The End Game

Where do stocks go from here?

Historically, bear markets fall into 3 types, ‘structural’, ‘cyclical’ and ‘event driven.’

To get a sense of how much markets are likely to fall. and for how long, a bear market framework published in Share Despair (2002) can give us a reference.

Structural

Triggered by structural imbalances and financial bubble: Very often there is a ‘price’ shock such as deflation that follows.

Cyclical

Typically a function of rising interest rates, impending recessions and falls in profits. They are a function of the economic cycle.

Event Driven

Triggered by a one-off ‘shock’ that does not lead to domestic recession (such as a war, Oil price shock. EM crisis or technical market dislocation).

How long can it last?

  • Structural bears on average drop 57% and last 42 months.
  • Cyclical bears on average drop 31% and last 27 months.
  • Event-driven bear markets lose 29% and last 15 months.

The Golden Bull/Bear Ratio

The two following charts may appear to have similiar general patterns and the first one covers roughly 6 times the span of the second.

Stocks since 1900

(30k feet)

Since 1996

(6k feet)

Source: JPMorgan

Similiar and the same in a hidden manner are the two bull market patterns shown above.

Let’s add to it …

Since 2009

(3k feet)

The Golden Bull/Bear Ratio

What is hidden in the above charts but what is common across all periods is that about 62% and 38% of the time:

  • There is a bull followed by a bear
  • Occuring in the same 62/38 ratio in both time and space

Here’s more on this ratio …

The one indicator that can identify a change in trend from bull to bear …

Elliot Wave Oscillator – Tutorial and Examples

Business Service Sector Declined Significantly

After steadying last month, activity in the service sector declined significantly, according to firms responding to the Federal Reserve Bank of New York’s August 2020 Business Leaders Survey.

The surveys headline business activity index fell fifteen points to -17.1 The business climate index was little changed at -74.1, indicating that the vast majority of firms still viewed the business climate as worse than normal.

Employment levels continued to decline, though at a slower pace than in recent months.

Firms turned pessimistic about the six-month outlook, and expected the business climate to be worse than normal in the months ahead.

Our V Shaped Recovery

We are having a V shaped recovery it appears.

What I mean by that is based on our presumption via stock prices that in approximately 6 months from now we will be back to normal.

Stocks & Recovery

Yes our government has stepped up to the plate. That is, technically through the end of the last stimulus check.

What about so far …

(https://wolfstreet.com/2020/08/11/recovery-of-foot-traffic-to-places-of-commerce-office-occupancy-hit-by-covid-resurgence-persistent-work-from-home-real-time-data/)

Foot Traffic

Source : AEI Foot Traffic Index

Returning to Work

Source: Kastle Systems “Back to Work Barometer”

Evidence of a major risk for stocks

Obviously if demand falls off a cliff by 30% there wll be a concern that deflation eventually becomes the price trend.

If you look at the following charts there’s no doubt why Fed Chairman Powell declared recently a new Fed focus: to raise inflation.

Last month the headline CPI was 0.6% for June.

July’s numbers will be released on Wednesday.

Further signs of deflation can have an immediate and lasting impact on stock prices.

Inflation (CPI)

Money Velocity

Money & Credit

Lending Rates

Overall Debt to Growth

Price Instability

Deflation (and too much inflation) causes price instability and can drive stocks down.