Tariffs, Death Cross, Inversion


For months I have been writing about what I thought has been the slow rolling over into a bear market. I thought the 2% rule had been invoked in Q2 (2% rule is an average of a 2% decline three months in a row). Since then, my belief about a bear having started has looked right some of the time and wrong some of the other time.

Today's drop is a pretty good kick in the stomach that appears to have stemmed from Kudlow and Mnuchin having backed off of the President's Tweets from the G-20 dinner. This of course came after a nice lift on Monday (although Mark Yusko noted that from the opening print to the close the market was actually down and this is of course correct) that seemed to stem from a Tweet saying a deal had been reached. It appears they actually just agreed to kick the can down the road for 90 days but no one seems to know when the 90 day clock starts.

The yield curve made some progress toward inverting as two and three year Treasuries inverted with the five year Treasury. This isn't really an inversion insomuch as banks don't borrow at three years to lend at five but the two ten spread is flattening (about 11 basis points as I write this) as the ten year went below 3%. A yield curve inversion is recessionary because it impedes access to capital but it is important to realize that there is a lag effect of quite a few months and for now we don't have the type of inversion that leads to a recession. I am not denying it will happen but we are not there yet is my point.

The S&P 500's 50 day moving average (DMA) is about to go below the 200 DMA (Stockcharts.com has the two DMAs six points apart as of today) making what is called a death cross. Crossovers matter but the history of the death cross isn't necessarily terrible (Bespoke has written about this) but of course a death cross does occur at some point fairly early in a bear market (based on percentages it is still early if indeed a bear market has started).

I've been transparent about the steps I've taken for clients which were to buy BTAL back in May, I bough SH a few weeks ago, I sold VOX recently and PTLC flipped to cash a few weeks ago. I know what trade comes next if market circumstances dictate (not going to front run that obviously) but as I have been writing about for many years (this is the second bear market in the life of the Random Roger blog) and hundreds of posts that this is a very normal thing if it even is a bear market. The market goes down a lot (it is not down a lot yet) and scares the hell out of a lot of people, then it stops going down often for no reason at all and then it goes on to make a new high. The only variable is how long that all takes. If a bear has started, it is still early and if a bear has started it will likely last for a long time (18-30 months would be considered normal). That does not change the sequence of what I laid out above.

If all of this is normal, has happened before and you know how it ends (a new high in a few years, maybe sooner) then you have nothing to fear, you have no need to panic, you just need to stick to your strategy whatever that is. Like in 2008, I have provided a front row seat to how I manage these events for anyone who cares to look.

You have been through this before.