Is This Still a Bull Market?
Featuring Chris Verrone
Published on: August 28th, 2019 • Duration: 12 minutesChris Verrone, partner at Strategas Research, sifts through the noise to answer a timely question on every investor’s mind: is the bull market over for stocks? In this interview with Alex Rosenberg, Verrone analyzes the market’s recent price action, breaks down some key contrarian signals, and notes where to draw the line in the sand for the S&P 500. Filmed on August 27, 2019.
ALEX ROSENBERG: Welcome to Trade Ideas. I'm Alex Rosenberg. We're here with Chris Verrone, partner at Strategas Research. Chris, thank you for joining us today.
CHRIS VERRONE: Great to be here, Alex. Thanks for having me.
ALEX ROSENBERG: I'm going to start with a simple question here, are we in a bull market?
CHRIS VERRONE: I think we are still in a bull market. The next number of weeks I think are going to be critical in understanding what's left in the gas tank here. But let's remember the slope with the 200-Day Moving Average is still upward sloping. So if we go back to simple trend following rules, the trend in this market is still up. And I think until that changes, you have to be operating under the framework that this is a bull market and that is ongoing.
ALEX ROSENBERG: Now, if this is a bull market, if we're continuing to be in a bull market, it's actually a somewhat provocative view these days, because a lot of people have been talking about the idea that every things rolling over economically as well as market wise. Does that suggest that this is a capitulation moment that you want to be buying into?
CHRIS VERRONE: I think what's interesting here, and what we always try to do in our work is bridge the gap between perception and reality. And we think price allows us to do that. Now, when you think about how dire the headlines have been, they've been basically apocalyptic now over the past couple weeks. The market actually doesn't act that bad. You still have about 60% of stocks in the S&P above their 200-Day Moving Average. I would start to get more nervous if that was under, say, the 45% neighborhood, that's when you start to risk a bigger problem showing up on the horizon.
So I think we're okay here. I think it's notable the market still acts okay despite how poor the headlines are. I think the big level just in terms of if this is still a bull market, what levels do you need to respect, that 2730 neighborhood, which was the early June lows, you really don't want to violate that. That would be really the first time this entire cycle that we've made a lower low. So that will get us a little uncomfortable. But I think you have to operate under the framework that we're still okay here.
ALEX ROSENBERG: So then what do you make of some of these signals that people have been pointing towards? We've had a few drops of around 2%, the yield curve, a lot of people found out what that was in a hurry is that inverted, or sticking around zero now in the 2s, 10s spread? What do you make of those specific signals?
CHRIS VERRONE: I'll make two points there. I think the first, just with respect to price action, I think investors forget that volatility is a feature of markets. We just went through this 10-year cycle where the Fed took all the vol out of the market. And we just forget how common corrections are. If you go back the last 65 or 70 years, the average drawdown in any given year is about 14%. So it's not uncommon to see weakness without saying a bull market's over.
Now, with respect to the yield curve, we've always thought about this in terms of a shot clock. When the yield curve inverts, put 9 months on the shot clock. That's about how long you have to recognize if other things are going to change and confirm the ominous message of the curve. So for example, if the message of the curve here is pression, I would expect things like corporate credit would get a lot worse, I would expect money growth would slow.
Neither of those have really happened yet. So I'm a little bit reluctant to say the curve is signaling yet. If we started to see unemployment claims rise, if we start to see money growth turn lower, if we start to see credit weekend, I think that will be evidence that hey, maybe we got to take this message from the curve more seriously.
ALEX ROSENBERG: And let's go to some of those other indicators that you're looking at, some of the internals of the market. I know you've been looking at signs that this could be a contrarian by signal, maybe you could walk us through some of those.
CHRIS VERRONE: Yeah, I think two or three things in particular that stand out- put call ratio is up in the 95th percentile of all historical observations over the last number of days. So as expressed through options, there is some stress among investors, I think that's an important point to make. The second thing I would just note in terms of money flow, you've seen a big exodus from the major ETFs, the SPDRs and the QQQs. We look at ETF flows from a contrarian perspective.
So it goes back to the question we're all trying to answer, what is known and what is unknown? I think the sentiment data would suggest that people are already positioned for the ominous outcome. I'm not convinced their positioned for the positive outcome.
ALEX ROSENBERG: So what does that indicate to you about how if you want to be tactical and play for that optimistic outcome, how you might?
CHRIS VERRONE: I want to make it clear, this is a close call. And I want to respect the other side. I think in periods like this, respecting bellwether stocks can be very essential. Let's focus on what is in the center of the storm, names like Apple and Ali Baba, Taiwan Semi, TXN. And I think ultimately how bellwethers like those resolve themselves is going to be critical as to how the market resolves itself. The reality is, we've been in this range here for much of the month, 2822 to 2945. But more broadly, we've been in a range for almost 15 or 16 months. So I think watching some of these bellwethers, how they come out of this is going to be very telling about what's left in front of us.
ALEX ROSENBERG: So you would look at stocks like the Apples of the world to determine which way things are going in advance?
CHRIS VERRONE: Yeah. You know what's interesting? I think the last couple weeks in particular, while it feels like the headlines have gotten worse, feel like attitudes have gotten worse, the stocks have actually acted better than I think people would suspect. So if the market is telling us that something in the future is going to be worse than it is presently, I would suspect those stocks would start to roll over here. The fact that that hasn't happened, at least not yet, leaves me more on the optimistic side of the trade for the time being.
And I would even say, looking at some of the Chinese indices, you would expect Chinese stocks would be at new lows here and they're not. Shanghai Composite's a good day away from making about 2- or 3-month highs. The ChiNext Index, which is an index of very tech driven innovation stocks in China actually just made 5-month highs. So I think some of those stories have been lost with everyone's attention on what the next headline or what the next tweet says. I think that's a mistake. In periods like this, let price action dictate how bullish or bearish you need to be, not what the headlines say.
ALEX ROSENBERG: So it might be interesting to stick with the big tech stocks here for the next few months I guess.
CHRIS VERRONE: I think at the end of the day, every cycle has its secular leader, and tech has undoubtedly the leader of this cycle. I doubt you see some major shift in leadership until the next cycle. So we're still operating under the framework that pullbacks in tech, pullbacks in software, even semis, which act remarkably well despite how they should be behaving if the headlines are correct here. I think you have to look to weakness in those groups as viable until proven wrong.
So I think semis in particular are interesting here. They've been a very pression indicated this entire cycle. They've weakened before big weakness. They've improved before the market probably has improved. They've been pretty resilient over the last number of weeks here. I would encourage you to look at names like AMAT. LAM Research, Kelly 10-Core, TXN, Micron. I think stocks like that are going to just have a lot of information about what the next 6 or 12 months hold.
ALEX ROSENBERG: And to ask you a- I think you make a strong case from the market's perspective. If I was to ask you a philosophical question and try to take the other side, we've seen this big rise in passive investing, a lot of people are hogging indices. Does that mean that those specific signals that are coming from sectors maybe don't have the weight or power in this cycle that they might have had in prior cycles?
CHRIS VERRONE: I think it's a very important question, and I'm going to try to answer it two ways. The first I would say is I think you have more than 50% of assets now driven by past. So I think in some respects, it almost reinforces the leadership that's been in place. Tech and large cap are big passive games. As long as passive is dominant, I would expect large caps and tech to be dominant as well.
I think it's a problem for small caps. Not only are you so far along in a bull market where anything that's left in the small cap indices was never good, was never strong enough to graduate up the cap scale. But I also think small caps are negatively impacted by this large cap passive game, I think that's an important point.
The second observation with respect to passive that I think is critical here is passive is very dependent on your biweekly 401k money that's coming in. So maybe it elevates the employment data, unemployment claims, the unemployment rate as market indicators moving forward. So one thing we watch very closely is the relationship between, say, a short term average of unemployment claims versus a long term average of unemployment claims. If you look at the 6-month average and claims and just oppose it against the 2-year average in claims, when that starts to cross, so when the shorter average moves above the longer average, it has tended to portend the lot of consumer weakness in the future. So I think that's going to be a very important indicator here. It has not signaled yet, which is important.
ALEX ROSENBERG: Very interesting. Let's close off with that S&P 500 chart that you mentioned, that we're still in an upward sloping 200-Day Moving Average. What are some of the things when you just look at that big chart that you'd be looking forward to, as you said, it is a close call to choose which side of the fence to be on?
CHRIS VERRONE: I think ultimately, if you think about price action this year as one in which the markets acted well, maybe the pain trade has been up, but you've had some corrections. If the framework is going to remain correction in an uptrend, you can't make lower lows, below 2730 is a lower low. I think good roadmaps are looking at 2016, and looking at 2012, and maybe looking at 1995, were years where you were coming out of some pretty challenging markets the prior year. And as the market rallied in '12, and in '16, you never made a lot lower low, even though you have corrections.
2730 is that line in the sand for us here, I think beneath that, begins to risk something more serious is building. And as we mentioned earlier, the percent of stocks above their 200-Day Moving Average, you really don't want to get that much below 50% or 45%. I think that suggests something more serious is brewing in our future. So those are the two things that we're watching here.
ALEX ROSENBERG: And I do have to ask when you say something more serious, what kind of- I guess it's a counterfactual in a way but people are saying, well, it'll either continue higher in a mile pace where we'll have a severe downturn, people are talking about a crash situation, is that what you're seeing in the charger is it could be a more mild?
CHRIS VERRONE: I think a period of lower returns. We are in the middle of a pretty good 10-year return profile here. I think at some point, obviously in the future that will end. It's a question of whether it's ending now or whether there's more time in front of us. I think as you start to see more technical damage, the case to be made that it's ending now would grow stronger.
ALEX ROSENBERG: Chris Verrone, the man on the bullish side of the fence. Thank you for joining us here today on Real Vision.
CHRIS VERRONE: Great to be here.