This Bear Ain’t Playin’ Games with the Bulls

By David Haggith

This ain’t no ballgame. This bear has shown up for blood, not sport. The NASDAQ intraday hit the 20% down mark that is widely regarded as qualifying for a change from a bull market to a bear market. A close at that level would have made it as official as a declaration of a bear market gets.

As can be expected, the major index whose stocks played the largest role in forming the bull market of the last decade doesn’t die easy, so the NASDAQ bounced off the bear barrier for today, but it rests an easy day trip from officially killing the longest-living bull in history.

While the NASDAQ now hangs by its horns from the precipice, the Russel 2000, another major index, has already gone over the edge and is officially a bear market; and the Dow Jones transportation sector entered a bear market a little over twenty-four hours ago. So, market sectors are sliding over the edge faster than I can post articles now.

Of course, I’ve been saying for almost a month based on all the characteristics of a bear market that this is a bear market. So, it is no surprise to me that it keeps developing that way. If it looks like a bear, walks like a bear and bawls like a bear and bites like a bear, it must be a bear. (If you ask Russel, it certainly is.) The last time the NASDAQ entered a bear market was in 2009, and it exited in just three weeks. I’m suspecting this time lasts longer!

Consider that the bull’s paroxysms are happening when the Fed is still at an interest rate and balance-sheet height that would normally be considered quite accommodating. Consider, also, that it is convulsing in a year of record stock buybacks funded by record repatriation of foreign profits in a time of record tax breaks and hugely expanded government stimulus spending! Stop and really think about that mouthful because the Fed’s Great Recovery Rewind is so potent it is overpowering all of that muscle to throw this bloody bull over the cliff.

In an upcoming article, I’ll lay out the headwinds (more like hurricane) I see hitting stocks, bonds, and the economy in general in 2019. I anticipate that will be my first subscriber-only article (at least in its initial release). In this article, however, I want to give a general recap for everyone of the bearish facts (call it my bearometer) about the market’s present action that show how severe the bull’s death throes have been so far. (A brief history of how the bear has mauled the bull so far.)

Here are the headliner facts that show the bull is dying

You look at the aggregate, and you know this looks like a death scene of historic note:

1. No one has seen any sign of Santa Claus this year, and that is peculiar for a December. Moreover, trading volume, which usually drops to create the easy Santa Claus rally, has so far increased, indicating a lot of watchful, fearful, red investor eyes that are sadly not going on Christmas vacation or that are staying closely tuned while on vacation.
2. In fact, December so far is on track to be the worst December since the Great Depression!
3. Note that the US stock market plunged yesterday and again today because the Fed did exactly what the market thought the Fed would do and had already priced in that the Fed would do but hoped that the Fed would not do. This emotional reaction, to me, smells like loss of hope and intensifying fear (because nothing really changed, except that rosy hopes didn’t pan out).
4. The big mover in the market today and yesterday seems to be a shift in focus to what the Fed has indicated about its Great Recovery Rewind, it’s balance-sheet reduction schedule. (Powell indicated the unwind will continue on autopilot.) The Fed’s balance-sheet reduction is exactly where the focus and fear should have been, instead of on the Fed’s interests targets. Now it has clearly shifted in that direction. That change in focus will likely add even more volatility to markets. (The unwind is more consequential than the Fed’s stated interest-rate targets. The unwind is a vacuum sucking liquidity out of all markets all over the world at the same time. Think of what $80 billion a month in new money for a couple of years did to inflate markets; $50 billion a month in money destruction is the amount of reverse thrust now being applied.)
5. As a result of the Great Recovery Rewind and the Fed’s raising of interest targets, interest rates began to invert, which was widely regarded by stock market investors as a regime change in market structure. It got everyone thinking about recession on the not-to-distant horizon.
6. The rest of the world’s stock markets already went to hell in handbasket, and the US does not seem to be winding up as the “best horse in the glue factory” to which all other money is fleeing. Money is running for cash and bonds with the emphasis on cash.
7. The market clearly and UNDENIABLY flipped from buying the dip to selling the rip. For the first time in almost a decade, those who are buying at the bottom of down days are losing money and those who sell at the end of an up day are making money. That’s a completely opposite dynamic to what has prevailed throughout the decade-long bull market.
8. The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), the sturdy heart that powered the market relentlessly upward for ten years, are now bleeding the market down.
9. The second biggest source of the bull’s heart failure is in financial stocks, which is where we saw the worst negative price action back in 2008.
10. Risk appetite has fled, so that the stocks that aren’t falling too bad are the most conservative bets. What money stayed with stock, rotated out of growth stocks and into value stocks; but now the money is mostly pouring out of everything. (Loss of appetite is one of the final symptoms of death.)
11. That’s partially because people are realizing the Fed put is gone. The backstop has not been appearing at the tail-end of every drop. (The one group of people that does appear to be taking a vacation is the Fed’s Plunge Protection Team.)
12. Major indices all broke below their decade-long trend channel.
13. A death cross has occurred in every major index (where the 50-day moving average dives beneath the 200-day average, showing a change in the overall trend).
14. VIX inverted. Volatility has climbed and remained high compared to its long periods of calm. More significantly, bets have switched from going net short to net long on VIX, which essentially means investors are now betting things will get worse.
15. There is a reason they called it “Shocktober.” October’s surprise that I warned of took out more global market cap than any month going all the way back to the start of the Great Recession in 2008 … and was only a nip less than what vaporized in 2008! $8 trillion was swiped out of existence by the bear’s claws. October was the worst month since the Great Recession for the US as well. And we’ve gone a long way down from there. October was, in fact, the worst month since the Great Recession for a lot of things., (S&P, FAANGs, Semis, NASDAQ 100….)
16. GDP is declining rapidly after only one America-great looking quarter. (Someone had said back then GDP was supposed to keep going up. I said, on the contrary, it only went up because everyone was rushing to get their inventory stocked to the roof before tariffs went into effect and said it would certainly drop from that point on. You decide who was right.)
17. Jim Cramer said, “My main fear is that we could have a mini version of 2008 if the Fed doesn’t change course,” No, Crazy Cramer, we are going to have a maxi version of 2008, but thanks for noting the clear similarities because it means something when it comes from one of Wall Street’s big-name evangelists. (We’ll leave being high priest to Fed chair Jerome Powell.)
18. In fact, many of the market’s big-name bulls started sounding bearish in the last month or so, and with each day they sound even more bearish. I’m including many of the biggest of the big like Goldman Sachs. The bulls started crying to the Fed daily for mercy. (“Have mercy, Oh Fed, for in Fed we trust,” but the Fed turned a tin ear to their prayers.)

Never mind that the Fed has been slow-walking its interest-rate hikes at a pace beneath anything ever seen in the past. I mean real interest rates are still negative! If the Fed’s recovery cannot even handle moving up to barely negative real interest rates, what have we recovered? Come to think of it, that explains this week’s market face plant. With the Fed’s latest target increase, we just may be breaching the zero bound ceiling this week and going into normal (getting to where interest will be equal to or greater than inflation).

Maybe, must maybe, getting real at last is what everyone is really so afraid of. Of course, that is what I said years ago the dawning realization would be when the Fed finally tried to actually normalize finances. I just had to wait unto now to talk more about it — wait until the cries of pain begin as we finally near a real interest rate of … ZERO!

Federal Reserve goes for broke

Finally, is this little oddity: the Federal Reserve’s net worth in its latest quarterly report turned negative. No one really knows what this means because it is that abnormal. It could be nothing, or maybe it’s the emerging singularity of a black hole in the middle of the Fed’s solar system. If it weren’t the Fed, a hole that big would suggest an institution is going broke; but, hey, the Fed has infinite money-creation capacity. So, maybe it is nothing except weird. Of course, looking weird is not good for an institution whose only real capital is credibility. At the end of the day, that is all the Fed has to sell since it makes money up as it goes.

Keep moving’, Folks. Nothing to see here. Probably.

“We’re seeing the downside risk of unconventional monetary policy,’’ said Andy Barr, the outgoing chairman of the monetary policy and trade subcommittee of the House Financial Services panel. “The burden should be on them to tell us why this does not compromise their credibility and why the public and Congress should not be concerned about their solvency.’’ (ZeroHedge)

It’s just a little black hole appearing on a city street in Cern, Switzerland. Nothing to worry about in the Fed’s infinite and faux-almighty universe.

Do you still like playing with bears? Well, stay in the game then because there is plenty more to come. It is Christmas, so enjoy your time at the maul.

You can read more from David Haggith at his blog The Great Recession. You can support his work on Patreon HERE.