A number of media outlets, including Barron’s, CNN, and Marketwatch, have suggested that the 20% move off of the lows qualifies as a new bull market.
Does it really? To find out, I reached out via email to many of the savviest technicians and strategists on the street. Their insights were informative and thought provoking.
Before we get them, a quick confession of my priors: I have long believed traditional measures of bull and bear markets are wrong. My preferred measure of a secular bull market includes four factors:
–A broad economic expansion, with rising corporate revenues and profits;
–Rising stock prices making new all-time highs;
–Improving investor sentiment, and a willingness to pay more and more for each dollar of earnings;
–Duration: Lasting over a substantial length of time – years and decades.1
I will address these in greater detail in a future post. Meanwhile, let’s see what the technical types who look at price action and history have to say.
Definitions
Start with the 20% definition: It seems to be uniformly disliked by everyone. Ed Clissold, Chief U.S. Strategist at the highly regarded technical shop Ned Davis Research (NDR) notes the firm never liked the 20% rule: “Over 20 years ago, we created our own criteria because the 20% rule creates several bull and bear markets during volatile times that most would not consider bulls or bears. Many occurred in the 1930s, so they were not relevant to modern markets…until now.” Clissold notes NDR’s criteria for a cyclical bull market 2 “have not been met.”
Katie Stockton is founder and managing partner of Fairlead Strategies. She too dislikes “percentage qualifiers” for bull and bear markets. Instead, “they need to be characterized by a series of higher highs/lows or lower highs/lows, respectively.” Without those moves, we should assume this is merely an oversold relief rally. She also notes the definition of bull and bear markets “should be expanded to include duration.”
Peter Boockvar, Chief Investment Officer of the Bleakley Advisory Group and editor of The Boock Report, similarly calls it “nonsense.” “A stock that goes from $50 to $10 and then rallies to $12” is not suddenly in a bull market. His preferred measure of markets looks at breadth: When “most stocks are below their 200 day moving averages, I would consider that a bear market, and vice versa.”
Valuations
Meb Faber, Chief Investment Officer of Cambria Investment Management, reminds us that “bull markets begin at low valuations.” The 10-year PE ratio (Shiller CAPE) is his preferred measure. 2020 began with the CAPE ratio at 31, and as of last week had fallen to 24. Faber notes long-term valuations are “still expensive relative to the long-term average around 18 (and a low inflation average around 21).”
The issue, as he sees it, is that “secular bulls usually start at valuations in the low teens.” He reminds us that the Great Financial Crisis began with a CAPE of about 13, and notes that bear markets often begin when the CAPE ratio is around 28. “We’re still closer to high valuations vs. lower ones and a move to GFC lows is still a drop of 50% from here.” He looks at the move off of the lows as “a nice bounce in a bear market.”
Bear Market Rally
Speaking of which: Louise Yamada of Louise Yamada Technical Research Advisors also believes we should be skeptical of rallies during a downturn: “Until proven otherwise, we’d refer to it as a bear market rally, of which there can be many within an ongoing trend. 2002 had three bear rallies from 17-29% each, followed by another leg down; 2007 had four from 11-20%. So now we have one rally of 21% . . . we need to see if there are subsequent declines that go lower before calling it a new bull market.” 3
Jonathan Krinsky, the Chief Market Technician at Baycrest Partners, also sees a similar pattern in the historical data. “The 20% rise off the lows is far an all clear signal. We need to only look back at prior bear markets such as 1929-1932, 200-2003, and 2007-2009. All of those saw at least one, and in some cases several, 20%+ rallies off the lows, only to go back and break those lows before the bear market ended.” Krimsky astutely points out that while “every Bull market begins with a 20% rally, but not every 20% rally leads to a new Bull market.”
Trend
JC Parets, CMT, President & Founder of Allstarcharts, makes the case that trend matterds a great deal: “Bull markets are a function of a majority of stocks moving in an uptrend simultaneously. Historic record amounts of new lows (like we’ve seen in the past week) is the exact opposite of a bull market. In case it wasn’t blatantly obvious, those are the things we see in Bear Markets!”
His colleague Tom Bruni, CMT, adds that “If this is a bull market, it’s the only one in history that’s occurred with the majority of stocks in the US and around the world in downtrends.”
Sentiment
Has the prior bull market – the one that dates to either the bear market lows of 2009 or the new highs made in 2013 – even ended? John Roque, former technician at George Soros’ hedge fund, and now managing director at Wolfe Research, notes we are “not even sure most believe the prior [bull] is over.” He sees the market behaving like a wounded athlete that “ran a long way very quickly.” Mr. Market has an Achilles’ injury, “the bounce over the last 5 days was that same athlete, pushing through the pain, purely on adrenaline and grit.”
Caution is Warranted
Some final cautionary notes come from the technicians. Parets writes: “It is incredibly irresponsible to claim that stocks are currently in a bull market when we’re in the midst of one of the biggest stock market collapses in history.” And Faber has one last cautionary warning: “Since we don’t know how this pandemic plays out, a thoughtful investor needs to consider both scenarios, a romp to all-time highs and a dive to new lows. Are you prepared for both?”
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1. There are longer secular bull and bear markets with shorter, counter-trend (cyclical) moves. Think about all of the ups and downs in the secular bear market that lasted from 1966 to 1982, or 1982-2000 as examples.
2. The NDR definitions of bull and bear markets:
“A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify. A cyclical bear market requires a 30% drop in the DJIA after 50calendar days or a 13% decline after 145 calendar days. Reversals of 30% in the Value Line Geometric Index also qualify… As you can see, the criteria are a combination of time and price… A bigger decline over a shorter time frame, or a smaller decline over a longer time frame qualify. We use 30% reversals in the Value Line Geometric Index to catch market moves that may miss the time and price combination.”
3. She adds: “Of course the stimulus could end the decline, but when the earnings and credit quality of cos. gets revealed, downgraded, there could be another leg down in months… all non technical, but thinking ahead as to what could cause another leg down.”
