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Bear market prognosis under threat

Lesley Beath  |  26 Apr 2016Text size  Decrease  Increase  |  

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does have an interest in the securities disclosed in this report.


Global equity markets posted a mixed week. In the US, which is what we are focussing on for the moment, the major indices pushed quietly through resistance. The medium-term buy signal that was registered on the S&P 500 back in late February/early March remains intact.

I haven't mentioned the VIX or the US T-Bond/S&P 500 ratio for a while as neither have had much to offer as far as guidance is concerned. The VIX is trading at the lower limits of its recent range, so no major news there.

But the "ratio" broke short-term support last week, suggesting that risk in the equity market remains to the upside in the near term.

The medium-term outlook is still uncertain at this stage but as I have mentioned in recent reports my bear market prognosis is under threat. I think it is a 50/50 bet at this stage.

I note the improvement in markets outside the US and although I feel this is not the time to alter my views, I think we must be aware of a possible change in outlook.

As regular readers will know, I am always questioning my views. I do that because it is human nature to interpret events as you perhaps wish to see them, or as you have predicted them. In his famous book The Art of Contrary Thinking (originally printed in 1954) the author, Humphrey B Neill, says "one can interpret charts almost any way he wishes ... if one is bullish at heart his chart reading is likely to be interpreted optimistically; if bearishly inclined, charts accommodatingly will 'say' that the market is going down".

"During one-way trends (whether up or down) the trends are clearly enough defined on the charts: but when the market comes to an impasse and everybody is in a quandary as to the direction prices are likely to go, then the charts, too, are usually silent".

I was re-reading that book recently and that passage took my eye. I do believe we are at an important juncture in global equity markets and I do think the charts are "silent". They are giving mixed signals--not doing enough to give any clear insights.

My view, and the view of many, is that the 2009 bull market in the US ended last year. But that is old news. Market transitions are lengthy and deceptive and I think the charts now are indeed "silent" or perhaps "poker-faced".

The US market will play its hand when it is ready.

I must add that the human factor comes into play not just in interpreting charts, but also in interpreting fundamental data.

As hard as we try, it can be difficult to remove our biases from our analysis. And we can be prone to being stubborn with our opinions. In the book Psychology of the Stock Market, written by GC Selden, back in 1912 (yes, people have studied the psychology of the market a lot longer than you would think) he says "doubtless it would be axiomatic to warn the trader against stubbornness. It cannot be assumed that any operator would consciously permit himself to be stubborn".