June 5, 2019

Is this the end of the 10-year bull market, the longest in history? Nobody knows, but historically this is how the end of a bull market looks; And yes, we are disturbed. I normally do not get disturbed, but over the last 30 years of managing the markets I have only seen a pattern close to this one once; it was the start of the 2000-2002 bear market. I recently read Dennis Gartman’s morning report, author of the long-standing Gartman Letter, and as he states, in his 45 years of managing the markets he has never seen price action like this.

 06-05-2019 Chart 2 

I have been writing about the oversold market conditions and those conditions caused a nice trader's rally yesterday. The HCM-BuyLine Alpha dropped below the HCM-BuyLine® last week (see the chart above). If the market closes 3.25% below the HCM-BuyLine Alpha, we will be reducing equity exposure by 20-40%. If the market closes 6.25% below the HCM-BuyLine Alpha, we will be reducing equity exposure by another 20-40%, depending on the model we are trading. Let me be clear; we do not have a sell signal at this time, but we are very close.

Ned Davis Research, who has probably built some of the best market indicators out there, took their model portfolio from approximately 76% equites to 42% equities, which is getting to the lowest level of equity exposure they will have. They never go to cash 100%, but they are likely close to their lowest equity exposure position.

06-05-2019 Chart 1

The chart above is of the 1999-2000 market top followed by a 3-year bear market. If you owned 1/3 in the S&P 500 index, 1/3 in the Nasdaq 100 index and 1/3 in the Russell 2000 index, you would have suffered a loss in capital of over 70% and it would have taken over 15 years to recover. Market bottoms are an event while market tops are processes, and our current market looks eerily similar to 1999-2000.

We have read a lot about the late John Bogle, the legend of indexing, and in past interviews he has stated that indexing has been overdone. Ask yourself this question: if everyone owns the same 500 stocks, how low and how fast will the market drop when everyone starts selling those same 500 stocks? Talk about a domino effect. It wakes you up like a strong shot of espresso, doesn’t it?

Guggenheim Partners, who manages over $265 billion, came out last week and stated that their model was signaling a sell all the way down to the December lows, and possibly much further, which would be a 15% drop from now. The model they have built has generally been very accurate, and I have a lot of respect for it.

06-05-2019 SPY

If the lows of December were to be tested and broken, the next level of support would be the 2015 high, which would be about a 30% drop.

So, has the bull market run its course? Only time will tell. We will be managing by our trading rules, but extreme caution is warranted. I have been saying pullbacks should be bought for much of the ten-year bull, but I DO NOT ADVISE THAT NOW.

One thing is certain, a bear market will happen whether it’s next week, next month or years out. This bear has been hibernating for well over 10 years, the longest period ever, and he has not been fed for over a decade. He will be hungry.

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