Sell in May and Go Away? Check the ‘Bear Market Checklist’

According to the Chief Investment Strategist of Morgan Stanley, none of the 6 items are ticked in his checklist. However, only 2 items can be proven empirically – Bond spreads and Stock prices. It is debatable whether current stock price valuation are stretched (I personally think so, but it is only a one man opinion). Investor Euphoria? Seems like it’s present to me but again hard to prove either way. Recession looming? Doesn’t seem likely but don’t forget that Q4 GDP came in at -0.1%, hence anything can happen.

And finally, is the Fed tightening monetary policy? Fed certainly hasn’t done any tightening actions, but recent minutes suggest that a significant portion of voting members wish to see the end of QE in 2013 or 2014. Ben Bernanke shock the world last week by suggesting that anything could happen, including an expansion of current QE initiative, but reaction towards that declaration is rather mute, suggesting that market may not truly believe what Helicopter Ben is saying.

So technically Darst is correct, in that none of the items have been confirmed, but we are awfully close to ticking 3-4 of the checkbox, or perhaps they are already checked, just that we are not aware. Looking at price technicals, we are definitely not in a bear trend. But can price potentially reverse in the future? The likelihood is always there.

David Darst has six boxes on his bear market checklist, and none of them are filled in yet.

The Morgan Stanley chief investment strategist is a realist—cautious but not cowering, optimistic but not overzealous.

So when he looks at the current bull market, he certainly sees danger that conditions could change, particularly in the case of policy mistakes.

But the current trajectory is higher.

“The market’s running,” Darst said during the opening day of the SkyBridge Alternatives Conference in Las Vegas. “When cookies are passed, grab the cookies and realize they may not come back around again, and it’s not always going to be thus.”

The checklist:

Is the Federal Reserve tightening monetary policy?
Are stock price valuations stretched?
Is investor euphoria present?
Are bond spreads widening?
Is there a recession looming?
Are transportation stocks, small caps and bank stocks retreating?

“Right now we are 0-for-6 in the bear market checklist,” Darst said.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu