Time To Start Reloading Shorts?

The bear market bounce that I said was odds on two weeks ago in “Bulls Fighting to Save March” has happened. The SPX has jumped 25% off its 3/23 low.

The question now is whether the bounce is: only getting started, midway, or run its course? Since we don’t yet have a crystal ball, we have to look at how past bear market retraces have played out in order to make some inferences.

Going all the way back to the 1920s, the index that would eventually become the S&P 500 has registered 14 bear markets as defined by a 20% fall from a record high. Within these bear markets, the market has staged a bear market rally in excess of 15% on 19 occasions.

Here’s the list of each of these bear market rallies along with their duration in days and their percentage increases from trough to peak.

The median bear market rally lasted 35 days and rose 19%. But within that data, there’s a lot of dispersion. The duration of rallies ranged from just 2 days to over a year, with 1947’s rally lasting 393 days. And while some rallies stalled out at just 16% one bear market retrace ran up as much as 46% in 1929.

This bear market retrace can go either up or down from here. It’s still well within the normal range of bear rallies. At 12 days its duration is on the shorter end while its rise is already above the average bear rally return.

I’m of the opinion that the outcomes are skewed to the downside from here. Maybe we get a dip followed by one more run higher to suck in the last of the bulls. But this move is starting to look heavy.

Most of the major indices are up against their upper Bollinger Bands. See the chart below of the SPX (you can click on charts to enlarge). The next 2-3 days will be the tell… can the market pullback from here and make another push past yesterday’s high? Or has it sucked in enough eager bulls to corral into round 2 at the slaughterhouse?

I’m looking at getting long bonds and long gold if the answer is the latter. I think the 10yr yield is going to zero. I remain of the opinion that the market is still vastly underestimating the destruction that’s occurring right now to the real economy.

15%+ unemployment is in our very near future and that’s a lock. I think it’s crazy that a large swath of the market thinks that we’ll be able to just magically restart the economy once these lockdown phases end and get everybody back to work.

Go and talk to any real business owner and you’ll hear a whole other story.

The selloff that we’ve seen in the market so far is the start of the bear market, not the end. The median bear market lasts 81 days past the initial 20% drop to trough and experiences an additional selloff of 18.41% on average.

So while we could very well run a little higher from here. The odds very much favor another retest if not a full-on break to the downside of this broadening wedge top.

Stay safe and keep your head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

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He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

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Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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