The action this past week has been, to say the least, dismal. However, the major lows that have been support for the bull market since 2009 continue to hold for now, but are under attack. We continue to watch these lows closely as a failure would likely accelerate selling.

This week, I am going to take a look at major sectors, asset classes, and markets to analyze the risk/reward of having money invested in any specific area. In every bear market, there are always opportunities, we just have to find them.

However, before I get into that, let me discuss why I believe we have currently entered into a bear market cycle. Last week, my friend Joe Calhoun at Alhambra Partners wrote a brilliant piece discussing what a bear market actually is:

“The definition of a correction as down 10% and a bear market as down 20% though are just arbitrary numbers agreed upon by no one and everyone. And those thresholds, despite recent history, are met quite frequently. 10% corrections come around every couple of years and most of them are over before most investors get a statement that might scare them into doing something stupid. 20% bear markets are also pretty routine, coming along roughly 1 year out of 4. Corrections and bear markets are generally over pretty quickly, even the ones that turn into financial crises. The 2008 bear market, from peak to trough, lasted 17 months; it only felt like a lifetime.

The real enemy of investors is not these fairly routine 10 or 20% downturns. The real enemy is the bear market that is associated with a recession or crisis, the one that knocks your equity block down by 40 or 50%. And actually, it isn't even the depth that is the real enemy. For most investors the enemy is time. Whether you are a younger investor still accumulating assets or a pre-retiree about to depend on your nest egg for income or a retiree already doing so, bear markets eat up your most precious commodity – time. Recovering from large drawdowns when you are young is obviously easier – if you stick to a plan and don't get laid off in the recession that caused it. But if you are about to retire, a bear market may mean you have to keep working for a few more years, putting a little tarnish on your golden years. If you are already retired it may mean something even more devastating – running out of money before you run out of years.

So, is this already a bear market? If we are measuring it for the S&P 500 in terms of price the answer is no. But in terms of time? I think, for a lot of people, we're already there.

In short, the trend has changed, the inflection point between trending higher and trending lower is long gone. If you're still looking for it, I'm sorry to be the one to tell you but you missed it.”

The chart below shows what Joe is talking about:

Notice that prior to both previous bull market peaks, price momentum turned from positive to negative. Likewise, at almost the exact peak, as NOW, the 13-Month moving average changed from a positive to a negative slope. 

Let's step back and take a look at the longer-term development and we can see the same behavior. The chart below is the 200-400 day moving average crossover I have discussed previously.

Importantly, as I have annotated, at the peak of the previous two bull markets, both the long-term Wm%R and Full Stochastics registered a trend change which was ultimately confirmed by the 200-dma crossing below the 400-dma. You were given plenty of warning to exit the markets BEFORE losing 20% of your money to validate the onset of a bear market. 

(Notice that during the correction in 2012, the registered sell signals of the Wm%R and Full Stochastics were never confirmed by a 200-400 dma crossover.)

Currently, both primary sell signals are in place and with only a 5-point spread between the 200 and 400 dma, the confirmation of a bear market will be registered in the days ahead UNLESS there is a rapid rise towards old all-time highs. Given the current fundamental, technical and economic backdrop there is little reason to expect such a sharp rise to occur.

63% Chance Of Loss in 2016

However, let me add a bit of statistical analysis to the discussion from my new friend Salil Mehta from the Statistical Ideas blog:

“A good chunk of Wall Street strategists have yet again quickly changed their minds on their 8% 2016 forecasts (markets are instead DOWN 8%.) Now that's a 12-month commitment!

The 16% gap (8% fantasy minus -8% reality) predicts nothing about the future, and anyway, the gap is in the middle of the recent pack! So let's explore all of the 10.5-month returns (from mid-February through December), from year 2000 onwards. The evidence shows that there is an awesome 63% chance for a negative 2016 (as illustrated below, 38 percentage points of which are due to additional negative returns from here).

But what on earth could these cunning “strategists” possibly say now that would be of interest? Nothing intelligent: the same inaccurate story for >20 years, which is a twice as high, 8% annualized from these depressed values. Equally sad, NONE are guessing that markets will go down further.”