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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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