No risk on for you! End of the rally?

This could be the end of the bull market as we know it.  Momentum has faded and growth stocks are being sold the hardest.  All the major indices are now in correction.

Look out below, we could easily see a re-test of the uptrend from 2009 at 1800 on the S&P 500.  Failure there opens up equities for a nasty bear market.

Futures paint dim picture of tomorrow

Selling pressure continues overnight as the week started off with a haircut on all major US indices.

Market summary as of 11:05 pm EST.

Dow futures are down nearly 250 points, adding to the losses from Monday.

Nikkei slammed down over 400 points.  Volatility still a consistent theme.

Shanghai C shares down almost 2.5%, giving up the ground made back yesterday during a similar sell-off.

WTIC oil futures are down almost 3%, reversing almost half of its gains for the day.

Gold has caught a bid up about 0.5%, oddly a safe haven for this evening after indiscriminate selling during other such occasions.

There was a strong flight to safety bid in the Treasury bills during the trading day.  Was that a signal that this unwind was coming?

Crude oil surges above resistance in historic move; bear rally or interim bottom?

This could be a bear market rally or the makings of an interim bottom in WTIC.  Either way it is a huge reversal.  Last night the WTIC futures were down almost 2% and today prices are up 7.16%  That’s nearly a 10% swing reversal in a single trading day!

My thoughts are as follows:

1: The Sauds will run out of capital if they keep pumping excess supply in to the market.  I believe they are working to curb the oversupply situation by limiting their contribution.  I also feel that OPEC will mirror this move.  The Saudi idea that they could curb the activities of their competition was met with the reality of 0% interest rate policy here at home keeping it cheaper to sustain than to stop all operations.  With all that in mind, prices below $40.00 are unlikely to remain so for long unless China goes in to a full blown recession.

2: We’ve now neutralized the oversold condition on spot WTIC prices and are back above the relatively key level of $45.00.  This is an area where there has been significant support in the past.  I expect it may act as support again if we see selling pressure.  It would also make sense to see some backtesting/consolidating here, perhaps back to the 20 day moving average around $43.10 (which is also where several key price support areas have been).

WTIC-2

3: As we’re above $45.00, the next major level of resistance is quickly approaching at $49.01 (50 day moving average). If we are able to make a rally above $49.00 with large volume, then I’d be tempted to say we’ve put an interim bottom in place.  That said, “V” shaped bottoms are rare, so a re-test of lower levels first is very likely unless this is merely a bear market rally.

4: The latest sell-off started when there was a ‘death cross’ of the 50 over the 20 day moving average — and ended with a waterfall decline to about $38.00.  At that point the relative strength index was under 20 and extremely oversold.   Now we are looking to challenge the 50 day moving average from below with relative strength showing the buyers are not exhausted yet.

Truly exciting times in commodities markets.  I can smell the panicked short covering today.

Black Monday, again?

With Dow futures down over 200 points in the aftermath of disappointingly hawkish tones from the Jackson Hole retreat, China’s markets continue to slip and the global bid for oil is running dry again. Are we headed for another volatile week in markets around the world?

Screenshot from 2015-08-31 00:01:58

US Stock futures as of 11:48 pm on August 31st, 2015. Image source: Bloomberg.com.


The rout isn’t over; in all likelihood it’s only just begun.

Most investors are still recovering their bearings from the last two weeks of whipsaw market action.  I’ve said that I think that this is just the beginning and I am reiterating that view tonight.  We are entering a traditionally volatile time of year from September through November as well.  I imagine this unfavorable seasonality will exacerbate the underlying fragility of this already unstable stock market here and around the world.

Paper peril ensues

Meanwhile, in the world of currencies, the Asian financial crisis is re-emerging as Malaysia, Thailand, Vietnam, Russia and others see their currencies plunge.  China’s devaluation is rippling around the region, shaking confidence in one of the largest regional consumers of exports.

The final result is still evasive

Where do we go from here?  What will happen to asset prices?  We’ll soon find out.  Have an exit plan ready, though, because this is a very crowded market and it could create more disorderly selling on the way back down to new lows. It’s not uncommon that sell-offs lead to a snap back higher in prices before the selling pressure resumes.

I fully expect that we’ve seen the highs of this particular bull market cycle and should fully expect a significant bear market to follow.

The inconvenient reality of loose monetary policy

It couldn’t be described as anything short of a fantastical fabrication: Keynesian economic theory indicates that creating new money will create new employment opportunities.

Sadly this school of thought is wrong.  All loose monetary policy does is inflate asset prices.

This process actually takes away jobs.  If investors and wealthy individuals don’t need to create businesses to build wealth then they will not.  It also boosts the wealth of the haves and reduces the opportunities of the have-nots.  An effective wealth transfer in the opposite direction of what is ideal for a consumption-centric economy.

Thus we can easily explain why our country has not recovered — and will not recover — provided that there is an effort to centrally plan the economy.

Doing so inverts the risks involved with starting companies and speculating in markets to favor the latter.  The favorable capital gains over income tax structure only reinforces this backward paradigm.  Does it make any sense that speculation should have a lower tax rate than hard work?

We need to re-think where we want money to flow.  Jobs and our economy or fictitious financial markets that once cratered our economy and have provided little (if anything) since being bailed out to support it.

Markets, mayhem and mania

With days like these, who needs months?  In the last four trading days the US stock market has regularly set various records for point swings, point movements and volatility in general.  Today was the biggest point gain in the Dow in history.  It used to take months to have these sorts of swings in price — now it happens in a day or two.

Volatility is back with a vengeance.  And that’s not really a good thing.

I grow more concerned because with the backdrop of volatility, a broken uptrend in stocks and lack of clarity from central bank chatter — there seems to be a wait and see attitude from various market participants.  This is after 2015 was the year of consolidation.  The markets moved sideways and then eventually down.

But what concerns me more than the price action in stocks is the price action in commodities.  The barometer of global economic buying pressure has a very, very low reading.  We are heading in to a significant global economic storm.  China seems to be leading the way with Europe and Japan contributing to deflationary pressure with a lack of spending.  The US has not visibly succumbed to the second stage of the global financial crisis that’s brewing — but it’s reasonable to speculate that our economy never fully recovered.

This has been the slowest recovery since World War 2.

And with good reason!  We haven’t yet healed the problems, restored economic balance, curbed the excessive (leveraged) risk taking, wound down the insolvent financial institutions or held criminal fraud to account.  Instead the problems from 2008 are not only still lurking, but are actually much bigger than they were back then in scale and concentration.

Large banks were made larger by the crisis — not smaller.

Too big to fail really means too big to exist, but it wasn’t seen that way during the panic.  Enormous financial institutions were given shotgun marriages to insolvent ‘spouses’ that they would consume.  As a result deposits and risk are more concentrated than ever before.

What was back then a purely financial crisis in the banking system and financial industry (which bled in to housing and other areas eventually) is now a crisis that effects our government’s balance sheet, our central bank, financial institutions — as well as governments and central banks around the world.  It’s the largest, most alarming set of risk coupled with some of the largest bubble-like activity in real estate, equity and bond markets we’ve ever seen.

This cannot possibly end well.  And the final chapter of this recovery appears to be much closer than many would hope.

Trend support broken on S&P 500 index

Stocks are selling off — and fast.  But what exactly is a price trend and what do they look like?  Trends are defined as a series of higher highs and higher lows for an uptrend and a series of lower lows and lower highs for a downtrend. Uptrends are the result of more buying than selling for a given period of time while the inverse is true of downtrends.  An uptrend is essentially a chart where the price starts on the lower left and ends on the upper right.

After the S&P 500 consolidated for about a year it has decidedly turned much lower — and quickly.  With the worst three point day rout in the Dow since its inception behind us now, what is going to happen next?

First, I think it’s important to note that while I believe the trend remains down, there is likely some sort of bounce that will come soon.  Think of it as a moderating bounce.  One where we see some positive price action to push things off the extreme lows and encourage some buying.  After all, across just about every measure on the short to intermediate term, stocks are oversold.

damagedWe’re overdue for a bounce, but what follows may be a trounce.

That being said, it’s most likely that such a wave of buying will be short lived and followed by additional, deeper selling.  The reason I believe that this is the case is that the main catalysts that have driven the market higher, as discussed in my previous article, are largely drying up.  While at the same time, the global picture seems to be much more grim.

Global stock markets in free fall crash overnight

Stock markets around the world are experiencing significant sell-offs overnight, with China leading the way down 8.5% in Shanghai.

“Black Monday” – Shanghai Composite Goes Red For The Year, Wiping Out 60% In Gains, 2000 Stocks Limit Down

Elsewhere the same selling pressure is pushing down markets:

Japan’s Topix Index Extends Drop to 5%, Most Since 2013

US Futures Fall Sharply After Friday’s Selloff

This is a developing situation… This post may be updated.

The US stock market rout may be in its first stages

While the world’s financial media struggles to soothe investor confidence, I think it’s important to reiterate the problems that we are facing globally:

1: China, the second largest economy, is tumbling fast.  Their stock market is experiencing some of the worst declines its seen in its history.  Meanwhile the Chinese economy seems to be melting down with lower exports from decreased global demand.

2: Commodities, largely a barometer of economic buying pressure, have crashed to lows not seen since 1999.  A strong signal of a coming storm.

3: Europe is a basket case, and quickly turning in to a debt-driven catastrophe.  The Greek crisis is not resolved, but instead drags on. Other countries such as Italy, Spain, Portugal and France are not in much better shape.

4: U.S. multinational companies have been buying back their own shares with borrowed money to make their earnings appear better than they truly are.  These accounting games will blow up in investors’ faces sooner than later.

5: Margin debt from speculators betting on higher prices is at all time highs.  This means that when selling picks up margin clerks will be liquidating these speculators accounts — and that will cause panic selling.

These issues are all indicative of a situation where the risk to the downside significantly outweighs the potential reward for continuing to hold equities.  In all likelihood there will be a snapback rally from the oversold condition prevailing in U.S. equities.

Once such a rally completes, I believe a lower high will be in place and that lower high will be followed by a lower low — which will confirm that the trend has changed from a period of consolidation to a new downtrend.

Trade carefully and stay light on your feet.