A funny thing happened on the way to the bear market…

By David Nelson, CFA

A funny thing happened on the way to the bear market this month. Despite the best efforts of short sellers, strategists and talking heads everywhere, markets worldwide have staged a stunning comeback with most up mid-single digits month to date.

World Equity Performance October


The September Employment report was the liftoff for a short covering rally as the month’s biggest gainers have been low quality challenged companies many of which today are still down significantly for the year.

A short covering rally does not a bull market make but it’s a start. The NYSE Bullish Percent Index which had remained negative since May reversed back in September to the upside only to flip negative a couple of weeks later. As a reminder this longer term indicator measures the percent of technical point and figure charting buy signals on the New York Stock Exchange. A 6% change in direction reverses course. Sounds like a small number but it moves like a battleship.


Last week the indicator flipped positive once again setting up what is considered Bull Confirmed status. No it doesn’t mean that a bull market from here is a lock but it’s another data point on the side of the bulls.

Oil & the Dollar


Oil strength and dollar weakness helped buoy stocks last week for two reasons. First, if oil can even stabilize at these levels concerns for many companies in the oil patch whose debt will roll over in the next few months might subside.


The inability of the dollar to break out to new highs helps U.S. multinationals who have been complaining about the negative translation and its effect on earnings for most of the year.


The acid test for the rest of 2015 will likely be Q3 earnings reports that start in earnest this week. More important than the actual numbers will be management commentary and guidance especially looking into 2016.

  • Are the effects of a strong dollar subsiding?
  • Is China getting worse?
  • Are managements comfortable about adding to cap ex?
  • What does organic growth look like for next quarter and beyond?

These are just a few of the questions analysts and investors will be zeroing in on over the next few weeks.

Does the commodity stock rally have legs?


The chart above gives me pause. The CRB RIND index measures industrial commodities and at least to date shows little sign of turning. If the recent turn in oversold commodity stocks is for real then this index will have to turn as well.

Growth has Outperformed Value Year to Date
IVW iShares S&P 500 Growth vs IVE iShares S&P 500 Value


Is the tide going out for growth?


Since the start of the correction as economic conditions weakened growth outperformed value. This isn’t surprising in that growth often gets bid higher as it becomes scarce. The recent bottom marked a distinct change in the market’s character with value taking the lead as investors seemed unwilling to push their favorite growth stocks higher. If this trend has legs then portfolio managers will need to adjust.

“The best battle plan goes out the window once the bullets start flying”
Veterans know exactly what that phrase means.

Investors sometimes face similar challenges and have to know when to throw out the playbook and adjust to changing conditions on the field.