Corrections

We’ve been correctly positioned near our tactical portfolios’ equity minimums, yet we’re oddly compelled to use this month’s “Of Special Interest” section as a very public second-guessing of that move.

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The August market break did not emerge from out of the blue. The foundation for the bear case was put in place many months before those four ugly days in late August.

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While we have a high level of conviction on our August bear market call, we should emphasize that our disciplines trump opinions.

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While the current market setback of –5.8% doesn’t qualify as an intermediate correction, it’s close enough to the threshold to warrant a quick review of what such a correction—and the ensuing recovery—might look like.

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Was the brief taper-induced pullback a sign of what’s to come down the road?  If so, we looked at what factors performed well and what factors didn’t in response to the rising rate environment.

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While this is not our forecast, some investors will no doubt be mortified to learn that a “typical” calendar year (again, if there were such a thing) contains a drawdown as large as –13.5%.

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The April/May swoon (an S&P 500 loss of -9.9%) has been accompanied by significant deterioration in our Major Trend Index. But the latest reading (data through June 1st) stayed positive, and our best guess is that it will hold firm.

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Several U.S. indexes and world stock markets have already lost 20% or more from recent peaks, satisfying the parameter for a bear market.

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After annual summer correction re-run, we believe the market swoon is over, having produced a garden variety correction of -7.2%.

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Market in gear, with almost all market indices hitting new highs in tandem. Would be unusual for a market correction with this type of uniformity.

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August turned out to be a very volatile month, not the “doldrums” that many investors would have wanted to see during this traditional summer vacation month. Budding optimism that had developed in investors back in April has now apparently been completely washed out by the poor August performance.

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Beware summer doldrums, August has a knack of sometimes being a crazy month. Market continues to be viewed as being in a severe correction mode, rather than a full fledged bear market.

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A market decline much beyond 20% could be labeled a “non-economic” bear market. Outstanding feature of past “non-economic” bear markets has been their brevity.

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Doug Ramsey looks at the history of “severe” market corrections (declines of 12% to 18%), and contrasts that with true bear markets.

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Doug Ramsey utilizes several bear market arguments to build a bullish case. Rising Interest Rates, Overbought Market, Low Volatility, and Low Trading Volumes, can all be looked upon in a BULLISH light.

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Doug Ramsey demonstrates that new bull markets can be expected to correct by 10% or more at some point — which may be why so many pundants are looking for a correction now. Past history shows that based on duration it would be early in the current bull market for a correction at this time, but based on  magnitude, the timing would be about right.

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Major Trend Index improved to Neutral in early April and clinging there now.  Are we seeing a delayed bear market rally?  Examining what could come next.

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An update of our study on past bear markets, showing typical peak to trough declines in the popular market averages and the duration of these declines. Also look at past bear market rallies.

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This month Steve again lays out both the Bull and Bear cases.

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Stocks continued to move higher in the first quarter, with many of the broad market indexes finishing out Q1 near their cyclical highs.

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