Right now there’s nothing to be bearish about. I say that with conviction, because my “Bear Market Checklist” is a perfect 0-for-9. Heck, not a single indicator on the list is even close to flashing a warning sign. We’ve got nothing but big whiffers! Take a look. Pop a pill and relax. There’s no immediate danger threatening stocks.
So writes Lou Basenese (www.wallstreetdaily.com) in edited excerpts from his original article* as posted on his site under the title Time to Sell Stocks? Consult This Bear Market Checklist First.
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Basenese goes on to say in further edited excerpts:
~Bear Market Warning Sign #1: A Tightening Fed
When the Fed…starts tightening monetary policy, it’s time to keep an eye on the exits…because they have a tendency to overdo it, thereby creating a much more challenging environment for businesses. As Richard Bernstein notes, “Historically, bull markets didn’t end when the Fed started to tighten. Rather, they ended after the Fed tightened too much.” We’re in the clear now, though, since Ben Bernanke isn’t even contemplating an end to the quantitative easing efforts.
If you want something specific to track, look at the yield curve. That is, the difference in short-term and long-term government bond yields. When it inverts (i.e. – short-term yields rise above long-term yields), it’s a surefire indicator that the Fed has tightened too much. As you can see below the current yield curve is nowhere near inverted.
Stock prices ultimately follow earnings…so when corporate profitability starts taking a hit, it’s only a matter of time before stock prices head south, too. [In that regard, however, we currently] have got nothing to worry about. In the first quarter, S&P 500 companies reported a 3.2% increase in earnings and analysts expect them to keep growing over the next three quarters, by 1.6%, 7.9% and 14.2%, respectively.
~Bear Market Warning Sign #3: A Recession is Coming! A Recession is Coming
Economic activity tends to slow down long before corporate profits take a hit so we need to be on the lookout for reliable signs of a looming recession. I say “reliable” because, at any given time, there are always a handful of analysts warning that a recession is coming.
Ignore the Chicken Littles – and their opinions. Instead, focus on the hard data, including the two most reliable recession indicators I shared with you in late March – Piger’s “Recession Probability Index” and the 2/10 Spread. (For the record, they aren’t flashing any warning signs.)
Although the economy isn’t firing on all cylinders, it’s growing nonetheless. The latest estimates call for GDP growth of about 2% this year.
~Bear Market Warning Sign #4: A Spike in CDS Prices
With all the funny money being pumped into the market by the Federal Reserve, another banking crisis is the biggest threat to the stock market…[yet when we] consult the latest prices for credit default swaps (CDS) for banks and brokers (if banks are truly about to pull the stock market into the abyss, CDS prices should be rising rapidly) [it is evident that,] right now, we have nothing to fear but fear itself.
As Bespoke Investment Group says, “Our Bank and Broker CDS Index is now at its lowest level since April 15, 2010. Over the last week alone, financial-sector default risk is down 8.5%, and it’s down 50% over the last year.” [See chart below.]
Stay tuned for tomorrow’s column, where I plan to share the remaining five indicators on our “Bear Market Checklist.” In the meantime, pop a pill and relax. There’s no immediate danger threatening stocks.
Ahead of the tape,
(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
*http://www.wallstreetdaily.com/2013/05/15/bear-market-indicators/ (© 2013 Wall Street Daily, LLC. All rights reserved.)
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