Last week was difficult, at best, for global stock markets as the S&P 500 dropped more than -3% and the bond market surged as investors continued their “flight to quality.” Fear spread around the world with global markets shedding recent gains. It was definitely a “risk off” week and the beginning of what I believe will continue to be a “risk off” period as we move through the closing days of summer.
The macro news was mostly poor, as we’ll discuss in a moment, and the technical picture deteriorated, pointing to lower prices ahead.
In our portfolios, we moved to “Red Flag Flying” mode, expecting lower prices ahead, and moved from our remaining cash positions to inverse ETFs in the Standard Portfolio, while keeping our option portfolio positioned for more downside ahead.
Looking at My Screens
On a technical basis, significant damage was inflicted last week to equity markets around the world. As we’ve been saying for several weeks, it seemed that an imminent decline in U.S. markets was upon us, and it appears that last week’s action could have been the beginning of that move.
In the chart above you can see that the S&P 500 has dropped below its 200 day moving average and also below its 50 Day Moving Average, indicating that the long and medium term trend is down. These significant moving averages now become resistance rather than support and we see the next support levels at 1060 and then near 1020 at the June lows.
The 50 Day Moving Average remains below the 200 Day Moving Average, forming the widely watched “death cross,” which typically accompanies significant trend changes. Additionally, the 12 month moving average of the S&P 500 was also violated which is another bearish indicator for major markets.
As if all of this isn’t gloomy enough, last week’s stock market action triggered a “Hindenburg Omen,” named after the German zeppelin that crashed and burned in New York in 1937. I casually watch this indicator that was triggered on August 12th because it has a fairly reliable track record and you don’t see it very often; when you do, it usually portends negative stock market action ahead.
In summary, it seems clear from everything I watch that the path of least resistance is down for the intermediate term and momentum suggests more downside ahead.
The View from 35,000 Feet
While the technical picture is poor, the fundamental picture might be even worse.
Last week’s news was fairly grim as downgrades of estimates of consumer spending and GDP continued to pour in and the 10 year US Treasury yield dropped to its 16 month low.
The economy in China continues to slow and Europe continues to percolate on the back burner as Spain teeters on the edge of recession with a GDP growth rate of 0.2%. Farther down the Mediterranean, Greece has returned to recession as its economy has already started to contract.
At home, JC Penny calls the current consumer climate “uncertain,” and across the board, consumer spending looks anemic with no sign of an imminent rebound as consumers continue to deleverage and worry about their jobs. Last week did nothing to alleviate those concerns as unemployment applications rose and the unemployment rate remains at quarter century highs.
Finally, the Fed had their monthly meeting last week and did little to improve the overall mood by saying the recovery was going to be “more modest than had been anticipated” and deciding to stick to their quantitative easing policies of buying back Treasuries and not reducing their balance sheet below the current $2 Trillion.
What It All Means
What it all means is that the global economy continues to slow in spite of enormous central bank intervention around the world and that the entire stimulus appears to have failed to have jumpstarted the global and US economy as was hoped.
We’ve been saying this for sometime and the ongoing data again indicate continued deterioration in the economic environment which also is confirmed by our technical indicators. The Fed has been the major force behind the recovery and equities rally thus far and Dr. Bernanke and his colleagues, along with the US Congress, now seem to be just about out of ideas and assets for doing anything more.
We remain in the “Red Flag” mode, expecting lower prices ahead and are positioned for gains if that should occur.
The Week Ahead
Next week brings another blizzard of economic reports, particularly on Tuesday, that should set the pace for the next few weeks’ stock market activity.
0830: August New York Empire Manufacturing Index
1000: August NAHB Housing Index
0830: July Housing Starts, July Building Permits, July Producer Price Index
0915: July Industrial Production, July Capacity Utilization
0830: Initial Unemployment Claims, Continuing Unemployment Claims
1000: July Leading Economic Indicators, April Philadelphia Fed Report
Leaders: Gold, Coffee
Laggards: Gasoline, Sweden
I’m traveling in China this week and it’s a truly fascinating place as the dragon continues to make its presence known on the world stage. It’s almost like two countries, with the cities being showplaces for the world and the rural areas still looking very much like emerging economies. Reports say the economy here is slowing but that certainly isn’t evident in the streets of Beijing.
Disclosure: Author has positions in SH, RWM, PSQ, EFZ, SEF, SKF, VXX and SPY put options.