Why I’m not overly bullish or bearish

As the S&P 500 stalls at overhead resistance while exhibiting negative divergences, here are some reasons why you shouldn’t be overly bullish or bearish on U.S. equities.




The Bear Case

The bear case for stocks is based mainly on macro and fundamental conditions. A recession is on the horizon in H2 2023, and recessions are bull market killers. New Deal Democrat, who maintains a set of coincident, short-leading, and long-leading indicators, has been documenting the slow deterioration of economic momentum, which first started in the long-leading indicators designed to spot economic weakness 12 months ahead. The weakness spread to short-leading indicators, which have a six-month time horizon, and they are finally appearing in the coincident indicators. His latest update shows that of his 14 long-leading indicators, one is positive, three neutral and 10 are negative. Among his short-leading indicators, the score is four positive, four neutral and six negative. The coincident indicator dashboard shows two positive, three neutral and five negative. He concluded:

The “Recession Warning” which began at the end of November for this year remains, as all three of my primary systems remain consistent with a near-term recession.



In addition to the economic recession, don’t forget about the likely earnings recession. BoA found that estimate revisions have been deteriorating across the board.



These signals, along with the deterioration in small business optimism, are pointing to a hard landing in the near future.




Possible Sentiment Support

On the other hand, most of the recessionary conditions may already be discounted. Carl Quintanilla of CNBC reported that a recent JPMorgan survey of investors shows that a recession that begins in H2 2023 is already the consensus call.


In addition, Lisa Abramowicz at Bloomberg reported that, according to the April BoA Global Fund Manager Survey, global managers’ allocation to equities relative to bonds has dropped to its lowest level since 2009.



As well, hedge funds have built up record shorts in S&P 500 futures, which should be contrarian bullish.




Sentiment Doubts

On the other hand, bearish futures positioning has been no guarantee of higher stock prices. In fact, an analysis of the recent record shows that investors should bet with and not against significant long or short positions in hedge fund positions in S&P 500 futures.



The crowded short sentiment readings from surveys and S&P 500 futures have not been confirmed by other sentiment models. The NAAIM Exposure Index, which measures the sentiment of RIAs who invest individual investors’ accounts, is in neutral territory and readings are nowhere near a buy signal.



The recent behavior of the VIX Index and high yield bond relative performance are also pointing to a risk-on sentiment backdrop.




Similarly, the put/call ratio is also in neutral and shows few signs of excessive fear or greed. Readings have normalized to levels last seen before the pandemic.




In short, some of the sentiment models supportive of a bullish outcome are suspect. The history of a crowded short in S&P 500 futures has shown itself to be not very useful as a contrarian indicator. In addition, sentiment surveys are less useful than models that show how investors are committing their funds. And option market sentiment, such as the put/call ratio and the VIX Index, are showing neutral or risk-on readings that contradict the extreme cautiousness of institutional sentiment surveys.



Historical Templates to Consider

So where does that leave us? It’s possible that both the bulls and bears are right. A recession is probably in the cards, but most of the deterioration may have already been discounted, though European equities appear to be in a better position than the U.S. 


This suggests a scenario where neither bulls nor bears gain the upper hand. Recession and earnings fears constrain the upside potential to stock prices and cautious sentiment serves to put a floor on them.



I offer the 2001 experience as a possible template for the trajectory of today’s market. Recall that the stock market peaked in March 2000 when the NASDAQ Bubble burst and stocks went into a long multi-year bear market. The 9/11 shock was a jolt to market psychology. At that time, the Fed was already easing monetary policy. The market rebounded quickly soon afterwards, only to see negative fundamentals re-assert themselves. The stock market then chopped around for about a year before making a final bottom about a year later.



The 1980–1982 experience is another market template to consider. The most commonly quoted index then was the Dow and not the S&P 500. The market made an initial bottom in March 1980 and proceeded to rally as rates fell. The rally ran into stiff headwinds in early 1981 as the Volcker Fed tightened monetary policy to extremely painful levels. The bear market resumed in mid-1981 and didn’t bottom until the Mexican Peso Crisis threatened the stability of the U.S. banking system, which forced the Fed to ease. 



Fast forward to 2023. The Fed and other major central banks were near the end of their tightening cycles when they were hit with a banking crisis, which was sparked by the failure of Silicon Valley Bank but spread to the systemically important Credit Suisse. The crisis passed and the banking system appears to have stabilized, but valuations are still challenging.  The S&P 500 trades at a forward P/E of 18.2, which is elevated by historical standards especially in light of continuing negative earnings revisions that put upward pressure on the P/E ratio.



If today’s market were to follow the 1980–1982 or the 2001 templates, expect stock prices to rebound and trade in a choppy and volatile range until the full effects of the likely recession is known. Bear in mind that these experiences are only templates for the market. Don’t expect the market to necessarily undercut the recent lows, or expect the timing of the banking crisis low and the final low to be the same as past periods.


5 thoughts on “Why I’m not overly bullish or bearish

  1. Limited upside and a possible debt ceiling crisis that will have a greater downside than Cam’s above metrics would indicate. The risk reward doesn’t jive.

    McCarthy and Biden are so far apart.

  2. You know the saying about fighting a war with the tactics that worked in the last war?
    What war are we in at present? Sovereign debt crises, because it is not just us, but most of the developed world. This perhaps is why we get all this money printing, more debt, which is managed with financial repression.
    They say that when there is a bear market bottom that nobody wants stocks, and that it goes on and on. Have we seen that recently? Perhaps the nasdaq after the Dotcom bust, it took much longer than the S&P to recover.
    My greatest fear is a return to true historic PEs at a bear market bottom (well, if I still have stocks instead of cash)
    Ed Easterling of Cresmont Research says we have been in a secular bear since 2000….what? But if you look at the charts it makes sense, and the prior market cycles all fit.
    In short the thesis is based on “bull markets end with over priced stocks, and bear markets end with underpriced stocks, which also means bear markets start with over priced stocks and bull markets start when prices are low” No argument from me on that.
    So what’s going on? Since 1971 when we started fiat money it took time for spending to get really reckless, like any bad habit it escalates. Now with all the debt and implied gov’t spending SS and Medicare etc, the bills keep coming.
    The GFC is the canary in the coal mine. With the Dotcom bust the S&P took 7 years + to recover to the level of 2000, while the nasdaq was barely 50% of it’s 2000 high after 7 years, which looks more like a bear market should. After the GFC this all changed. The markets were flooded with liquidity and interest rates were crushed. This was repeated in 2020. Why? Because for the time being they can. It’s when they can’t do it any more that things will get really bad. I have no idea when this will happen.
    Will congress not raise the debt ceiling which has been done so many times that it should be irrelevant? Allow military spending and social security and medicare and interest payments on debts to go bust? Maybe, but the only scenario that makes sense for that is WW3 with China and we lose big time, meaning that congress has left the building. So no, they will do what they always do after a whole bunch of BS, especially since we have elections next year.
    This is why recessions are no longer bull market killers, because believe it or not we may be in a crypto bear market ( I had to get crypto in, forgive me ) since 2000 and of course you can’t kill a bull if it is a bear.
    How this will end I don’t know, but my guess would be a fall in the dollar, it may still be a reserve currency, but depreciating. Perhaps that will be when things really unravel, so I think Forex is something to watch for a sign.
    For now I expect money printing to continue with each crisis and debt to keep rising.
    One could look at Japan as a template for what has happened, and interest rates, but Japan has a totally different balance of trade. If Japan ran a trade deficit like we do, what would the Forex of the Yen look like?
    Maybe technology will somehow save us, you know robots like C3PO, so we can just veg out on the sofa and watch whatever. Don’t count on it.

  3. We are in a very confusing and difficult environment. Macro and fundamentals do not favour upside from these levels, particularly when there is a risk free alternative of roughly 5% for the next 6-12 months. The thesis that the economic recession is already discounted does not make sense to me with P/Es at 18-18.5 times for the large cap equities. Margins are under pressure across the board.
    The credit is becoming tighter at the regional and small to medium sized banks. Even if Fed pauses after May increase, they are unlikely to cut until PCE declines meaningfully from 5.6%. Inflation is still their North Star, not unemployment.
    So, as Ken says, the risk reward is asymmetric to the downside. I sell into the rallies and invest at 5% risk free.
    Yodocc2003 writes about the super macro issues that would make it very challenging down the road. Only way I think about preparing is to buy Gold, own your home, and …

    1. In the 30s there was the dustbowl which caused many farms to fail which created problems for the local banks. They should have protected those banks which would likely have prevented many bank runs. But the US was a manufacturing powerhouse in those days, if less sales occur at home you can try exporting product. China is the manufacturing powerhouse these days. We have a service economy, you can’t export a service one provides locally. What happens when debt and increased interest rates suppress spending? You can’t provide a service unless somebody spends. They cannot let the money stop circulating. If the velocity of money keeps dropping, they have to increase money supply.
      But even if we stop buying I-phones, TVs, furniture etc we still have to eat, so maybe agro commodities.
      According to Rogoff and Reinhart inflationary depressions are not rare. It’s that Fiat thing. If that happens long duration bonds are a death trap. But this final debt spasm could be decades away as everyone keeps printing so Forex stays stable and we just live with it until it falls apart.
      Anyways, maybe the reason the market isn’t crashing is because the big money believes that our leaders have no choice.

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