by ilene - August 25th, 2015 9:05 pm
Courtesy of John Rubino.
Back when society’s balance sheet was reasonably solid, the occasional bear market was no big deal. A 20% drop in the average S&P 500 stock would scare investors and lead to slight declines in consumer spending and government capital gains tax revenue, but the overall economy would barely notice such a minor speed bump.
But that was then. Like a person with an impaired immune system, today’s developed world is so highly leveraged that a shock of any kind risks catastrophic complications. This is why governments and central banks now meet every incipient crisis with quick infusions of newly-created cash and lower interest rates. We can’t risk letting markets be markets any more.
Among the many things that might go wrong if equities fluctuate normally, state and local budgets that depend on capital gains revenues and sales taxes (both of which tend to fall in bear markets) would take a potentially serious hit. From today’s Bloomberg:
The gradual recovery of U.S. state budgets, which collectively anticipated 3.1 percent more revenue this year, may be reversed by stock market declines that imperil income taxes, their largest source of money.
Since 2011, states have been restoring education, health care and other programs slashed during the recession, and the trend was forecast to continue this year, according to the National Association of State Budget Officers in Washington.
Monday’s 3.9 percent decrease in the Standard & Poor’s 500 Index, continuing the index’s worst downturn since the financial crisis in 2009, spells trouble for states like California whose reliance on capital-gains taxes makes them vulnerable to swings in equity markets. The market correction comes after a rout in oil prices that has stung states including Alaska and Texas that rely on revenue from petroleum production.
“Before the last week-and-a-half or so, states have been in the best relative fiscal health since the end of the Great Recession,” said Arturo Perez, fiscal program director for the National Conference of State Legislatures in Denver. “This is a big game of wait-and-see.”
In surveys of fiscal officers from all 50 states conducted between February and April, the budget officers group found that
by phil - August 25th, 2015 8:18 am
We need 3% gains today.
That's right, after dropping 15% our 5% Rule™ says a weak bounce should be 20% of the drop and that's a 3% bounce off yesterday's close just to keep us a tiny bit bullish and, thanks to China's expected market save (more on that later), we're getting it pre-market. We already played for these bounces, of course – as I noted in yesterday's morning post, we wanted to go long in the Futures at:
- Dow 15,840 (/YM), now 16,320 - up $2,400 per contact
- S&P 1,850 (/ES), now 1,946 - up $4,800 per contract
- Nasdaq 4,000 (/NQ), now 4,200 - up $4,000 per contract
- Russell 1,080 (/TF), now 1,152 - up $7,200 per contract
That's $18,400 (per contract) in gains from our suggestions in yesterday's morning post. Whatever you do DO NOT SUBSCRIBE HERE or you will get useful information like that sent to you pre-market every day. Of course, those gains are nothing compared to the shorts we abandoned at the same levels from last week's Live Trading Webinar, where we featured a short on the Dow Futures at 17,477 which were up $8,185 per contract at our target low of 15,840.
I was the first person to hash-tag #BlackMonday (which trended), tweeting it out at 5:05 am, long before the Futures fell off a cliff. We expected the sell-off due to lack of China intervention and, by the time I was writing the 8:20 post, we did a very good job of calling the bottoms but, at 9:42, in our Live Member Chat Room, I said:
I think this is almost a flash-crash. Someone (thing) is selling with abandon. I think since we wanted to grab a long, we should and I nominate Dow at 15,600, which is more than 10% down for at least a bounce and the DIA Sept $155s at $6.75 were $13 on Friday and I like them for a gamble with the intention of selling the $159s for $6 on a bounce (now $5.20) so 20 of those for the 5% Portfolio with a stop at $6 or if the Dow can't hold 15,600.
by ilene - August 24th, 2015 8:01 pm
[The art of catching a falling knife should be practiced with a helmet and very thick gloves!]
Courtesy of Wade of Investing Caffeine
“In the middle of every difficulty lies an opportunity.” ~Albert Einstein
It was a painful week for bullish investors in the stock market as evidenced by the -1,018 point drop in the Dow Jones Industrial Average, equivalent to approximately a -6% decline. The S&P 500 index did not fare any better, and the loss for the tech-heavy NASDAQ index was down closer to -7% for the week.
The media is attributing much of the short-term weakness to a triple Chinese whammy of factors: 1) Currency devaluation of the Yuan; 2) Weaker Chinese manufacturing data registering in at the lowest level in over six years; and 3) A collapsing Chinese stock market.
As the second largest economy on the planet, developments in China should not be ignored, however these dynamics should be put in the proper context. With respect to China’s currency devaluation, Scott Grannis at Calafia Beach Pundit puts the foreign exchange developments in proper perspective. If you consider the devaluation of the Yuan by -4%, this change only reverses a small fraction of the Chinese currency appreciation that has taken place over the last decade (see chart below). Grannis rightfully points out the -25% collapse in the value of the euro relative to the U.S. dollar is much more significant than the minor move in the Yuan. Moreover, although the move by the People’s Bank of China (PBOC) makes America’s exports to China less cost competitive, this move by Chinese bankers is designed to address exactly what investors are majorly concern about – slowing growth in Asia.
Although the weak Chinese manufacturing data is disconcerting, this data is nothing new – the same manufacturing data has been very choppy over the last four years. On the last China issue relating to its stock market, investors should be reminded that despite the massive decline in the Shanghai Composite, the index is still up by more than +50% versus a year ago (see chart below)
Fear the Falling Knife?
Sector Detector: Finally, market capitulation gives bulls a real test of conviction, plus perhaps a buying opportunity
by Sabrient - August 24th, 2015 5:37 pm
Reminder: Sabrient is available to chat with Members, comments are found below each post.
Courtesy of Sabrient Systems and Gradient Analytics
The dark veil around China is creating a little too much uncertainty for investors, with the usual fear mongers piling on and sending the vast buy-the-dip crowd running for the sidelines until the smoke clears. Furthermore, Sabrient’s fundamentals-based SectorCast rankings have been flashing near-term defensive signals. The end result is a long overdue capitulation event that has left no market segment unscathed in its mass carnage. The historically long technical consolidation finally came to the point of having to break one way or the other, and it decided to break hard to the downside, actually testing the lows from last October! Many had predicted that the longer we go without a meaningful pullback, the harder and scarier it would be when it finally broke down. In addition, program trading kicked in to deleverage positions, with preset algorithms exacerbating the selling and volatility.
Actually, there are four main issues creating uncertainty for investors: China’s true growth outlook, commodity prices, the Federal Reserve’s plan for rate hikes, and the upcoming corporate earnings season. But all is not lost, and a capitulation event like this also provides a healthy cleansing, providing the opportunity for capital to transfer from weak to strong hands, and now there is suddenly a lot of room to the upside — if bulls can keep their composure and regain their conviction.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
With signs of slowing growth reducing demand from China, coupled with further devaluation of the yuan, other exporting nations are racing to debase their currencies in order to stay competitive. But as I discussed last week, the devaluation of the yuan (which is pegged to the dollar and thus must manually adjust the valuation) pales in…
by phil - August 24th, 2015 8:20 am
People are starting to FREAK OUT!
It's been so long since we've had a good old-fashioned market correction that many "investors" think the World is ending and are selling everything that isn't nailed down. Of course, in some cases they are right – especially if they are the kind of momentum chasers who piled into Netflix (NFLX) at over 250 times earnings or Tesla (TSLA) about the same or Amazon (AMZN) at 100 time earnings as they looked to carnival barkers like Cramer and Co. to hit the noisemakers and tell them how wise they were for following all the lemmings off a cliff.
Skip to the last four minutes of this interview from last Wednesday Morning, where I explain why Netflix was our top choice for a short, now 25% ago and I also called for a 10% market correction, now (including the morning's futures) 8% ago. That morning, we were also shorting the Dow Futures (/YM), which were at 17,000, Russell Futures (/TF) at 1,205 and Nasdaq Futures (/TF) at 4,525 using the strategies we had discussed at the end of July in: "Using Stock Futures to Hedge Against Market Corrections."
Aside from the Dow contracts now up $5,500 at 15,900, Russell contracts gaining $8,500 at 1,120 and Nasdaq Futures gaining $10,500 at 4,000, we also suggested bullish play on gold that has already jumped 30% in two weeks. Even in this downturn, I was able to point out to our Members early this morning that there was a good entry on Gasoline Futures at $1.33 on the /RBV5 contracts (Sept) and we're already back at $1.345 for a $650 per contract gain.
As noted in "Using Futures..", there are ALWAYS opportunities to pick up nice gains in the Futures market, no matter which way things are going. I also sent out an alert to our Members with Technical Analysis of the current market conditions and you can see it on Twitter (our 5:05 am tweet) if you'd like – as I won't rehash it here other than to say our expected 10% correction is right on track.
by ilene - August 23rd, 2015 6:38 pm
On Friday, ahead of the closing stock rout, we forecast that the biggest risk for anyone staying long over the weekend was a disappointment out of China, where the sellside had gotten so excited that a 50-100bps RRR cut was imminent, that the lack of one would surely send futures sliding.
As noted earlier, everyone is expecting a 50-100 bps RRR cut this weekend. The risk is there isn't one http://t.co/oU5t45ERWw
— zerohedge (@zerohedge) August 21, 2015
Sure enough, as we noted earlier today, much to everyone's surprise and disappointment, the PBOC did nothing (for reasons we speculated upon earlier).
Which bring us to this evening's S&P futures, which opened for trading minutes ago, and as expected gapped by over 0.6% after the Chinese disappointment, down 19 points to 1952 and looking quite heavy as several key support level as in the crosshairs.
The key carry driver for all US equity action, the USDJPY, is not looking too healthy either and just hit its lowest level since July 8 as the Yen is soaring on carry trade unwinds:
To be sure, the real action in tonight's illiquid market will not be in US futures, at least not until Europe opens, but in China, where it will be up to the "National Team" to prevent a massive rout now that the PBOC has told stocks they are on their own for the time being..
Also keep an eye on crude: after an initial gap lower the black gold is trying to stabilize the drop. Perhaps it is waiting for Gartman to confirm he is still long before crashing below $40.
So what happens next? It's clearly anyone's guess so here courtesy of Bloomberg is a selection of quite a few guesses and what some pundits, many of whom predicted smooth sailing unttil year end, are suddenly and very dramatically changing their tune.
- “It’s going to be pretty deep. … We’re in the camp that this is not yet a big move. It’s scary, and those last two day trends look