Bear Market or Miller Time?

Fred Imbert of CNBC reports, Dow falls more than 150 points, posts worst Thanksgiving week decline since 2011:
Stocks fell on Friday as some of the most popular technology shares were under pressure once again, while a steep drop in oil prices also weighed on equities.

The Dow Jones Industrial Average dropped 178.74 points to 24,285.95 while the S&P 500 pulled back 0.65 percent to 2,632.56. The Nasdaq Composite dipped 0.5 percent to close at 6,938.98. The Dow and S&P 500 posted their worst Black Friday performance since 2010. The Nasdaq had its worst Black Friday since 2011.

For the week, the major indexes all dropped more than 3 percent. They also had their biggest loss for a Thanksgiving week since 2011.

"I don't think the bull run is over but I think we're close to the end of the cycle," said Mark Esposito, CEO of Esposito Securities. "It feels a bit unsafe." Esposito cited slowing earnings growth, higher market volatility and slowing economic growth as signs the currency cycle may be ending.

Facebook, Amazon, Apple, Netflix and Google-parent Alphabet all fell on Friday. These stocks, which make up the popular "FAANG" trade, all fell at least 5.7 percent through Wednesday's close.

Apple, which has fallen more than 25 percent since hitting an all-time high earlier this year, dropped 2.5 percent after The Wall Street Journal reported the company plans to cut prices for the iPhone XR in Japan because it's not selling well.

Friday's session ended early after the Thanksgiving holiday on Thursday, when U.S. markets were closed.

Stocks were also under pressure on Friday as crude oil prices plunged. West Texas Intermediate futures fell more than 6 percent to $51.03 per barrel, reaching their lowest level of the year.

"Tech stocks are under pressure once again but more troubling is that oil prices are collapsing," said Peter Cardillo, chief market economist at Spartan Capital Securities. "Lower oil prices are not a good sight for the economy."

"OPEC has indicated they're going to cut [production], but that's not helping. That's a bad sign," said Cardillo.

The drop sent the Energy Select Sector SPDR Fund (XLE) — which tracks the S&P 500 energy sector — down more than 3.1 percent. Shares of Concho Resources, EOG Resources and Devon Energy were among the biggest decliners in the XLE.

Crude's decline comes at a time when U.S.-China trade tensions have raised concern of a possible economic slowdown. The two countries have imposed tariffs on billions of dollars worth of each other's goods as the Trump administration takes on a protectionist stance on trade.

U.S. and Chinese leaders are expected to meet at a G-20 meeting in Argentina at the end of the month, though few economists expect the scheduled talks to resolve the trade dispute.

"A lot of the moves have to do with tariffs and moves by the Fed," said Greg Powell, CEO of Fi-Plan Partners. "Depending on what happens in those talks, that could change the whole dynamic in the market from a sentiment standpoint."

China stocks fell on Friday in anticipation of the U.S.-China trade talks. The Shanghai Composite dropped 2.5 percent while the Shenzhen A Share index pulled back 3.7 percent.

Retailers bucked the negative trend, as the SPDR S&P Retail exchange-traded fund (XRT) rose 0.3 percent on Black Friday, one of the busiest shopping days of the year. Shares of Lands' End and Etsy rose 5 percent and 2.8 percent, respectively, while L Brands gained 2 percent. Overstock, which is also in the XRT, surged more than 23 percent after its CEO said the company would sell its retail business to focus on crypto.
So what to make of the slide in tech stocks and stocks in general? Berkeley Lovelace Jr. of CNBC reports, Goldman Sachs: The stock market plunge does not indicate a recession on the horizon:
The U.S. economy will not head into a recession in the next two years despite fears in the market that one may be on the horizon, Goldman Sachs' Peter Oppenheimer told CNBC on Wednesday.

Oppenheimer, chief global equity strategist at Goldman, expects the U.S. economy to grow but at a much slower pace of 1.6 percent by 2020.

Equity markets are selling off for several reasons, he said, citing global trade worries, fears of weak profit growth in the next few years and rising interest rates.

"The reality of a slowdown in profit growth and in activity, economically, has really been at the heart of this sell-off," Oppenheimer said in an interview on CNBC's "Worldwide Exchange."

U.S. stocks rose Wednesday. With Tuesday's losses, the Dow and S&P 500 were lower for the year, and the S&P 500 joined the Nasdaq in correction territory.

Oppenheimer said he expects support for equity markets, arguing that stock returns compared to economic growth expectations suggest there may have already been an overshoot on the downside in the market.

"We're still in an upward trend," Oppenheimer said. "The overall growth rates are going to slow, and we should expect a relatively low return in global equity markets next year but still positive."
While Mr. Oppenheimer remains upbeat on the US economy and stocks, his colleague at Goldman, David Kostin, is a lot more cautious. John Mellow of CNBC reports, Goldman Sachs on 2019: Raise cash, get defensive and look out below if more tariffs happen:
Goldman Sachs is not feeling very bullish about stocks in 2019, according to its official outlook report to clients out this week.

Here are some of the investment bank's predictions for next year:
  • The S&P 500 will rise just 5 percent to 3,000 by year-end 2019 (after closing 2018 at 2,850).
  • Households, mutual funds and pension funds should raise cash: "Cash will represent a competitive asset class to stocks for the first time in many years."
  • Investors should buy defensive sectors and stocks to ride out a tough year where fears of a recession increase. Goldman raised utilities sector to "overweight" in the report.
  • Base forecast: Stocks return 7 percent, T-bills return 3 percent and Treasurys return 1 percent in 2019.
  • But the market could be in for big trouble from tariffs: "If the full 25 percent tariffs are levied on all imports from China the earnings impact could be significant, potentially eliminating any profit growth next year," the report said.
Goldman generally believes the bull market will continue in 2019, but it could get choppier as the year continues and investors begin to worry about a recession in 2020. The bank puts a 30 percent probability on a market "downside scenario" where fears of a recession and tariffs drive the market earnings valuation to contract and the S&P 500 to end the year down at 2,500. (It gives a 50 percent probability to its S&P 500 3,000 base case and just a 20 percent probability for the 3,400 upside case.)

"For equity investors, risk is high and the margin of safety is low because stock valuations are elevated compared with history," chief equity strategist David Kostin and team wrote in a note to clients Monday. "We forecast the S&P 500 index will generate a modest single-digit absolute return in 2019. Perhaps more important, the prospective risk-adjusted return to equities will be less than one-half the long-term average and cash will represent a competitive asset class to stocks for the first time in many years."

The bank's economic team said Sunday that economic growth will slow to a crawl in the second half of next year.

The S&P 500 closed Monday at 2,690.73, little changed for 2018 and down 8.5 percent from its record reached earlier in the year. The market slid again Tuesday as investors continued to dump their technology stock winners. An earnings miss from retailer Target also added to the negative sentiment.

Too much in stock market

Most investors (households, mutual funds, pension funds and foreign entities) are too overweight stocks and need to raise cash, Goldman said.

"These entities have equity allocations ranking in the 89th percentile vs. the past 30 years," the report said. "At the same time, these investors have cash allocations at the very bottom of their historical allocations, often ranking below the 1st percentile."

Buy utilities

Goldman still likes technology stocks despite the rout that started in October. The bank also likes communication services, saying both sectors have high profit margins that could be sustainable in a tougher economic environment.

But Goldman is especially bullish utilities, raising the sector to overweight.

The bank likes the sector's "track record of notable outperformance during decelerating GDP growth environments and a low historical beta to S&P 500."

Quality stocks

Goldman also advised clients to buy stocks with stable businesses and recurring revenue. Members of the firm's "high quality" stock basket include Dollar Tree (DLTR), PepsiCo (PEP) and BlackRock (BLK).
Mr. Kostin is kind of late, I've been telling my readers to get defensive and stay defensive since July, recommending stable sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and of course, hedging your equity risk with US long bonds (TLT).

As far as Goldman's "quality stock" recommendations, looking at the 5-year weekly charts, I like the breakout in Pepsico, Dollar Tree looks like it's bottoming and might bounce back and BlackRock which got whacked the most is basically a bet on the stock market (click on images):

Not surprisingly, the focus is on the FAANG stocks as they haven't been doing well and are in a bear market (click on image, h/t Visual Capitalist):

Last week, I discussed shares of Apple (AAPL) when I went over top funds' Q3 activity and said even though I prefer this company over Facebook, its share price needs to hold its 50-week moving average or else it's headed lower. And the 50-week didn't hold (click on image):

Will Apple shares continue to head lower and make a new 52-week low (its 50-week low is $150)?

I doubt it but who really knows? Selloffs tend to be self-fulfilling and stock prices swing and overshoot on the upside and downside so there is a big risk that Apple's share price heads lower before recovering and there are a lot of factors at play here.

There is a general malaise about tech shares (XLK) which have been pummeled and are at risk of sliding lower here if they don't hold these levels (click on image):

More importantly, credit spreads blew up this week, sending high yield bond prices (HYG) lower and they too are at a critical level (click on image):

By the looks of it, the bear market has arrived, but not everyone is convinced. Martin Roberge of Cannacord Genuity sent me his weekly market wrap-up earlier, Bear Market in Time?, and shared these insights:
This week’s pullback in stocks has brought indexes to their October lows which is where the battle between bulls and bears begins. Since October lows, however, one could argue that bears have the upper hand given this week’s blow out in credit spreads, the rout in oil prices and the breakdown in FAANGs. Bulls may argue, however, that the ongoing tightening in financial conditions and weak global economic data are bringing the Fed closer to a pause after a December hike. Also, bond yields have stabilized and the bearish narrative is well discounted into stocks. Should none of these two outcomes materialize, investors could face a bear market…in time, something that we explain below. Otherwise, in Canada, the government is following the US experiment by providing fiscal reflation ($17 billion) despite good economic conditions and tight labour markets. The fall economic statement reinforces the case for the Bank of Canada to pursue gradual rate hikes. In fact, the BoC could outpace the Fed in 2019 and this could go a long way in re-rating the CDN$. By ricochet, this could end the lengthy bear market in the S&P/TSX relative to world equities.

Our focus this week is on the US Conference Board leading economic indicator (LEI). To the extent that the longevity of the equity bull market is correlated with odds of a US recession, this week’s advance in the LEI is positive. As our Chart of the Week shows, the ratio of the leading-to-coincident indicator (L/C) keeps accelerating, moving away from its 5-yma which historically represents the boom-bust line. Since 1960, when the L/C ratio broke below the 5-year average, a recession set in 13 months after the downward cross on average. This means that even if one were to expect the L/C ratio to rollover next year, a recession would not arrive before 2020. With odds of an economic soft-landing in 2019 much higher than 50%, we believe equity market corrections are unlikely to morph into a bear market in PRICE. However, the draining of liquidity by world central banks and a 2000-01 style decline in growth stocks is likely to cap the upside in broad equity indices. The net result takes the form of a bear market in TIME, which is a prolonged trading range (click on image).

Now, I like Martin, think he's a very smart guy who produces great research but it's worth noting the LEI is reported with a lag and stocks and credit spreads are components of it, so I wouldn't read too much into this chart even if it looks clear there's no recession next year.

The problem is everyone is expecting a recession in 2020 or beyond, not before, and markets have a tendency to surprise us on the downside.

Moreover, once a bear market develops, it could get really nasty, really fast, which is why some investors will tell you, raise cash, don't give up on US long bonds (TLT) and even hold gold as a hedge.

Earlier this week, was talking to my trading buddy Fred Lecoq who likes gold miners (GDX) here and think there may be more upside (click on image):

I think it's a bit early but I did note Ray Dalio's faith in gold is unshaken despite the selloff this year, CPPIB took a major position in gold miners in Q3 and Vital Proulx's Hexavest increased its gold miners and junior gold miners in Q3 (see top positions here).

Fred told me Hexavest has been under-performing this year and I said: "yes, they're bearish on these markets so that doesn't surprise me but when things turn south, I expect them to outperform their peers" (Vital Proulx is an excellent portfolio manager with a lot of experience).

Let me leave you with some more thoughts. The Macro Tourist blog posted a great comment this week, The Fed Finally Blinks, which showed a chart you need to bear in mind (click on image):

It’s a great table for it shows that both bonds and stocks around the world have suffered this year with almost no financial asset class posting positive returns. Brazilian and American stocks, along with Chinese 10-year bonds, were the only ones that could muster a return with a plus at the front. And even those returns were anemic.

Will the Fed raise in December and take a long pause? I hope so or else CNBC's Jim Cramer might have a meltdown on air again.

But on a serious note, what if the Fed doesn't blink and continues to indicate it will tighten at least three times next year, if not more? Then risk assets are in big trouble, especially if the yield curve inverts which it will if the Fed overshoots.

I don't think it's bear time yet but be careful here, if something breaks, risk assets will go into free fall and that's when you'll remember the wise words of John Maynard Keynes: "Markets can stay irrational longer than you can stay solvent."

Capiche? Hope you enjoyed this market comment and all my comments. Please kindly remember to support this blog with a donation or subscription using PayPal on the right-hand side, under my picture. I thank everyone who shows their financial support and welcome new supporters.

Below, Goldman Sachs chief global equities strategist Peter Oppenheimer says a big reason why the equity markets have sold off is because of an expectation of an economic slowdown and slowdown in profit growth.

Also, CNBC's Wilfred Frost and Dom Chu report on the state of the market before the closing bell on Black Friday.

Lastly, economic consultant Gary Shilling breaks down the biggest risks to the US economy, including contagion from emerging markets debt, the Federal Reserve raising rates and potential shocks that could cause stocks to sink. Listen to Shilling, he's often right on his big calls.