Market Analysis: Bulls or Bears?

The market continues to arm wrestle between the bulls and the bears.  Knowing who will win is key to successful short term results.  At Indie Asset Partners (IAP), we look for clues through our technical, macroeconomic and fundamental analyses.  No short cut to hard work!  And, as always, we always suggest making modest portfolio adjustments based upon the market signals.  In today’s volatile environment, which we believe will continue, we do not suggest swinging for fences.

Our technicians started charting the markets after the 2008 collapse, when bad advice from the “experts” led them to provide clients more independent research.  By studying technical moves, moving averages, and put/call ratios, the market appeared more predictable.  As we learned to watch patterns, we also learned to not be biased, understanding the probabilities of either a bear or bull market.  In the past 30 years we have had two bear markets.  As for bull markets, 1982 through 2000 was clearly the biggest bull market in recent history.  From a technical point of view, 1987’s crash was a crash within a bull market, which is very different from the two bear markets.  We all would love to have those years back – especially 1990-1999—with more predictability on the dramatic market moves.

The two recent bear markets that serve as harbingers are 2000-2003 and 2007-2009.  From studying these markets, we believe the current market is at a similar point of decision.  We reached that point in September 2010, as well, when the S&P breached its moving average and had a 4 month correction.  At that point, the Federal Reserve stepped in to provide what is called QE2 (Quantitative Easing), which offered more liquidity to the banks/markets, and the rally continued.  Today we are there again – a point of decision.  As before, a number of unknown factors can influence the trends, so we must be aware of the possibilities.  Determining whether we are in a bull or bear market and the attendant investment decision are essential.

Bull Technical Market:  With our technical markers appearing to be close to a top, the stock market could end mildly over the next few months.  The market could undergo a correction; the correction would be modest, and the Dow should hold 11,000.  Over the next several months, volatility should calm, and we should not have as many plus-200 or minus-200 days.  A general solution would be reached in Europe, and general economic data should improve, including unemployment.  By March of 2012, we would be on the rise to a healthy market, similar to bull markets where the markets generally have calmer moves and the net return is positive.  In the bulls’ favor is a positive seasonal bias.  Typically the markets are calm and up from Thanksgiving to Christmas.  So, with our work technically challenging further gains on this move, it would mean that the next 2 to 3 months should be very mild for a bull market, with not much selling.  The DOW should stay close to 12,000, and then be prepared for a nice rally around late December to early January.  If the market rises much above 12,000, it could be very bullish for 2012.  More on that if we see this condition.

Bear Technical Market:  With our technical markers appearing to be close to a top, the market would start down within the next 2 months, and the volatility would continue; quite frankly if this is a bear market, it could get very volatile.  When the markets were in 2000-2003 and 2007-2009 style bear markets, one condition that was consistent was lower lows.  Our last low on the DOW was 10,400, so over the next 4 months that could be breached.  Looking at the macroeconomic picture, if this market turns into a bear market, we should see some signs of more issues/problems overseas with European banks, countries, etc.

The bottom line is that we are at a point of decision from our technical view.  When it clears either way, we will report what we believe as soon as we see the technical signs.  When we see some data that leans one way or the other, we will report this on our next update.  But the uncertainty clearly indicates it is not the time to increase your portfolio risk.  Key support right now is DOW 11,000.  We would like to see the DOW get above 12,000 (which is about where the long term moving average is today) and HOLD.  The market has been above the moving average two times the past three weeks, to quickly turn back below the moving average.  Long term, when the market is above the moving average, the trend is positive.  When it is below the moving average, the trend is negative.  So, come on 12,000 – let’s hold it!

Macroeconomic Trends.  In addition to technical analysis, we also follow macroeconomic trends as noted above.    This information is also mixed. The U.S. economy, which is 25% of the World’s GDP, is trying to heal with mixed signs of success.  China also appears to be intentionally slowing its economy to avoid inflation.  Europe, as we know, is reeling in debt, moving towards austerity and is likely headed for recession.  With these three players accounting for approx. 60% of the World’s GDP, there is little to cheer about.  The most compelling reason to buy equities is valuations (low PEs and certain higher implied yields than government bonds).  However, if Europe continues to implode or the U. S. stumbles, these valuations will look expensive.

For investors, the challenge is how to make a reasonable level of return while dealing with the noted technical and macro risks.   Our comprehensive analysis suggests we may have more clarity soon – within the next 2 to 3 weeks.  At this time, however, having quality equities with a mix of short term bonds is a decent investment strategy until we see if the bulls or bears win this struggle.  If your personal equity risk is an 8, on a scale of 1 to 10, 10 being the highest risk tolerance, we would suggest you take that down 2 notches to a 6.  If you are a 4, take it down to a 2.  At IAP, we believe now is the time to “adjust” away from higher volatility stocks, focusing more on “blue chips”,  and to keep your bond risk at a minimum (shorter durations).  We suggest investing in predictable companies with high yields and holding a higher level of income securities.  We would not recommend the low government debt securities, but would suggest rather preferreds, yielding typically 6-7.5%, MLPs, utilities and other high yielding (but well researched) debt instruments.