are pricing in. Do not confuse this with "therefore this is what will happen." Let's refer to some charts what the market are expecting (the most famous is the fed fund futures probability chart).

The most obvious case is the Lehman Bros.

The black line is the S&P 500's movement since March 8 (they day before we knew there were banking problems) vs Lehman's bankruptcy on September 15, 2008.

The next 13 days after these events, the stock market returns were very similar, then the TARP vote failed, another unexpected event, and the bottomed dropped out of the market. Eventually the S&P lost nearly 50% from its high. 

Another similar event was COVID, the cyan line.

The public first became aware of it on January 23, 2020. The stock market fell 3% and then recovered.

Market wags spent the next month arguing what it was transitory (that word again!) and did not matter. A month later it mattered and the bottom dropped out of the market.

A third example was Iraq's invasion of Kuwait. Initially it too was thought to be a non-event.

Then a week later when President HW Bush said "this will not stand" and order operation desert shield (which eventually became desert storm).

The market then realized it was indeed a big event.

Research, fact checks, history repeats 😉

It's important to know what the market thinks. BUT DO NOT ASSUME" so therefore that is what will happen."

It is the second part that gets investors in trouble over and over. They start with the conclusion; the market's pricing and they look to support this pricing. Instead they should be asking if the market is correct.

So, are we having a banking crisis? Yes, the "evidence" is present but not apparent, yet. The market's assumption is there will be no more failures, and no more stress. So if there are any more failures, or any more stress, risks the trap door opens.

Will there be another issue? Highly likely. But that is just another opinion, not a fact.

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