We've been going down now for a very long time. The decline's been masked by a few outperforming stocks, but we know that the average stock has fallen more than 20% from its high. We must be resigned to the idea that while we can get some decent trading in when things get to extremes, we are going to have to adjust to the notion that good news just doesn't matter because the overall market wants to go down.
So, it is time to talk about the psyche of a bear market so you can get why nothing is working and we can't put together enough of a streak to make it so you can get anything but a trading bounce.
First, our checklist is a good indicator of the fickle nature of a bear market. Yesterday we had a Federal Reserve official say that we need to be very careful that we don't get ahead of ourselves when it comes to rate hikes. That's not the exact translation, but James Bullard, who had been a hawk because of employment growth, recognized that the Fed doesn't have to be too aggressive in tightening because declining oil makes tightening quickly less necessary.
But then today Bill Dudley, another important Federal Reserve official, said the opposite. He seemed unperturbed by the obvious slowdown in the U.S. economy and seemed to indicate that we need to continue to tighten because things are so good with employment. It was the exact opposite of Bullard, at least in my book, and it really contributed to the negative action we are seeing.
Yesterday the Chinese Communist Party walked up the stock market to close above 3,000, which kept it out of bear market territory. Today it fell right back in and the Party seemed helpless to stop it. As we said earlier in the week, China could have to repeal its entire move up from much lower levels and a 30% retracement cannot be ruled out. That's a lot of points we will be reacting negatively to and will cause many remaining bulls to pull in their horns.
Oil is the most important indicator of the market's next move and it now seems ineluctable that, barring a hot war in the Middle East that takes out oil capacity, the path of least resistance is down. Remember that despite various oil men coming on television to say that oil is going to bounce back to much higher levels, the man who has been most right all the way down, our expert Rusty Braziel, author of the "Domino Effect," makes it clear that we will be lower longer and that's the watchword.
Again, despite what you hear, it is in the Saudis interest to keep pumping to destroy the American oil industry and they can do it, but not yet because there has been great forbearance by lenders and there's such confidence still that the decline is temporary.
When you consider that the amount of oil the U.S. is pumping, even down here is barely lower than last year, so don't hold your breath. But also don't hold any oil company stocks because they are in the epicenter of the decline and they are all value traps. Every single oil company, big and small, needs to raise money and Freeport-McMoRan (FCX) andChesapeake (CHK) are most stretched. So, needless to say, while yesterday we may have gotten the biggest increase in oil, that's a box unchecked, too.
We have to believe that judging by where the stocks of the airlines, rails, autos, cellphones and home builders are trading, we have now seen the peak in all of those cycles. That's a drastic judgment, but the stocks are leading you exactly to that judgment and in a bear market you don't trifle with what the stocks are saying.
Finally, yesterday we had a terrific earnings report from JP Morgan (JPM). But last night we heard from chip giant Intel (INTC) and while the actual quarter was good, the forecast was miserable. Intel saw weakness pretty much across the board. The company has a very conservative management. Still, not that long ago it seemed to be on the verge of calling a bottom in personal computers. That theory was blown to smithereens and that's terrible news for HP Inc. (HPQ), the spinoff of Hewlett-Packard, as well as fellow value traps Seagate (STX), Western Digital (WDC) and Micron (MU). It says negative things about the big cloud businesses that the enterprise is weak and makes us cautionary about IBM (IBM), which reports Monday. I even called into question the prospects of the recent Altera acquisition, given the weakness in the results from that line item.
Plus, the other major banks that reported, Citigroup (C) and Wells Fargo (WFC), were good, but not as good as JP Morgan and in a market like this the bad will take down the good.
So, we had the earnings box unchecked, too.
China, oil, fed, earnings -- wow. All bad.
It's pretty clear by now that the Fed raised rates at exactly the wrong time and without something from them saying that they are on hold we are in a bad way, especially given the nature of today's Fed Head's comments.
So, let's go back to the notion that when everyone gets negative opportunity arises. I always want to be opportunistic, when everyone is running away from the market. That makes sense, as I said the other day.
But on days like today with options expiration and a three-day weekend, it's asking too much to think that you can do some buying.
Better to hold on, wait and get a better moment. Yesterday was a good day to reposition. My charitable trust sold a lot of oil exposure simply because the oils are under tremendous stress and it's the silent bond market that's the killer.
I reiterate that we are the most oversold since 2011 when Europe was falling off a cliff and it looked like we would be brought down with it. The bank earnings say that's not the case this time. Our financials were forced to be stronger by the government.
Still, we are in capital preservation mode and if boxes can be unchecked as quickly as they can be checked, we will have to presume we are back in 2011 when it looked like Greece, Italy, Portugal, Spain and Ireland could bring us down.
We are not in as bad a shape as back then because the damage is containable to about $300 billion in the oil patch and that can be restructured. Oil credit is much smaller than banking credit.
So, why not sit here and buy? Because stocks are more expensive than back then and the Fed is no longer our friend. We are fighting the Fed and this is what we get, so the bottom line is to keep some powder dry, sell the weak stocks in your portfolio in the next spike up, keep a clear head and this too shall pass.