Weekend Reading: Markets Send A Warning

Over the past few months, I have repeatedly written about being stuck within an ongoing trading range and warned of the dangers of a downside break. From last week:

“The problem with going nowhere is that it makes managing money much more difficult. With the market having broken the bullish trend line from the February lows, as shown below, along with remaining overbought with a sell signal in place, the risk to the downside outweighs the potential for a further advance currently. With downtrend resistance from the previous highs pushing prices lower, the risk of a break below 2125 is elevated. Being a bit more cautious given the current technical backdrop will likely be prudent.”

Well, it didn’t take long as this past week the markets broke through that support and are now testing the 200-dma. With sell signals in place, the downside pressure currently remains as shown in the chart above by the vertical dashed black lines.

As I stated in yesterday’s post I expected a bounce on Thursday.

“Importantly, the violation of that crucial support suggests a further correction is likely. However, by the time a break is completed, the market has already become short-term oversold and a “sellable bounce” is very likely. As Bloomberg noted:

“The index’s longest-ever run of losses was eight days, matched at the height of the financial crisis in October 2008. The S&P 500 started falling on Monday, September 29 and saw lower closes at the end of every trading day until October 10, in what was its worst week in history.”

With the markets now matching an eight-day decline as of Thursday’s close, there is an extremely high likelihood of a bounce, particularly next week following the election. In order for the markets to regain their bullish footing, and reverse some of the technical deterioration, an advance above 2150 would be required with an eventual breakout to new all-time highs.

Given the stronger dollar, weak economics, over-valuation, and rising rates, there is mounting evidence that we have seen the highs for this current market cycle. Therefore, it is advisable that rallies back towards 2125 are used to rebalance portfolios, raise higher levels of cash and reduce overall portfolio risk. After all, we can’t “buy low” if we didn’t “sell high” to begin with. 

In the meantime, here is what I am reading this weekend.

Fed / Economy

• Fed To Pensions: Suspend Disbelief by Danielle DiMartino-Booth via Money Strong
• Clocks Fall Back & Consumer Spending May Too by Sarah Ponczek via Bloomberg
• Endless Presidential Campaign & The Economy by Steve Goldstein via MarketWatch
• Restaurant Recession Has Arrived by Tonya Garcia & Ciara Linnane via MarketWatch
• Economic Anxiety Isn’t Behind Trump by Anatole Kaletsky via MarketWatch
• Would Higher Rates Boost Growth by J.Bradford Delong via Project Syndicate
• Obama’s Economic Commentary Is All Wrong by Steve Forbes via Forbes
• Why The ECB Will Print, Print, Print by Yves Smith via Naked Capitalism
• Fed Won’t Say What It Should by Narayana Kocherlakota via Bloomberg
• Fed’s Tactical Advice Shouldn’t Reflect Strategy by Scott Sumner via The Money Illusion
• Irrational Tossers by Buttonwood via The Economist
• Recessionary Conditions Persist by Ironman via Political Calculations
• Yellen Questions Reveals Slim Knowledge by John Cochrane via The Grumpy Economist
• Consumer Warning As Auto Repo’s Soar by Tyler Durden via Zero Hedge
• Peak Auto Sales? by Aaron Layman via AaronLayman.com

Markets

• Will Falling Asset Prices Trigger A Recession by Mike Shedlock via MishTalk.com
• Investors Must Be Contrarians by Tren Griffin via 25iq
• Investors Betting On Inflation by Luke Kawa via Bloomberg
• When Will The Great Crash Begin by Richard Dyson via The Telegraph
• Bonds Find Welcome Floor by Lisa Abramowicz via Bloomberg
• If The Market Is Going To Crash… by Alex Rosenberg via CNBC
• More Reasons To Worry About Stocks by Michael Kahn via Barron’s
• Market Sends A Miserable Message by James Mackintosh via WSJ
• Market Timers So Bearish It’s Bullish? by Mark Hulbert via MarketWatch
• Investors Have Given Up Beating The Market by Anthony Mirhaydari via Fiscal Times
• To Everything There’s A Season by Doug Kass via Real Clear Markets

Interesting Reads

• Alpha Wounds: Lack Of Independent Judgement by Jason Voss via CFA Institute
• Companies Lose Billions On Stock Buybacks by Bernard Condon via AP
• Here’s Whats Wrong With Gold by Greg Guenthner via Daily Reckoning
• Ballot Measure Could Upend Porn Industry by Kari Paul via MarketWatch
• Avoid The 7-Scariest Retirement Mistakes by John Wasik via Forbes
• Financial Decisions Postponed For Election by Helaine Olen via Slate
• Candidates Should Be Discussing Poverty by Nicholas Kristof via New York Times
• Difference Between Comedians & Everyone Else by James Altucher
• Could BlockChain Prevent A Rigged Election by Brian Kelly via RCM
• Recessions, Predictions & The Stock Market by Pater Tenebrarum via Acting-Man blog
• Factor Shift: What Isn’t Working Anymore by Jennifer Thomson via Gavekal
• Valuation Measures Far Beyond Double by John Hussman via Hussman Funds
• Investors Over Prepared For Election Volatility? by Dana Lyons via Tumblr
• This Economic Flag Is At Half Mast by Jesse Felder via The Felder Report

“Passive Investing Is The Path To Mediocrity” — Doug Kass