Courtesy of Doug Short.
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Thankfully it is Friday which means a rather volatile, and rough, week for stocks is coming to a close. This past week I did a rather complete technical review of the major markets globally noting a rising level of deterioration in prices. As I noted in that missive:
“However, since the beginning of the year, as the Federal Reserve has begun to reduce their “liquidity-driven goodness”, markets have begun to stagnate at the levels I identified earlier this year.
“This is something that I discussed previously. The chart below shows the historical correlation between increases in the Fed’s balance sheet and the S&P 500. I have also projected the theoretical conclusion of the Fed’s program by assuming a continued reduction in purchases of $10 billion at each of the future FOMC meetings.”
“If the current pace of reductions continues it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. “
With global economies and markets, beginning to deteriorate rapidly it is only a question of time before that weakness washes up on the shores of the U.S.
Currently, the markets remain entrenched with their bullish trend and have yet to violate any levels of important support. Since 2012, the 125 day moving average has acted as critical support for the S&P 500 during market corrections. Currently, that support is floating at 1937.
With the markets oversold on a very short-term basis a bounce is likely. IF the current bullish trend is to remain intact, keeping the bulls in charge, it will be important for the markets to make new highs. The failure to do so will likely put investors in jeopardy.
This weekend’s reading list of “Things To Ponder” is a look at the recent correction in the markets. Is this the beginning of a more major market reversion or simply an ongoing dip within the bullish trend.
1.) I Won’t Say Crash…But By Henry Blodget Via Business Insider
“For the past year, I have been worrying out loud about US stock valuations and suggesting that a decline of 40% to 50% would not be a surprise.
I haven’t predicted a drop like this, though I certainly think one is possible. I also haven’t made a specific timing call: I have no idea what the market will do over the next year or two. But I do think it is highly likely that stocks will deliver way below-average returns for the next seven to 10 years.
So far, the market has shrugged off these concerns: The S&P 500 is up about 8% from last fall’s 1,850 level.
That’s good for me, because I own stocks. But my concerns haven’t changed. And I’m not expecting this performance to continue.”
He lists three reasons for his concern:
- Stocks are very expensive on almost all historically predictive measures
- Corporate profit margins are still near record highs
- The Fed is now tightening
2.) 10 Reasons I Am Selling On Any Strength By Doug Kass Via TheStreet.com
“I was amused that several commentators in the business media this week couldn’t find specific reasons for the recent market drops. By contrast, I see not only weighty technical divergences and narrowing breadth but also a host of fundamental concerns.”
- Away from the U.S., economic activity is weakening.
- The European Central Bank faces the challenge of structural issues.
- Geopolitical pressures are rising outside of the U.S.
- Housing activity continues to pause, and its foundation is fragile.
- The automobile industry is exhibiting signs of peaking, and so are other durables.
- A strengthening U.S. dollar is dulling our economy’s prospects by hobbling U.S. export growth.
- Domestic growth remains sub-par and at “escape velocity.”
- Inflation continues to run below the Fed’s projections
- Personal consumption expenditures, in particular, look to be weakening.
- Payroll growth has fallen for the past three months.
3. Leading Indicators Roll Over To Sell Signals By Lawrence G. McMillan Via WSJ MarketWatch
“Moreover, several internal technical indicators have actually rolled over to sell signals (as we shall see shortly). Should one be worried? So far, one of the lessons of this nearly three-year-old leg in the bull market is that one should not anticipate a selloff, even if some of the indicators turn negative. It’s been a fairly consistent theme that breadth, volatility, and even put-call ratios might generate sell signals (in fact, in late July of this year and early April of this year, they all generated sell signals). However, as long as SPX holds above support, one must continue to respect the bullish case.”
4. Why BlackRock Is Freaking Out Via ZeroHedge
“Just last week, we explained why Blackrock – the largest asset manager in the world – is gravely concerned about the ‘broken’ corporate bond market. Simply put, thanks to The Fed’s continued presence in the Treasury market has left the corporate bond market a liquidity-starved ticking time-bomb if faith in the stability of defaults ever falters (with firm balance sheets at record high leverage) and “selling” begins. As the following chart from Deutsche Bank highlights, the current level of liquid assets as a proportion of total HY assets is about as low as it has been tracking data back around 25 years.”
5. Clear And Present Dangervia GaveKal Capital Blog
“There are four developments in the fixed income markets that represent a clear and present danger for stocks.”
- High yield spreads continue to widen
- Inflation expectations are plunging
- 10-year global bond yields are dropping
- Yield spread is narrowing.
Bonus: Signs Of A Top
In 1999, as the markets soared, day trading firms sprang up around the world as individuals were lured in by the easy money of the “Wall Street Casino.” In 2007, we saw individuals extracting liquidity from their homes to bet on the financial markets.
When asset prices begin to rise relentlessly, individual’s investment success breeds excessive confidence in their “apparent” skill. As you know, in both cases, the result was devastating and led to a massive destruction of personal wealth.
As we enter into the sixth year of a ripping bull market with little volatility, we see similar signs once again. BBC recently did a two part series covering individuals “trading their way to wealth” in the markets. With little education, skill or experience – these individuals are betting that they can “out think” the major players on Wall Street.
Importantly, notice that as these individuals tell you their story, they have only been investing over the past few years. They have never seen or experienced what happens during a real “bear” market, but there is little doubt that few will be left standing when it comes.
Part 1: Professionals (Players)
Part 2: Individuals (Suckers)
“Every day I get up and look through the Forbes list of the richest people in America. If I’m not there, I go to work.” – Robert Orben
Have a great weekend.
Originally posted at Lance’s blog: STA Wealth Management
© STA Wealth Management