May 17, 2021
Good morning,
We talked about the second year of a bull market – more corrections, deeper corrections, increased volatility (up and down) and much more emotionality. Last week we got all of that. To say nothing of my undamaged market decline vs personal travel record.
Is the latest sell-off the start of a major decline? The answer is “no” so far. If in fact it was time to “sell in May, and go away” then we would be seeing much more divergence and breadth weakness than we have seen thus far. The positive correlations between stocks, bonds and commodities are all persisting, making it more likely that the stock and commodity benchmarks will keep trending higher in tandem.
How will we know if a sell-off is leading a period of decisive weakness or is simply part of a consolidation within an ongoing uptrend? Data based indicators, primarily ones related to tape behavior (price change) will deliver the message. They will warn of worsening market performance when a majority of them drop into their bearish mode. Almost none of that has happened yet.
As long as liquidity remains abundant and the outlook for economic and earnings growth continues to improve, another bear market will be a low probability. The current market outlook includes elevated, 2nd yr. bull market, single-digit correction risk and so far lacks double-digit bear market risk.