What follows is an excerpt from this weekend's 276th Edition of Zenolytics Turning Points.
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MARKET UPDATE
This is not a bear market.
More importantly, the secular bull market remains very much intact.
Analysis of the markets that stems from any other conclusion, more specifically, that we have seen a shift into an intermediate to long-term bear market environment is doomed to failure as the foundation of the analysis naturally creates numerous faulty conclusions that will be systematically disproved by the markets as the secular bull market resumes.
Unfortunately, for investors that fall into the “bear market” trap, by the time realization occurs that this has simply been yet another correction within a bull market dressed in different color clothing, markets will be at or near new highs.
The problem of bull or bear market classification stems from the fact that investors continue to utilize a pre-March 2020 mindset when considering volatility in the markets.
The post-March 2020 volatility regime is a completely different animal altogether than anything in the pre-March 2020 markets.
Although the Fed has been attempting to remove liquidity from the economic system, the fact of the matter is that record liquidity remains. Liquidity drives volatility.
In turn, investor behavior changes, further exacerbated by financial information that piles onto a specific theme, whether that theme is recession or otherwise, causing investors to make seemingly informed decisions that are anything but.
Put as simply as possible, moving from one side of the boat to the other has never occurred in such a uniform, dramatic fashion as it does now. Further amplifying the situation is the fact that there are no more data advantages between investor classes.
What this does is to create exaggerated market moves based on data that is being disseminated simultaneously among all investor classes, creating identical reactions. As the volatility of the price action increases in a singular direction, investors both small and large tend to act on that data with more conviction, further driving price in the direction of the primary trend.
While liquidity has played an enormous role in the ultra-volatile markets of today, information distribution and the near uniform conclusions drawn from such information also play a major role.
More than ever, investors are analyzing identical information with the direction of the primary trend influencing their bias more than any other single factor.
All of these factors taken together create massive moves in both directions. The March 2020 decline, followed by the record rally taking place afterwards was the first iteration of the new volatility regime.
The “inflation led, Jerome Powell with a black hood and hatchet chasing investors” decline of 2022 will be the next example of the new volatility regime, with the rally taking place during the second half of 2022 likely matching or exceeding what we experienced in 2020.
While this conclusion may seem illogical based on present fundamental conclusions, market cycles within a secular bull market simply work this way. Explicitly stated, as a secular bull market progresses, each successive decline and subsequent rally become more volatile until the secular bull market ends.
Investors utilizing the same definitions for what constitutes a bear market as they were 15, 30 and 50 years ago are no different than those who benchmark present day computing power against computing power from the 60s, 70s or 80s.
The technology has evolved infinitely.
The markets have also evolved infinitely.
We are functioning under a completely different set of rules in a QE led economy.
Understanding these rules is more paramount than ever.
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