DM and EM Bear Markets?

Just as we outlined here last week, the S&P500 did in fact retreat in the short-term, specifically over the last week, when it gave back 1.33%. But since volume was light, it can’t be claimed that investors were rushing for the exits. On the other hand, investors did express their greater caution by taking out more insurance against further losses—the VIX index rose to the mid-teens for the first time since late May.

US macro reports were mixed as usual, with no signs that US economic growth is accelerating. In fact, the latest revision to Q1 growth missed expectations—it came in at 2.0% (annualized) instead of the 2.2% that was expected. While 2% growth is better than no growth, this rate of growth is well below levels that were reached in prior recoveries, when they were typically above 3% per year.

In terms of technical analysis, the charts are still bearish on the dailies. That said, the S&P500 did manage to hold near the 50 day moving average, and if this level can be held next week, then a short-term rally may ensue.

The weekly charts are still bullish, but only barely, after last week’s losses.

More importantly, our Simply Rule for the S&P500 is still bullish, so investors can stay long the entire index (in other words, this analysis does not apply to any particular company in the S&P500, but it does apply to the index as a whole).

Finally, this same Simple Rule, when applied to the developed market (DM) equities and to emerging market (EM) equities generates an entirely different conclusion. For both DM and EM equities, a new bear market cycle has begun. So that means if we owed DM or EM ETF’s such as EFA or EEM, we’d have exited these positions by now, and would have allocated those funds to other investments. As the situation in DM and EM equities evolves, we’ll look to our Simply Rule to give us a signal that we should re-enter these asset classes. But this buy signal is not around the corner—it will most likely take several months to register.

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