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OpEd: The Market’s Immune System May Be Compromised

The coronavirus gets all the blame for the market implosion, but about two-thirds of these 19 bear market warning signs compiled by Bank of America were already flashing red. Does that mean the market’s immune system is compromised?

The market has been able to shrug off numerous bearish indicators, but can it shrug off the coronavirus? Given that the S&P 500 is down close to 8% since Friday's close, is this the infection that kills the bull market?

While prior recessions popped singular market bubbles, we are now experiencing the “everything bubble,” which includes stocks, real estate and bonds. Many theories abound as to how much longer the bull market can hold up: From Brent Johnson’s “Dollar Milkshake Theory”—the notion that keeping the dollar strong over the next few years, combined with things being much worse elsewhere, is bullish for the U.S. in the near term, but much less so in the long term—to gold bug Peter Schiff, who sees currency and market doom at the front door knocking (to be sure, Schiff has heard doom knocking on the door for a long, long time.) 

But it may be the coronavirus that finally puts the nail in the coffin of a bull market that was already showing signs of weakness. To take the temperature of the patient at hand, we can look to indicators compiled by Bank of America. 

The bank’s researchers have a list of 19 data points that once triggered, according to historical trends, indicate the market party is over. The list of 19 signs ranges from fundamental to sentiment-related indicators and uses data tracking back to 1968. As reported by Maggie Fitzgerald on, the signals for a bear market are as follows:

  • Federal reserve raising interest rates.
  • Tightening credit conditions
  • Minimum returns in the past 12 months of a bull market of 11%
  • Minimum returns in the past 24 months of a bull market of 30%
  • Low-quality stocks outperforming high-quality stocks (over six months)
  • Momentum stocks outperforming (over six to 12 months)
  • Growth stocks outperforming (over six to 12 months)
  • 5% pullback over the past year
  • Stocks with low price-to-earnings ratio underperforming
  • Conference Board’s consumer confidence level has hit 100 within prior 24 months
  • Conference Board’s percentage expecting stocks to go higher greater than 20%
  • Lack of share price improvement (less than 1 percentage point) for earnings beats
  • BofA’s calculated “sell side indicator,” a contrarian measure of equity optimism, over 63%
  • BofA’s Fund Manager Survey cash level positions fall below 3.5%
  • Inverted yield curve
  • Greater than .6 percentage point change in long-term growth expectations
  • “Rule of 20” where trailing price-to-earnings ratio plus CPI is over 20
  • Volatility index spikes over 20 at some point within phe last three months
  • An indicator based on earning estimate revisions

According to Bank of America, when 80% of the indicators have been triggered, a bear market has occurred.  Currently 63% are in the red, up from 47% in January. 

These kind of market indicators can be akin to reading tea leaves, though Bank of America has compiled a lot of historical data to support them. But what they don’t reflect is the unknown, like the impact of the coronavirus. How likely is the market to repel the contagion when these indicators suggest the patient was already sick?

Oftentimes it is the unknown that becomes the big one, the Black Swan event, potentially sending all other indicators reeling.

Jon Henschen is the owner of Henschen & Associates, a consultant and recruiter for broker/dealers.

TAGS: Industry
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