In last week’s update, I discussed the markets entrance into the “Seasonally Strong” period of the year to wit:
“The table below shows the statistics of the seasonally strong/weak periods of the S&P 500 from 1957 to present using the data from the Federal Reserve (FRED).
As noted above, there is a statistical probability that the markets will potentially try and trade higher over the next couple of months particularly as portfolio managers try and make up lost ground from the summer.
However, it is important to note that not ALL seasonally strong periods have been positive. Therefore, while it is more probable that markets could trade higher in the few months ahead, there is also a not-so-insignificant possibility of a continued correction phase.
Furthermore, the probability of a continued correction is increased by factors not normally found in more “bullishly biased” markets:
- Weakness in revenue and profit margins
- Deteriorating economic data
- Deflationary pressures
- Increased bearish sentiment
- Declining levels of margin debt
- Contraction in P/E’s (5-year CAPE)
(For visual aids on these points read: 4 Warnings)
Return Of The Bull, Or Bear Trap
The rally, driven by the highest level of short interest since 2008, has once again ignited “bullish optimism.” As shown in the chart below, the number of stocks on “bullish buy signals” has exploded in recent weeks.
While the “bulls” are quick to point out the current rebound much resembles that of 2011, I have made notes of the differences between 2011 and 2008. The reality is the current market set up is more closely aligned with the early stages of a bear market reversal.
However, with the markets extremely oversold following the August-September declines, the rebound in the markets was not unexpected. As I have repeatedly noted over the last couple of months, these strong reflexive rallies should be used to rebalance portfolios and reduce areas of excessive risk.
