Overview: Worse than a Normal Recession?
The S&P500 lost 15% since the Bear Market Rally peaked in mid-August, and has just retested the mid-June market low and today is heading lower. Jim Cramer of CNBC recently stated “We’re now in ‘good news is bad news’ mode, because the Fed’s not going to stop bringing the pain until we see real deterioration.” Morgan Stanley strategists warned on Monday that the recent rally in the U.S. dollar is creating an “untenable situation" for riskier assets that could end in a financial or economic crisis. Morgan Stanley further warned on Wednesday that a corporate earnings recession may be coming that could be worse than a “normal” recession. Until the VIX volatility indicator exceeds 40, professional traders generally won’t believe there has been sufficient capitulation to confirm a market bottom. Currently the VIX is at about 30, indicating that the market bottom is quite likely lower. Slowing the economy means business revenues drop, earnings shrink, and stock prices follow suit. Similarities to 2008 abound.  Buckle up and “Don’t fight the Fed.”

Buckle Up Options
Our StormGuard indicator remains negative and is declining. Unfortunately, proficiently buckling up in 2022 has been quite a challenge – sharply rising interest rates have pummeled bond and treasury funds concurrent with the ongoing decline in the equities market. Many professionals are beginning to question the future viability of the classic 60/40 portfolio. The BlackRock 60/40 Target Allocation Fund (BIGPX), for example, is now down 20.6% YTD. Even the SPDR Gold ETF (GLD) has declined similarly over the past 7 months.
 
The 10% summer rally in long-term Treasuries was among factors that led a number of our Bear Market Strategies to select from this category in September. However, the Fed surprised many in September with the seriousness of its hawkish stance on inflation and interest rate hikes resulting in the further decline in bonds and treasuries. The two primary options for buckling up are described below.

Buckle Up - Basic
While StormGuard seeks to determine when equities markets appear to be bullish or bearish, the purpose of a Bear Market Strategy is to evaluate defensive fund candidates when StormGuard is triggered. We have recently reviewed our many posted Bear Market Strategies (that you may integrate into your own equity Strategies) to ensure their defensive candidates include a robust range of short-term to long-term bond options.  At this time, it appears that the more stable shorter-term bond candidates will be favored. If your Strategies employ an integrated Bear Market Strategy you are buckled up.

Buckle Up – Aggressive
Four of our Bear Market Strategies (BMS-G, BMS-M, BMS-S and BMS-X) employ one or more inverse (short) ETF candidates, such as SH, DOG, MYY, EFZ and RWM. If you believe more market-downside is coming and you want to hedge your portfolio, then employing one of these Bear Market Strategies may be of interest. The algorithms for these four Bear Market Strategies are aware that their fund candidates include inverse funds that will require special validation testing immediately following a market V-bottom that seek to prevent rebound losses. Note: If you have a combination of taxable and tax-deferred accounts, it will be more tax efficient to execute the hedging trades for your overall account within your tax-deferred account.
 

Parking a car with precision would be virtually impossible if there were only a few seconds of delay in your visual perception. Given that most economic indicators have one to six months of lag in response to stimulative action taken by the Fed or Congress, by the time economic indicators are reported and actionable, economic reality is already a few months further down the road. That, by itself, makes a soft landing virtually impossible. On August 31, it was unknown whether or not the market would retest the June lows. Today the S&P500 broke through the June low for a second time this week, resulting in a new 2022 market low. Still, having had no sign of capitulation but having steadily deteriorating economic news, it appears that the market is poised for another leg down. 

 

VIX History
When the VIX Volatility Index exceeds 40, it is believed to be a sign of capitulation indicating fear is rampant and rapidly declining prices are producing margin calls in over-leveraged accounts.