Thursday, August 18, 2022

The simple Einhorn bear market checklist



We have used the Steve Einhorn checklist as a simple tool for determining the likelihood of a market downturn or reversal. It is based on 5 factors: problematic inflation, hostile Fed, prospects for a recession, investor sentiment, and valuations. We are currently showing three checks for a downturn. This is down from 5 in June and early July.

Inflation is still a problem even if there has been a peak. The Fed is still hostile to markets as rate increases continue to be expected. The market may view that this will change but the wording from the Fed is clear. The prospects for a recession are still high in all market indicators but labor although there is a large difference between the household and establishment signals. Investor sentiment has turned with massive short coverings and flows moving out of cash. This is  a factor that needs to be watched carefully. Finally, valuation have come down form extremes but there are still at elevated levels. The markets are not cheap just less rich. 

The market rally is from a lessening of concerns, but that is not the same as saying there will be a market upturn.

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