Market Correction or Bear Market? This Could Change How You See Aprils Drop

First off, I apologize that last week’s video was so long. I’ll keep this one short, I mean why bother make it a long video, with as much news and changes from the White House every few hours or days, by the time I write this, its reviewed by compliance, filmed by Erik, edited, and posted it takes about 5 days and the world could change again!

The SP500, after essentially peaking Dec 6^th, my bday, at just under 6100, then meandering between 6125 and 5825 for 3 months into March, tanking on the frictionary tariff policies of the current administration, the index looks to had made a low on April 7^th.  That’s a -21.4% peak to trough intraday move lower, and almost -19% if you are using closing prices. Technically, based on conventional market definitions, this is a “correction”, but most watching their portfolios, heavily concentrated in technology and consumer discretionary stocks know that many of their holdings and maybe their overall portfolios are in a bear markets defined by > 20% losses.

The trillion dollar, yet currently unanswerable question is was April 7^th “A Low or The Low for the overall S&P500 index and USA stocks.  Ex a few periods like the GFC in 2007-08 and the popping of the speculative Dot.com bubble frenzy in 2000-01, which did proceed longer and deep recessions, history says enough damage has been done and one should be adding to desired positions over the coming weeks and months.

Here’s a log chart of the SP500 since the end of the GFC in 2009.  We’ve been below the channel for a few months during the Covid lockdown and its recession. And we’ve been above the ascending channel for a few months during the euphoria of post Covid reopening. More recently, we’ve gone from the top of the channel at around 6100+ post 2024 Presidential election when the vast majority of investors, including ourselves were promised carrot approach, pro-growth policies and deregulation and we’ve now gone to the bottom of the channel the last 3 months as those initial hopes were dashed and instead investors got the stick policies of enormous and ever changing tariffs, DOGE cutbacks and other frictionary policies.

Historically, if we aren’t entering a prolonged recessionary period, this graphic would say its time to be a better buyer than seller.

But Chris, the S&P 500 just passed its dreaded Death Cross!  You can’t buy it now you might be thinking.  I know a few RIA’s in the Southwest whose entire multi-billion dollar AUM  practices were built on this one metric because it worked once for them.  Their marketing spin and claim to fame or one hit wonder, “We got you out!”.  Of course, they fail to divulge that they never got their clients back invested materially and missed out on years and near decades of high stock returns the last 15 years.

First off, the death cross, which is when any assets price of its 50-day simple moving average crosses below its 200-day, is historically not a reliable indicator.  Yes, it did perform well during secular bear markets such as GFC and Dot.com crash, but outside those types of longer-term bear markets, its reliability is mixed at best. Maybe it use to work a lot, but with the advent of modern information dissemination and electronic trading, price moves, both up and down happen much quicker.

According to Bruce Wood Capital and others, since 1950, there have been 37 Death Crosses in the S&P 500. While the death cross did flag major bear markets like 1974, the dot-com bust, and the global financial crisis, most of the time it’s isn’t useful. The facts: Statistically speaking, 78% of all Death Crosses end with the market higher.

The average return during a Death Cross is +2.0%, and there have only been 4 instances where the S&P 500 was down more than -10% at the completion of the Death Cross.  Seems a bit of a lagging indicator to me.

FWIW, the late 3qrter 1998 LTCM hedge fund blowup period, which was mid Dot.com buildout that we’ve previously referenced when the S&P 500 dropped over -21%, tech tanked, semiconductors dropped, the dollar fell -10% was also one of these “death cross” periods.  No, it’s not exactly the same as the Fed did cut rates then but back then the S&P 500 retest its lows over the next 3-4 weeks and went on to make new and substantial ATHs over the coming 12 t0 18 months.

We’ve previously shared this 1998 LTCM comparison, mid Dot.com overlay path, but here’s another take on the same potential outcome from Christo Barker at Fischer Investments.

I know you’re saying to yourself it’s different this time.  Maybe it is. But so far, it looks and feels a lot like it did back then.  The SP500 dropped about -22.4% peak to trough in about 2 months back then into peak global uncertainty and hedge fund blow up and forced liquidation.  The S&P 500 recently fell almost exactly the same % peak to trough, using intraday highs and lows.

But Chris, I’m sure back then with the Dollar being the world’s reserve currency there was a flight to safety of the USA dollar.  Everyone wanted to hoard dollars and I’m sure the DXY rallied back then.  Well the answer there is also, no it played out near exactly the same and the dollar declined almost exactly -10% back then during LTCM.

Ok but back during Dot.com growth was great, I’m sure oil was fine but now its been dropping for almost a year.  Big Difference Chris.  So I looked it up.  Pretty much the same.  dOil was a dog in 1998 and eclined into LTCM in October and troughed on that day In 1998.

As much as we heard for 2 weeks that the Fed is on hold and heard the President berating the Fed Chairmen to cut rates, the Fed is on a rate cutting cycle. They are currently paused and not cutting like most of the rest of the world precisely due to the short term inflationary impacts of this Administration own tariff policies.  What I heard in Powell’s speech was, “I want to cut rates”. I’m just waiting on the reason.  Investors, he mentioned real time inflation breaks evens flat to dropping.  That is a Fed Chairmen who is watching real time data, not just survey data which has rarely been predictive.

Investors have rarely been this fearful and sentiment this negative, and historically when its been at these levels, you’ve been better off buying and walking away for 12-18 months than selling.  Per Lance Roberts at RIA here in Houston, net bullish AAII sentiment, as low as? Covid market lows, 2022 Fed Taper tantrum lows, and yes near GFC 1q2009 lows.  Looking back would you have been better off buying or selling with perfect hindsight?

Investors, I don’t know nor does anyone.  I do know that historically, If and I mean if we are not entering a recession, an economic recession called for many times over the last 4 years by many bears and doomers, then those early April lows are the number one should trade against.  That one should be buying and adding to stocks on any forthcoming pullback or retest of that area.

Seems to me Friday April 11^th, was the likely low in many things for the next 9-12 months.

Yes, I know that earnings visibility is almost nonexistent short term. However, it always is at lows.  Remember stocks are discounting mechanisms looking forward into the future.  A great chart from Josh Brown and another from Michael Batnick and the Irrelevant investor reminding investors how far in advance stocks bottom before the economy improves and earnings visibility returns.

Price bottoms almost 9 months before earnings due in bull markets. As long-term investors like to remind newbies, the market doesn’t wait for an all clear.    Stocks anticipate turns.  The market doesn’t wait.

We hear a lot from prospects that the markets are too volatile right now. I’m going to wait until things settle down.  I get it.  When things are moving this fast it feels horrible.  However, historically, this is exactly when individual investors should be slowly adding to their long-term stock allocations not retreating.  Why? Because time is on your side.  Volatility has ramped because there are many traders being forced to sell at the lows.  Being “derisked” being blown out for taking excessive risk at the wrong time.

A great table from Jay Kaeppel at Sentiment trader, shows the returns of the Nasdaq 100, tech heavy index AFTER the VIX crosses back below 45 like it did early Friday April 11^th.

Yes, you are reading those numbers correctly.  A 94% 1-year win rate with +42% average return, median return of 46.6% and very high hit rate.  And yes, investors this does include the LTCM blow up time of late 1998 during dot.com that we previously noted.

Historical volatility spikes like we just saw are buy and mold points, not pull the rip cord and eject points.

No there is not a lot of good economic news out there on the screens right now.  These are definitely the times that are stressful for investors and those cared with managing others savings and financial plans. Can the markets go lower, of course there are no guarantees. But at extreme levels of volatility historically, equities being long term assets whose returns are measured in years not weeks and months, its been better to add to investments slowly rather than panic and pull the ripcord.

Regardless of the path for the economy and financial markets in the next few months, the investment team at OHFG will be here manning the ship and adjusting our models and long/short, hedged equity fund where we can.

Until next week, have a blessed weekend and know that the OHFG team is doing what we can to plan for you and your family’s future regardless of what stage you are at in your career or retirement.