Bear Markets, Gold and Bonds – Podcast Notes

In general, I am not a fan of price targets or projections because they are very subjective. Instead, I prefer to identify the trend in a systematic and objective manner, and then trade or invest accordingly until proven otherwise.

The index and sector breadth models turned bearish at the end of February and the S&P 500 broke down with a crash the last three weeks. The broad market environment is bearish and this means support levels are meaningless. Prior lows are not expected to hold because lower lows are expected in bear markets and downtrends. For example, the December 2018 not considered a viable support level.

As of Friday’s close, the S&P 500 is down some 20% from its high. As the chart shows, the index has lost 50% twice in the last twenty years. Another 50% buzz cut would take the index back to the 1700 area. Instead of support or resistance levels, I can guess at some levels where the S&P 500 might become interesting. For example, the 2000 area looks interesting because it marks a 50% retracement of the advance from March 2009 to February 2020. The 2015 consolidation is also in this area (blue zone). Let’s cross that bridge when and if it gets here.

Further down, the prior highs around 1500 could mark a destination zone for the bear market. I sure all armchair chartists are marking this level. In addition to being highly subjective and obvious, I am very hesitant to use price data this far back because the S&P 500 was a very different beast in March 2000 and October 2007. The top stocks and sector weightings were not the same as they are now.

The third item that shows up on this chart is RSI moving below 30. This is a monthly chart so 14-month RSI below 30 is seriously oversold. Note that RSI moved below 30 in October 2008 and the S&P 500 did not bottom until March 2009.

Overall, the S&P 500 could become "interesting" in the 2000 area and when RSI moves below 30. This is NOT a forecast, but it is certainly possible in a bear market.

Livermore, Schwager and Zweig

I would also like to share a quote from Reminiscences of a Stock Operator by Jesse Livermore. This is perhaps the single best book on trading ever written. In his book, Stock Market Wizards, Jack Schwager asked traders for their most influential book. Far and away, Reminiscences of a Stock Operator was the most mentioned book. The quote below was also shared by the late Marty Zweig in Winning on Wall Street, another classic.

"Remember that stocks are never too high for you to begin buying or too low to begin selling"

This is basically saying that trends extend further and longer than most people expect. Furthermore, it is largely futile to make upside price targets in an uptrend and downside price targets in a downtrend. In Dow Theory terms, the best we can do is identify the trend and trade accordingly.

Gold and Bonds as Alternatives?

It seems that the Gold SPDR (GLD) and the 20+ Yr Treasury Bond ETF (TLT) would be great alternatives to stocks. Sometimes gold and bonds are good alternatives, and sometimes they ain’t. Note that the S&P 500 is down 20% the last 17 trading days. Meanwhile, the Gold SPDR is down 6% and the 20+ Yr Treasury Bond ETF is up 5%. Elsewhere, the safe-haven currencies are also up with the Swiss Franc ETF (FXF) and the Yen ETF (FXY) up around 3%.

We do not have many bear markets or crashes to show how bonds and gold work as alternatives. Also keep in mind that each bear market or crash occurs with a different backdrop. The dotcom bubble marked the 2000 top and 9-11 occurred during the subsequent bear market, while the financial crisis drove the 2008-2009 bear market.

The first chart shows the S&P 500, gold and the 10-yr Treasury bond from 2000 to 2003. Gold fell and bonds rose during the first leg down in stocks. After that, gold and bonds largely rose when stocks fell.

The next chart shows these three from 2007 until 2009. First note that gold and bonds broke out in September 2007 and turned up well before stocks turned down. Second, gold and bonds were great alternatives to stocks during the first leg down (October 2007 to March 2008). The alternative status of gold and bonds then turned mixed.

In particular, notice that stocks, gold and bonds fell from April to October 2008. Thus, gold and bonds did not offer a hedge or alternative. Gold and bonds surged for a few weeks in November-December 2008 and then went their separate ways. Gold continued higher as stocks fell, but bonds moved lower (January to March 2009).

GLD is GLD and TLT is TLT

As noted before, analyze the GLD chart if you are interested in GLD and the TLT chart if you are interested in TLT. In other words, trade these two based on their own merits (or demerits). Despite intermarket theory, I see no reason to be bullish on gold and bonds just because I am bearish on stocks. As noted on Thursday and Saturday, GLD and TLT are in long-term uptrends for now. TLT was mildly oversold on Thursday, and again on Friday. GLD became oversold in a long-term uptrend with Friday’s close.

Some Good Food for Thought       

The notes below are from a podcast by Anthony Crudele, who interviewed Mark Dow. I have followed Dow for years on twitter because he offers some great insights. Note that Dow is not bullish on gold. The whole podcast is with worth a listen. The notes below follow the podcast timeline.

Three Key Takeaways

  • Fiscal policy is more important than monetary policy right now
  • Gold and bitcoin are not hedges
  • Stocks were already toppy and the coronavirus was just the push

Married to an Italian who is currently in Italy caring for her parents

The coronavirus is an unimaginable risk (versus an imaginable risk)

The risk cycle is over

You can give people more money, but they need a risk appetite to spend it

Monetary policy cannot help us on this (corona crash)

The response to the coronavirus must be fiscal

Markets look forward

Markets need too know that there is a light at the end of the tunnel

Corona damage will be great because the US is 3 weeks late in a dynamic that is exponential

Gold and bitcoin are discussed at the 25 minute mark

Gold is not longer a hedge or monetary asset

Take your stops on the way down. It is painful, but you must do it.

Reducing gross units (raising cash) is better than hedging

Gold might be a hedge against inflation, but don’t see inflation

Focus on fewer instruments and get to know their rhythms
GDX moved from 22 to 16 in a nanosecond

Probably going to see more of that from ETFs (as in August 2015)

The move to passive investing will probably exasperate these moves

Fed can put trillions into Fed funds system and have no influence on risk appetite

New regulatory structure for banks (liquidity credit ratio and capital cushion)

Banks are fine, but less willing to make markets

Oil shale producers are not systemically important

Oil and S&P 500 are not positively correlated

Have to truncate the cash flows of some oil-related companies

Minsky Cycles from Wikipedia

Starts very risk averse, risk taking increases and ends in extreme risk taking

Now watching the volatility markets closely

Volatility is high and everyone is afraid to take volatility risk

Liquidity is relatively low and everyone is afraid to take liquidity risk

More and more strategies will focus on capturing volatility

Need to watch risk-on and risk-off assets for anomalies

He talks about the coronavirus in the last five minutes

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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