Why this is a correction and not a bear market

Trend Model signal summary
Trend Model signal: Risk-off (downgrade)
Trading model: Bearish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”

My inner trader uses the trading model component of the Trend Model seeks to answer the question, “Is the trend getting better (bullish) or worse (bearish)?” The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

A glass half-full, or half-empty?
Wow! I realize that when I tactically turned negative on stocks last week, this kind of downdraft would happen (see The road to a 2016 market top). Regardless, David Rosenberg had an excellent piece of advice with his “Breakfast with Dave” last week for investors (for traders, it’s another story):

I have three pieces of advice of my own to all the nervous nellies out there, not to mention the nattering nabobs of negativity, turn off the television, focus on the big picture, and review your asset mix.

1. Are we facing a war or revolution that will cause the permanent impairment of capital (e.g. Russian revolution, World War II, US Civil War, etc.)?
2. Is a recession on the horizon?
3. Is the Fed being overly aggressive and tightening the US economy into a recession?

The answer to the first question is obviously no.

I also see minimal risk of a US recession (see my Recession Watch page). Using the framework used by New Deal democrat’s approach of adopting the Geoffrey Moore long leading indicators, recession risk is low. As well, Georg Vrba`s work also comes to a similar conclusion.

As for the third question, the Fed is just starting a tightening cycle and they have made it clear that they plan on being slow and gradual. Moreover, various Federal Reserve officials have indicated that they are tolerant of inflation being slightly over target in order to bring the economy back to full employment. So the Fed can hardly be characterized as being aggressive.

In short, the triggers for a bear market are not there. But what`s spooking the markets? I can summarize the worries as:

• Geopolitics: The North Korean H-bomb test and rising tensions between Saudi Arabia and Iran;
• China; and
• Slowing growth.