Sunday, March 03, 2019

New Bull Market: Who Dis?

Yeah, that first ring must have really confused Alexander...!

Meanwhile, we keep ringing up higher highs on rallies and higher price lows on corrections.  We also continue to see the number of stocks registering short-term new highs expand.  This past week, for example, well over 1000 issues made fresh one- and three-month new highs, the strongest figures in quite a while.  New three-month lows have been consistently below 100.  

Even so, wannabe bears continue to talk about how we're overdue for a correction, how global economies are stalling, how trade wars will derail us, etc. etc., all the while missing what has been happening the last two months.

Who dis?

OK, so that's water under the bridge.  What can we typically expect in a year in which January and February start strong?

It turns out that Ryan Worch of Worch Capital has addressed this very issue in a post that pulls together a good amount of analysis.  He finds that early momentum during a year tends to continue over the following ten months.  There are corrections to be sure, but the vast majority of occasions have been higher by year end.

One possible reason that might be relevant to the current market is that the bull move of 2019 has been global.  Worch cites the work of Charlie Bilello, who finds that, out of 48 country-based ETFs, only two are showing negative returns thus far during 2019.  With central banks seemingly on hold globally, investors have been emboldened to own yield, own stocks, etc.  Bearing this out, my cumulative measure of NYSE stocks trading on upticks versus downticks has been relentless in making new highs.

As Bilello points out, however, every time is different.  None of us have seen this movie before, and that calls for a degree of humility.  Could war erupt or vicious trade wars?  Could we see major disruptions in a messy Brexit?  Of course.  Just as the Fed's turnaround at the end of the year turned equity markets around, surprise events could put us in reverse.

All that being said, momentum markets tend to correct more in time than price, as bulls late to the party look to add on any dips.  So far that's been the case.  Too, when we have pulled back, there have been enough bears that we see evidence of hedging in the put-call data and in the elevation of implied volatilities relative to realized vol.

At the moment, VIX has come down and we're not seeing the same level of hedging as earlier in the rally, so it may take more corrective action to shake out those late bulls and suck in the hopeful bears.  I have to say, however, that the number of traders I speak to who hold the view that we're moving to all-time new highs in a fresh bull market is close to zero.

Who dis?

Further Reading: