Looking for signs of strength, not just absence of weakness.
Burden of proof is on the bulls to show that strength can persist.
At this point, we cannot know whether the current environment will ultimately end up bearing more than a passing resemblance to the 2008/09 financial crisis. There are, however, enough similarities between now and then that the comparison is worth considering.
Consider what we are seeing from a price perspective and across a handful of other indicators:
Price: Failed rallies have been followed by lower lows on the S&P 500 since the index peaked in January of this year. A similar pattern developed following the market peak in October 2007. The damage done to a 60-40 passive portfolio has been greater this year than at a similar post-peak point during the financial crisis, but it’s perhaps not a coincidence that prior to this year, the only time in the past quarter century that both stocks and bonds were underwater in back-to-back quarters was in 2008.
Liquidity: Currently more than three-quarters of all global central banks are raising rates. The last time equities contended with a globally coordinated tightening cycle of this magnitude were in the years leading up to the financial crisis.The current upward momentum in corporate bond yields has been seen in just one prior period in the past 40 years. The fall of 2008. Downward pressure on equities did not abate until after bond yield momentum had peaked and central banks had moved into easing mode.
Breadth: Despite impressive index level gains last week, every day had more stocks making new 52-week lows than new 52-week highs on the NYSE+NASDAQ. The 31 weeks in a row of more new lows than new highs (stretching back to Nov 2021) is the second longest such stretch in the past 40 years, eclipsed only by the 45 week stretch from May 2008 to Apr 2009. Rally attempts in early 2008 failed to produce breadth thrusts and, so far at least, that has been the case in 2022.
Sentiment: Bull-bear spreads on the AAII and Investors Intelligence surveys, as well as the NAAIM exposure index, are strikingly similar to the levels seen in Q1 2008. Earnings estimates were moving lower in early 2008 and that is the case currently as well.
As strong as stocks appeared last week, precious little was done to disrupt the trend or argue in favor of the emergence of a persistent rally. We will watch both our bull market re-birth checklist and tactical risk management models for evidence that this is changing, but the burden of proof at this point is on the bulls. Given the similarities to the past and risks in the present, we need signs of strength at this point, not merely hope in the continued absence of weakness.
