Market Bottoms

[ducati916]

New claims (unemployment) released.

Pretty much doubled from the last report. If the market does not collapse, bullish sign.

jog on
duc

 

[peter2]

Yep, the market commentators were gobsmacked when the number was released last night. I think the Americans will panic again when the numbers of deaths continue to rise, lock downs become more prevalent and they actually experience how their lifestyles must change for even a short period. I wouldn't rule out civil disturbances and with their levels of gun ownership things could get very ugly.

 

[MrChow]

I don't think there will be a significant new bottom in this phase as the market seems to have priced in a consensus projection of the shutdowns effects by a couple weeks ago. When unemployment and death figures have been released since it has had no impact, if anything markets have been positive on those days.

But consensus (from the instos modelling) also seems to factor in a relatively smooth GDP comeback in the second half of year and that is the most likely weak spot where I can see surprises hitting. EG. Intermittent need for further shutdowns from secondary waves or a health issue turning into a credit crisis. Big moves need volitility and shocks from the unknown.

If those things don't eventuate later this year I think we'll look back at this time as the quick bottom similar to 1987 rather than the elongated timelines of 1929, 2000, 2008.

 

[ducati916]

I don't think there will be a significant new bottom in this phase as the market seems to have priced in a consensus projection of the shutdowns effects by a couple weeks ago. When unemployment and death figures have been released since it has had no impact, if anything markets have been positive on those days.

But consensus (from the instos modelling) also seems to factor in a relatively smooth GDP comeback in the second half of year and that is the most likely weak spot where I can see surprises hitting. EG. Intermittent need for further shutdowns from secondary waves or a health issue turning into a credit crisis. Big moves need volitility and shocks from the unknown.

If those things don't eventuate later this year I think we'll look back at this time as the quick bottom similar to 1987 rather than the elongated timelines of 1929, 2000, 2008.

I'm with you on this. Markets traded lower today (US) but volatility has not ramped up, still well above the lows.

jog on
duc

 

[ducati916]

March was a crazy volatile month. How volatile? Check out the chart.

Gotta love it.

jog on
duc

 

[ducati916]

Re. valuations indicating a bottom:

Because the market dropped so rapidly, those valuations are against GDP as it was. Once everything has settled out and been adjusted, it may well be that the fall in GDP as against Market Cap, actually takes the valuation into 'value' territory.

You could work it out long hand using best guestimates as to how far GDP has fallen. My guestimate is that once it is all calculated out and adjusted, it won't be far off that value region.

jog on
duc

 

[ducati916]

Some projections if you wanted to guestimate.

jog on
duc

 

[axyd]

I tried to use Earnings Yield as a prediction of Market Bottom and how cheap stocks prices are (hint - no, it's not good time to buy, stocks are not cheap)



What do you think?

P.S.

EV/EBIT ratio would be much better than Earnings Yield, but sadly there's no such data.

 

[ducati916]

I tried to use Earnings Yield as a prediction of Market Bottom and how cheap stocks prices are (hint - no, it's not good time to buy, stocks are not cheap)



What do you think?

P.S.

EV/EBIT ratio would be much better than Earnings Yield, but sadly there's no such data.

First and foremost I think most would agree that the US market from 2009 - 2020 was a secular bull market. The question therefore becomes:

Has (that) secular bull market ended, or, is the current situation a cyclical downturn in a (still) to be continued secular bull market. The alternative is that this is the start of a secular bear market.

Examples of secular bear markets are 1929-1934, 1969-1982, 2000-2003.
Cyclical downturns: 2012, 2016, 2019 (as recent examples) which had quick resolutions. 1987 was the classic cyclical downturn example (I never traded this one though).
Then we have the 2008-2009 example, which lasted approximately 1 year. I would call this a secular bear market, but of relatively short duration.

If this is a cyclical downturn, stocks will remain somewhat overpriced by almost any measure that you choose to employ, but they will start to trade higher again, irrespective.

How to distinguish in real time?

Now these are simply my observations, so take it as that:

(a) Secular bear markets start slowly, sucking longs in gradually who look for the bounce etc; and
(b) Continue this way for months (years); and
(c) Save their greatest declines (damage) for the end of the bear. This is the classic throwing in the towel. The most recent example of this was the 2008-2009 bear.

The reason for the slow start is that secular bears require a catalyst to ignite the fuse. That catalyst often does not arrive at the very start of the bear, it arrives a little way in.

Secular bears also (I think) require the wrong policy response from Central banks, Government, etc, which then magnifies and extends the bear.

It also helps if you can identify the cause of the bear: 2008-2009 was a credit issue. 1969-1982 was an inflation issue. 2000-2003 was a technology mania (like the railroads before them) that lacked earnings substance.

Cyclical downturns by contrast:

(a) Start fast; and
(b) Accelerate; and
(c) Bottom quickly, trapping the perma-bears.

The current issues are:

(a) Deflation;
(b) COVID-19

Has the current washout been sufficient to clear the decks? The (correct) answer to that question will identify whether this is simply a cyclical downturn, in which case we probably have bottomed, or the start of a secular bear.

COVID-19 was probably the catalyst. Unusually it arrived at the front end and was recognised fast. It will pass. What remains will be the deflationary environment. Normally a washout of this magnitude would sufficiently clear the decks of excess supply as a number of firms in each industry went under, Because through bailouts, excess supply is maintained, this process is not being allowed to happen. The classic example in the oil industry looks set to happen with a bailout of the shale producers, far better for the industry in the longer term to let them fail.

Will this policy response convert a cyclical downturn into a secular bear?

If you think yes, then hold fire as we will go lower, possibly significantly lower and the duration will extend in time. Eventually in a secular bear, fundamental valuations will provide definite information that value has returned to the markets and buy points will be quite easily identifiable.

I have my own thoughts on this which I will lay out in another post as this one is already getting long.

jog on
duc

 

[qldfrog]

I tried to use Earnings Yield as a prediction of Market Bottom and how cheap stocks prices are (hint - no, it's not good time to buy, stocks are not cheap)



What do you think?

P.S.

EV/EBIT ratio would be much better than Earnings Yield, but sadly there's no such data.

I am not a video person..but followed the beginning.agree that historically we are not in bargain territory
Noone could say that 2016 market was undervalued and this is the level we are at, with a depression ahead...

 

[Garpal Gumnut]

Picking bottoms makes for smelly fingers.

gg

 

[ducati916]

Some humour from the 2007-2009 period.

plus ça change, plus c'est la même chose


jog on
duc

 

[ducati916]

How do the numbers stack up today?

jog on
duc

 

[hja]

Picking bottoms makes for smelly fingers.

gg

Even if you manage to wipe with a few sheets of toilet paper? (no hoarder)

 

[hja]

plus ça change, plus c'est la même chose
jog on
duc

...et le pire cela devient... !

 

[axyd]

There's also problem - how to preserve the wealth till that moment when stocks are cheap and could be bought at huge discount.

It's not easy because there's no special "safe" asset - like "cash" to preserve the wealth. Holding cash (or short-term bonds) is no different from betting heavily on a single asset and taking huge risks.

So, we have the following storages for wealth (with risks):

- gold and silver (can fall).
- USD (inflation, fiat currency blowing up to zero).
- bonds (same as cash, plus risk of bond default).
- stock (can fall).
- PUT options (market in panic and they are very costly now, the average price now is x5 of usual price).

The question is how to allocate the wealth among those storages to minimise risks and have robust and safe portfolio, resistant to all sort of unpredictable future events and prepared to take advantage of future stock fall.

 

[Garpal Gumnut]

There's also problem - how to preserve the wealth till that moment when stocks are cheap and could be bought at huge discount.

It's not easy because there's no special "safe" asset - like "cash" to preserve the wealth. Holding cash (or short-term bonds) is no different from betting heavily on a single asset and taking huge risks.

So, we have the following storages for wealth (with risks):

- gold and silver (can fall).
- USD (inflation, fiat currency blowing up to zero).
- bonds (same as cash, plus risk of bond default).
- stock (can fall).
- PUT options (market in panic and they are very costly now, the average price now is x5 of usual price).

The question is how to allocate the wealth among those storages to minimise risks and have robust and safe portfolio, resistant to all sort of unpredictable future events and prepared to take advantage of future stock fall.

Says it all really.

We are far from the end of all this kerfuffle I hate to say.

The main reason I prefer stocks long is that one can sell them tout suite.

Property is certainly cactus.

gg

 

[ducati916]

Just looking at various factors from the 2009 bottom:

So the market and dollar (double bottomed/double topped) were a mirror of each other. No prizes for guessing that they are once again more highly correlated than they were a month ago.

There are of course fundamental reasons for this.

jog on
duc

 

[ducati916]

Before looking at the 'dollar', a simple indicator that is robust (at tops and bottoms)

The 2009 example was clear and correct.

As it was in 2003.

Currently:

The indicator bottomed March 11, stocks on March 23. I find 'divergences' to be extremely powerful when looking for tops/bottoms.

jog on
duc

 

[ducati916]

Insiders buying the 'dip' is a worldwide occurrence: