Once again it is that time of the year when we begin to look for our Seasonal MACD Buy Signal and once again there are many nervous traders and investors out there wondering how we could possibly be considering buying now. After all, the market is still correcting (for the first time in nearly four years), the Fed is signaling a rate increase, high yield a.k.a. junk bond yields have risen sharply, auto-giant Volkswagen is under investigation for emission cheating and commodity powerhouse Glencore is apparently on the verge of going under (more than a few sources have suggested as much). Not to mention geopolitical concerns or our presidential election.
There are many valid concerns here and the “wall of worry” is indeed quite tall. However, it is precisely times like now that have historically proven to be excellent buying opportunities. As recent as last year, the market briskly sold off in late-September into October. Our October 21, 2014 Seasonal MACD Buy Signal proved timely. Our October 6, 2011 Buy Signal was even timelier and came just days after S&P 500 completed its last correction of 19.4% (from close to close). Volkswagen, Glencore and even the climb of high yield bonds definitely do make for great headlines, but the likelihood that anyone, or even all three combined, could lead to a recession in the U.S. or across the globe as many fear seems quite small.
Seven years of ZIRP (zero interest rate policy) must have forced yield hungry investors into the high-yield market. It had to; it is what the Fed wanted to happen. At first many were likely reluctant to make the move, but they eventually capitulated and made the move from near-zero yielding, relatively safe assets into the high-yield market sending yields and spreads lower. But now, the Fed is signaling that rates will be rising soon so it only seems natural that anyone uncomfortable in that space is going to begin to move back to where they were before. And why not make the move when high-yield bond prices are still relatively high and yields are low.
Volkswagen is a disaster for shareholders from before the scandal broke. Potentially, they are on the hook for some rather significant fines, but recent history in the corporate world suggests they will come through this relatively unscathed as many criminal and civil suites usually end up being settled for way less than originally discussed. It would seem impossible to prove that all 11 million vehicles (or whatever the number is) with the allegedly illegal software actually polluted at levels above the limit. People have been and will be fired, management will be shaken up, cost-cutting and saving for the eventual settlement has begun. In the end, and in all probability, the company will be hit with a “record-breaking” fine(s) that will be way less than the tens of billions possible, pay it and move on with an even more profitable corporate structure than when the scandal broke.
Glencore has a problem, too much debt, but the holders of the billions of unsecured bonds the company sold over recent years have billions of problem. If Glencore does disappear, so do billions of dollars. It seems most likely that the banks and investors involved will come to a solution that prevents the worst, the death of a mining giant that employs approximately 181,000 people. Besides, did anyone really need Glencore or an analyst that covers them to tell us that commodities have been struggling?
This brings me to the alleged “biggest canary in the coal mine,” the stock market. On a closing basis, the S&P 500 has corrected 12.4% from its high on May 21 to its low on August 25. After four years absent a pullback of this magnitude it is no wonder many are concerned the market is signaling something far worse could be about to materialize. But, just how good of an indicator is the S&P 500? Is it really forecasting a U.S. or global recession in the near future? A look back at S&P 500 past track suggests about a 1 in 3 chance of recession at this point.
First a quick review of definitions. A bear market is defined as a 20% or greater decline in the S&P 500. A correction would be a decline greater than 10% and less than 20%. Based upon these definitions every bear market begins as a correction, but not every correction becomes a bear market. As of today, the S&P 500 is in a correction only.
Since June 15, 1948 there have been 11 S&P 500 bear markets and 23 corrections including the current one. Since the future is unknown, we will exclude the current correction from the tally meaning there have been 33 declines in excess of 10%. However, the National Bureau of Economic Research has only identified 11 recessions over the same time period. This works out to 1 recession out of 3 S&P 500 declines in excess of 10%. One out of three might be great in baseball, but it is not so good elsewhere. Relying solely on the S&P 500 to forecast the next recession is not the best idea as it has been wrong 2 out of 3 times.
Why the decline then? Perhaps the market was simply due. Maybe higher interest rates (or the fear of) caused traders and investors to pull back on margin debt. Valuations were stretched in some areas of the market. Current growth and earnings estimates are also tepid although much of this is the result of commodities tanking and the dollar surging. The demise of commodities and the rise of the dollar are relatively recent events making year-over-year comparisons difficult in many sectors. Provided the dollar and commodities stabilize, comparisons will also normalize in a few quarters which could be anticipated by the market long before it actually happens. Conditions for a rally are not aligned well yet, but they are getting close.
Seasonal MACD Buy Signal Update
Our Seasonal MACD Buy signal can trigger anytime now. Presently, the MACD Buy indicator (MACD (C,8,17,F)) in the following charts of S&P 500 and NASDAQ is negative. DJIA’s MACD indicator eked positive at the close today, but Stochastic and relative strength indicators remain negative.
When MACD indicators for DJIA, S&P 500 and NASDAQ are all positive, we will issue our Seasonal MACD Buy Alert. Until that time we will continue to maintain a defensive posture in our ETF and Stock portfolios.