We finally saw the relief rally in March that I was expecting during this historically strong month for the stock market. This rally however, has not been what I would call a healthy rally. It has once again been driven by short covering, the help of a short-term spike in oil prices (despite oil inventories remaining extremely high), another rate cut by the ECB and traders dominating the market action.
Although the 200 day moving average is a simplistic technical indicator, it does have its uses. One being, that when stock prices are unable to stay above a declining 200 day moving average, it’s a great indicator that the market is rolling over and you’ll see further price declines. Unlike before, the recent rally has failed to surpass the average which currently stands in the 2020-2021 range.
While this relief rally may provide assurance for most investors that all is well with the stock market, I still remain extremely pessimistic for the near term. Our PPOI technical model continues to show about a 2-1 probability of a further 10-20% decline in prices compared to a rise of more than 5%. I’m a big fan of playing probabilities as they win out in the long-term, although they can be frustrating to follow in the short-term.
Keep the following in mind if you’re overly bullish on the market.
· This is the fourth consecutive quarter of corporate sales declines.
· Rising wages will further erode already declining corporate profit margins.
· I’ve warned that the P/E ratio can be misleading due to financial engineering. This is evidenced by this year’s reported earnings being 25 percent lower than pro forma figures. Additionally, the gap between GAAP and adjusted [non-GAAP] EPS is the widest since the last crisis.
· In the last 12 months there have been 10 month-over-month declines in Industrial Production.This has never happened outside of a U.S. recession
· Almost 40% of stocks still remain in a bear market (decline of 20% or more from highs)
The bond market tends to be a better indicator of the health of the economy and is almost always proven right. The bond yield is hinting at further underlying weakness in the economy as the 10-year Treasury is over 60 basis points lower than the yield for the S&P 500.