MAGGIE LAKE: Are US equities setting up for a retest of the bear market lows? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Mark Ritchie II of Minervini Private Access who says an epic showdown is brewing between the bulls and the bears. It certainly feels like that. Hi, Mark.
MARK RITCHIE II: Hi, Maggie. Thanks for having me back. Good to see you.
MAGGIE LAKE: Yeah, good to see you too. And I feel like a little bit of that is peeking out because we have the selloff Friday, it was ugly into the close. Today was a little quiet. Look like US stocks were trying to recover, but you saw selling really just at the very end of the close here.
The NASDAQ looking like it's down 1%, the Dow down 0.5%. Certainly not what we saw on Friday, but you do feel like there's this coiled spring here. And we've got some data coming out, and then an expectation that everyone's going to be plugged back in come September. How do you see this battle playing out?
MARK RITCHIE II: Really good question. Where would you like me to start?
MAGGIE LAKE: Yeah, I know, except that it's [?] it's going to be painful.
MARK RITCHIE II: Right. If you look at what's transpired since those lows in late June, it's been a classic bear market type rally. However, there's been some nuances to it. This really sucked a lot of people in and we actually saw a few groups, say within individual stocks and a number of things that look constructive. I would not have, and I've been saying this a little bit on Twitter, I've not thrown caution to the wind to be chasing or buying this rally. And Friday really showed why.
And a couple of key points, one would be, and I tweeted about this I think maybe two weeks ago, you study historical bear markets, every single one has a market that has kept the lid on it by the 200-day declining moving average. In every one of those scenarios, what you had is the declining 200- day moving average keeps the lid on these bear market rallies. I gave the example of the 2001-2003, 2007-2009.
And if you look at what happened in the last week, two weeks ago really, what happened was we came right above the 200 in the Dow, came right to it in the small caps in the Russell 2000, and then the rally failed. Now, we've come back down and even today, we tested now the intermediate term average, the 50-day has turned up. For the first three months of this bear market, everything looked terrible. Meaning from really January to March, the market couldn't even retake its own 50-day, which is also pretty classic and everybody including sentiment got really bearish.
Then we come into June, and some of the sentiment measures, I've mentioned this a few times, they got really bearish. Positioning got really bearish. The bears got caught over their skis a little bit. This was a short covering rally. Now we're pulling back and I've been skeptical that this was going to be a V bottom. What I mean by that is what we saw in 2020 where the market just rocketed higher off the lows and left everybody in the dust.
Well, now, we've pulled back 7%, 8% in three sessions, and anybody who like I said who chased this is now underwater and feeling a whole bunch of pain. What I would expect, if you're bearish, the highs of two weeks ago on 8/16, that's a key level to watch. The bears have to hold that, in my opinion, at least on a closing basis, say for a week on a weekly closed because again, studying past precedents, once the 200 turns down and the market retests, that is what keeps the pressure on the market pushing lower.
Now, add the Fed comments from Friday. When Fed Chair Powell uses the words like forcefully until we get the job done, and today, Kashkari came out and said he was encouraged by Friday's price action, which is suggestive to me that the Fed is at least they're saying that we're going to be aggressively, almost standing on overtop of the market in the near term, say to get inflation under control.
Well, the bears have everything they want in terms of that type of language. If you believe like I do, don't fight the Fed and the Fed is saying we are going to be forceful in terms of continued hikes, this is set up for some dicey price action in terms of especially going into September which is seasonally pretty iffy. I'm not a big believer in just trading off of seasonality, but historical norms are there for a reason. You should be awfully careful.
And now, earnings season is pretty much over. There's not a lot of bullish drivers in the near term that I'm seeing. But this is where you want to be paying attention. If the bears can't push things back to the lows, that potentially tells me that some of this is already in the market, meaning that the worst of the hikes in terms of the economic impact or this recession, everybody seems to be talking recession now.
It seems like the most obvious telegraphed recession I've seen. Well, that tells me if the market fools the majority, either it's potentially priced in, or it's going to be really bad and this economy and the market is going to go meaningfully lower. Those are right off the top two things I'd be looking for in terms of, if the bears, when you get everything you want, and you can't get the news you think you want and you can't get the price action to corroborate, it just it just says that that's already priced in.
I would, if I was bullish, and the scenario for bulls is looking at, at Minervini Private Access, we've been looking at a couple of different bottoming historical precedents, 1990 and 1962. This is to give the bulls something to really watch for and what I'm watching for is, in both of those scenarios, you had recession potentially coming, and you had a strong rally off the lows. But when that rally petered out, things pulled back, but it took four to eight weeks for the market to digest that run, pull back, things look scary, everybody starting to tilt negative, sentiment getting negative, and then the market doesn't make those new lows, catches a lot of people off side and then starts to move higher.
I've made this point before a few times on Real Vision. And I think the last time I was on with Ash, we were talking about this in terms of let's just assume we're going to have a recession. Let's say that's baked in the cake, the market historically bottoms three to six months ahead of the economy. Is it possible that the market could bottom in the beginning of Q4? If the economy is going to bottom somewhere in December to March, very possible.
And I think a lot of people are not-- they're not going to be ready for that. It's something you want to just-- this is where you want to have an eye on the real price action, especially if we get a bunch of bad data, bad news, bad price action. And there's a number of really smart people on the fundamental side that are saying in the next four to six weeks, we might see some bad economic slowing, continued bad economics long. We've already seen some over the last four weeks due to the tightening in financial conditions.
So I'm saying we have a scenario where it could be some head fakes back and forth. And I think just given the fact that liquidity has been low, it's been poor, it would not surprise me if the trading is choppy or if we're not just in maybe a bit of a broader range. But if you're a bear, I would say you want to see a retest of the lows probably rather soon and then weak rallies.
And then giving a couple of technical points, we had an 11 to one down day in terms of selling pressure on volume on Friday. We haven't seen any of that really since June. And that is the equivalent of the wet blanket being thrown over the top of you in terms of selling pressure. The bad news for the bulls there was we also didn't really even have above average volume overall.
Coming into the fall, to your point before, is everybody's coming back from those longer summers, this type of thing, if the institutions really start showing up and selling in mass, I think a new low or at least a retest is probably a layup. And again, that's where the bears I think, would want to see things meaningfully press into new low territory. And I can get into a couple of the specific groups.
MAGGIE LAKE: Yeah, Mark, I want to jump in here because I just want to underscore something that I think that you said that was interesting and really important. And I know this is why you watch the levels and why we're talking about it. Because it does feel like this is a make-or-break time and it's going to determine what happens but when you said everything's lined up for the bears, it's almost like a court case, like you have everything you need and you can't get the verdict.
That's really important, isn't it? That's super interesting to me that you said that because recession's everywhere, we're feeling it, the Fed could not be more aggressive. Everything's lined up. This is why that level is super important to you, right? Because you're not going to get agnostic about-- you could believe the narrative and think things are horrible but if it doesn't break that level, that's problematic for the bear case, right?
MARK RITCHIE II: Well, absolutely. That's the point. It's the classic, I hear these questions all the time, XYZ company, they smashed earnings, and they sold the stock off. It was already in the price. And sometimes we don't know till after the fact. But I'm saying in terms of what the bears would really want to see is yes, they just got the Fed saying we are not pivoting at least anytime soon.
Now, of course again, if you're bullish, and there are a lot of bulls I know that are saying, yeah, the Fed has said this before. In October of 2018, the famous, we're far from neutral. And then two months later, they changed their mind. And I am certainly open mind into the fact that if the data gets bad, the Fed will at some point change their mind. The question is when? And will they just go on pause versus say, back to QE?
MAGGIE LAKE: That's the big question. Because they have said they're data dependent. They said they're serious. We're serious about fighting inflation, but they also say they're data dependent. Does this make the inflation data really key here? Because if we start to see that move lower--
MARK RITCHIE II: Yeah, I would be more in tune with, I think some of the inflation is potentially lagging, which a number of folks that we've seen on Real Vision have been trying to make that point. I think that, yes, that's part of it and some of the economic data, if it's true that the Fed is really more focused on employment than anything else, again, I think this is potentially a short-term bearish driver, because it means even if the economic data softens, and my view is often, listen, unemployment is the last thing to go.
That's normally near the end of the down move and the classic situation is late 2008, early 2009. If you look at by the time we were losing half a million jobs a month, that bear market was pretty much over.
MAGGIE LAKE: Yeah, that's right. It's the lagging indicator.
MARK RITCHIE II: The small problem was we were down 40% at that point, so if you wait until then to raise cash, you did it at the absolute worst time. If that's what the Fed is waiting for to potentially pivot, then we got more to go probably on the downside. To your point, though before, which was well articulated, listen, the narrative and the news and all that is great but if the price action doesn't corroborate it, the market is forward looking.
And that was really the point I was trying to make about the bottom and also just keeping an open mind. For me, as a general contrarian, the best setup here in the near term, meaning if you were to say, Christmas come early in our office, I would say that we either continue to pull back, or maybe we even retest the lows, where we undercut or get near the lows, and everybody gets end of the world bearish.
Similarly, where they're caught off side, that kind of thing, and the market puts even some type of a rally or maybe even more powerful of a rally off the lows than we saw in late June. Because then everybody's going to be potentially scratching their heads, caught offside. I thought the economy is rolling over, how in the world is the market bottoming? Again, the market's looking three to six months out, the market will potentially be signaling, at least in the short run, that the worst is past us.
There's another scenario though too where we could just stay in one of these secular, larger ranges where we don't make new highs. If you study the period, say from 1970 to 1980, you had a number of these strong, what some people would even argued cyclical bowls and cyclical bears that just wore a lot of people out. Well, we had a small microcosm of this in the last, really the last three or four months.
We went down double digits. Now we've come back double digits. Now we've pulled back. Unless you've been very nimble and taking a very trading type mentality, it has been very difficult to find good places to make, say consistent yield or returns this year.
MAGGIE LAKE: Yeah, it's gut wrenching, but you're essentially not going anywhere.
MARK RITCHIE II: Yeah. I often say markets have a way of correcting or wearing people out either through time or price or both. And this has been a good example of the "or both" scenario this year.
MAGGIE LAKE: Absolutely. David Moreland tweeted something out, something interesting out that caught our eye. And he said, we're witnessing the deepest 2/10 yield curve inversion in over 20 years, deeper than 2008. An inverted yield curve has historically led to some type of break in the system. Is that something that you worry about? And if that's a risk, why aren't we seeing the VIX higher?
MARK RITCHIE II: Two points here. Let's talk about the 2s, 10s, and that's something that we watch as well. I don't think it's the greatest timing indicator, and even those that watch it would generally say this is more of an environment signal than a short term what's the weather today signal. However, my view would be that these inversions are-- they're a preemptive strike to say, look, the market is not healthy and if recession isn't here, yet, it's coming.
And the biggest risk there is really on the credit side in terms of the credit market. And if the bears really want to push things lower, this is probably one of the trumpet calls or siren sounds, siren calls, if you will, that make sense to me that something is going to break in the credit markets, because financial conditions have gotten so tight and liquidity, the Fed is sucking liquidity out of the system that eventually something's going to break. auctions, whether it's in private bond markets, or go really poorly, or certain bond markets start to go very low bid or no bid, then I think it will start to signal there's a problem. One of the other bearish drivers, I think, or at least very imminent, based on some of the things on Real Vision I think people should be aware of, because there's been some folks calling for continued potential dollar strength, but specifically, maybe a depegging of one of the Chinese currencies, whether it's Hong Kong or the CNY.
If one of those events happens, that will be a global risk-off event most likely. That's not priced in. Credit blow ups, not priced in. The 2s 10s would just tell me that the risk of those type of scenarios, at least the 2s 10s to say in the credit markets, is much more elevated. Now, to your point about the VIX. Everybody's been saying when we are going to get this move to 40 or 50, or that real classic volatility purge puke on the one side and a spike on the other where everybody just sells positions, runs for cover?
We haven't really seen that all year. I would say the VIX is almost doing exactly what it's done, which is just frustrating people all year. If you've been hoping that your volatility hedges were going to protect your portfolio, it's been pretty tough sledding there. And I made this point before, there hasn't been many places to hide this year.
Volatility hasn't done it, precious metals hasn't done it, bonds has been even worse. Cash has been one of the only places and obviously, I'm saying for now, I think at least some levels of cash is still warranted.
MAGGIE LAKE: We have a great couple of questions, but it's a conversation coming from In The 310 from the RV site, I just want to read them because I think this is what a lot of people are grappling with, Mark, and it's perfect for the conversation we're having right now. They write, @Mark, are we not already in recession? We touched on that. But this is the part that struck me, fearing the new low territory and feeling like a fool to not sell all mid-August.
Why is this hike different than the others? Previously, market rallied momentarily. This time, there's blood on the street. And I think that's referring to there was this sense that the Fed was going to get it. They're, on top of inflation, getting get it over with and it was going to be quick and shallow, I guess, and we were going to be able to move forward and then the pivot would come.
It feels like there is a different sentiment going on this time. What do you make of that? And this is the problem of, you'd mentioned it, getting sucked into those bear market rallies.
MARK RITCHIE II: Well, and part of it is there's a large psycho psychological pull to this. People, when markets start to move and they're sitting on the sidelines, what's the natural response? I got to get involved. And I've made that mistake myself many times so I know how that feels. And I think because in July, we had a number of what looked like we had a higher-than-expected CPI, and the market didn't really make meaningful lows and the Fed went 75 again and the market actually started to rally.
And then they used what looked like maybe, yeah, that data dependent type of language, which I think was fair, and I think there are a number of people raising their eyebrows at Friday's language going wait