Stock Markets Likely to Fall Further 17 comments
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Looking at the US stock market from a high altitude is not encouraging. Favorable valuation and recovery timing arguments are interesting, but negative price behavior is the current reality.
The best time to commit additional cash to stocks is when valuation arguments and price behavior arguments agree. Agreement would be attractive valuation and rising prices.
Today we have demonstrably falling prices and, in our opinion, unattractive valuations.
As we have published on several prior occasions, we think 600 is a more reasonable valuation on the S&P than prices today in the 700’s. Arguments could be made for valuations lower than 600.
The price behavior is decidedly poor. Consider these internals as of last Friday February 27th.
The percentages are provided for the last close (S&P500 at 735), the 500-day average (S&P 500 at 1301) and the October 11, 2007 peak (S&P 500 at 1554) – displayed in this format (as of last close / 500-day average / as of Oct 11, 2007 peak).
New York Stock Exchange:
- Number of companies: 3,162
- % with bullish point & figure charts: (20.0% / 47.6% / 66.2%)
- % above 50-day moving average: (13.8% / 42.7% / 78.9%)
- % above 200-day moving average: (5.64% / 37.5% / 51.5%)
NASDAQ:
- Number companies: 2,851
- % with bullish point & figure charts: (23.5% / 37.8% / 50.5%)
- % above 50-day moving average: (21.6% / 38.7% / 64.75%)
- % above 200-day moving average: (8.7% / 30.7% / 45.6%)
S&P 500:
- Number of companies: 500
- % with bullish point & figure charts: (22.4% / 50.0% / 70.4%)
- % above 50-day moving average: (11.0% / 43.0% / 78.8%)
- % above 200-day moving average: (2.2% / 38.8% / 60.8%)
All US Stocks (the combined NYSE & NASDAQ):
We performed an across the board study for bullish and bearish stocks and found no solace.
The study included stocks with 60-day average volume of 100,000 shares or more, a 20-day average price of $10.00 or more (which excludes some big companies that have been big losers), and a 14-day Average Directional Index higher than 25 (an indication of a trending pattern in the period).
For bullishness, we required that the 5-day moving average price was greater than the 10-day moving average, which in turn was greater than the 20-day moving average; that the 14-day Positive Directional Index was greater than the 14-day Negative Directional Index; and that the point & figure chart was bullish with X’s (up) in the most recent column.
For bearishness, we reversed the situation with the 5-day moving average price less than the 10-day moving average, in turn less than the 20-day moving average; with the 14-day Positive Directional Index less than the 14-day Negative Directional Index; with a bearish point & figure chart with O’s (down) in the most recent column.
The results were:
- Bullish stocks: 15 (or 29 including 14 short short ETFs)
- Bearish stocks: 591 (107 of which were long ETFs)
Conclusion:
Broad US stock index prices are not rising. Market internals are weak at best, and probably described better as negative.
We believe valuations are too high and will go lower. Even if we are wrong about that, the train to better days in the stock market has not yet left the station, so we continue to wait and watch.
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This article has 17 comments:
Granted, the numbers are grim, and there is not much light as we peer over the precipice and into the abyss! However, there are still some areas that offer some hopeful, although very tentative signs:
1. at least in the short term, we appear to be avoiding the whirlpool of a deflationary spiral. The CPI, CRB index, manufacturing & non-manufacturing ISM, trade balance and the PPI are holding their own (at least for now)
2. industrial metal prices appear to have found at least temporary support; copper ~$1.50, zinc ~$0.485, lead ~$0.455, nickel ~$4.30 and aluminum ~$0.55
3. oil has met strong support in the low $30's may at least be struggling to find a more or less stable trading range.
While the outlook still remains strongly bearish for stocks, and there is still much downside risk, I simply point out that for now at least, it appears that a deflationary spiral has been avoided.
I wish therefore thou art. Great article. Thanks.
Thanks for mentioning oil and copper, for example, which I have notice have begun to show some tendency to be flat or slightly rising as of late. However, it's too early to call a trend reversal in them. They may serve as leading indicators of corporate earnings improvements (short of an oil spike due to war of some catastrophe), because they would show increased demand for productive inputs. Input should tend to rise before the outputs convert to revenue and earnings.
But the big picture is still pretty gloomy! We're hanging on by a thread, and the very great downside risk cannot be ignored. It is far, far too early to call any trend reversal!
On Mar 02 08:27 AM QVM Group wrote:
> Jim Hawthorne,
>
> Thanks for mentioning oil and copper, for example, which I have notice
> have begun to show some tendency to be flat or slightly rising as
> of late. However, it's too early to call a trend reversal in them.
> They may serve as leading indicators of corporate earnings improvements
> (short of an oil spike due to war of some catastrophe), because they
> would show increased demand for productive inputs. Input should
> tend to rise before the outputs convert to revenue and earnings.
The market internals reflect the current quasi deflation we are in.
I express it that way because many retailers have not yet caught up to economic realities yet, at least not like they will.
This week's economic calendar results should go a long ways in starting to correct the delusion that too many (not all) retailers are holding fast to their pricing strategies.
Market internals are likely to follow suit and even worsen.
At the very least it will be extremely interesting to watch unfold.
Please continue your fine work.
> is there any way to still make money or hedge from further losses?
> Selling some positions? Or just hang in and bear it?
IMO, anyone who has "hung in" to this point should reconsider investing in the stock market at all and an obvious observation indicates that such a person would not fare well trying to time the market in any way, shape or form.
It has been obvious for well over a year to many that the stock market wa sin a for a severe fall and it is even more obvious that an additional deline is ahead of us. That said, it is likely that at the moment you decide to pull out of your long positions a bear market rally will begin and you will be scared back into the market, only to be further hurt when the market once again turns to the downside.
Anyone who has not been on top of this market so far should do themselves a favor and stay on the sidelines until it is clear, using Leading Economic Indicators, that the economy is on the rebound. We are likely a year or two (or three) away from that point.
600 S&P500 was my meaning
Asuming 2010 recovery, market could bottom in the next 3 months. I noticed JPM and BAC talking about a profitable quarter, any result that are actually a profit from a large bank will see the market shoot up
I believe you're right to make the assumption that as the financials go, so goes the market. For over 20 years now, we have been unwittingly transitioning from a tech/IT soft&services/manu... base to an economy based (almost) entirely on finance/insurance; in a nutshell, an economy that consists mainly of just moving money from A to B and in the process inventing more and more creative and bizarre vehicles for doing so...
While a new financial paradigm based on the creation of real, marketable services that generate real wealth as opposed to the illusion of wealth may not lead the recovery, it is one necessary component to our continued survival.
A nation without a sound financial system cannot stand.
On Mar 02 07:01 PM ozcutty2 wrote:
> Well we are heading for capitulation i believe, not long ago their
> was still plenty of bullish talk, thats all gone now so we can't
> be too far from the bottom.
> Asuming 2010 recovery, market could bottom in the next 3 months.
> I noticed JPM and BAC talking about a profitable quarter, any result
> that are actually a profit from a large bank will see the market
> shoot up
Thank you for your clarification a bit further above. In fact I knew you meant 600 on the S&P 500 and not on the Dow. (and I hope other readers caught my "great joke" too)
Though even 3000 on the Dow might not be all that funny....(and can't be ruled out). During the Great Depression markets dropped by 90% to just 10% of their 1929 peaks and the Dow at 3,000 would be just a bit over 20% of the peak of 14,000. (i.e. twice the lows of the Great Depression) Which makes sense given that unemployment is unlikely to rise to more than one third to one half of the levels seen during the Great Depression
And I bring up the Great Depression simply because it is finally becoming clear that it is indeed the event that most closely resembles what is now happening and is the most appropriate comparator. (rather than any one of the run of the mill recessions we have seen since then that have been touted as improbable comparisons to date)
"Eventually" the financial system and its "crazy banking and insurance institutions" (who totally forgot about Risk and Reward Ratios and also threw common sense out the window in their relentless greedy pursuit of ever greater "profits" (i.e. of bigger and bigger gambling wins) will be healed; stock markets will recover; and the real economy too will take off once again. (though the age of cheap oil is over and unless a 100% of demand realistic alternative is brought on line and fast, we may never again see economies able to grow at quite the same rate. (not for long, anyway)
So the really interesting question is precisely WHEN will recovery and "normalization" occur...for each one of the above. (the financial system, the securities markets, and the real economy) (and maybe we shouldn't forget property markets too)
The Great Depression was not really fully over until after World War II and the early 1950's. If that were to happen again (and hopefully without having to have a World War III) ...a quarter century might be a bit long to wait for all of the instant gratification web 2.0 folks. (during which time the U.S. will also need to learn to save instead of taking out home equity loans, loading up those 18% credit cards, and squandering) (largely on Chinese junk)
It's certainly looking like the Obama administration is going to engage in almost as much public spending as the U.S. spent during World War II.
And fortunately instead of putting people to work by building tanks, ships and airplanes most of which got destroyed, this time we will be building needed infrastructure that will last. (so the return can only be greater) (if one doesn't count as a "return" also the benefit of a world not run by Hitler or the Japanese Emperor).
But as we "emerge" we also need to watch out a lot more for that new fascist state China which looks more and more like Mussolini's corporatist Italy than anything about to transition from "communism" to a democratically run market economy. Will Hillary Clinton take care of that one?