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Market Correction or Beginning of a Bear Market?

November 29, 2018

Is this October/November swoon in the market a ‘garden variety’ correction – meaning it will be short lived? Or is it the beginning of something more sinister for the markets? Is it the beginning of a longer bear market?

This is the number one most debated topic on Financial news networks these days. The short sellers have been out in force trying to drum up interest in the potential for further malaise. While the more traditional asset managers that are long only are spending a lot of energy defending valuations. 

This debate is as old as time - but its always louder in the midst of a sell off. Of course, having people on both sides of the market is what makes a market!!

Since our Equity Long Short portfolio pivots its exposure according to our proprietary market signals, we have a view on the market that is implied from those signals. 

Remember that our signals showed the stress the market was beginning to experience which is why we increased the bearish protection on all accounts back on October 8th

What do our signals say about this key question? 

Our signals in October and thru today tend to point more towards a correction and not the beginning of a prolonged bear market. The signals update every day and they could still point to a deeper sell off. But for now, the signals tend to show this sell off as transient and likely to rebound.

Can you explain these signals a little more?

There are two key signals we see that make us believe this is not the beginning of a deeper sell off:

1. The companies with the worst digital traction in our database have not performed materially worse than the best digital companies. In the beginning of a strong down market, the worst ACTUAL companies would usually always be punished worse than the best. The difference in price movement between these groups has not been material at all. And remember that our earnings calls were very accurate this last quarter. But the price difference was not very material between the best and worst digital companies.

To believe the sell off is going to be worse, we’d need to see leadership DOWNWARD in price among the worst digital performers.

2. The future earnings estimates (ie, 1-3 year projections) from the collective Wall Street banks for the markets and the bull/bear tails have not weakened by a material amount. In particular, the weaker digital companies have not been revised downward by a material amount over their stronger digital counterparts. 

Until forward earnings start coming down materially, most large investment houses are going to remain long their stocks. If we see cracks in these numbers (particularly the weakest companies leading the long term revisions downward), we will adjust our posture.

These signals could still change – but unless the weakest digital performers are leading the way down, the sell offs are probably transient in nature and defensive postures will be used in moderation.

Hope this helps you understand our view on the markets.