Stock Market Catalysts For Downside This Week

| About: SPDR S&P (SPY)


Does anybody not know what's taking place this week?

Brexit and stress tests both have major implications for the financial infrastructure and its web of transactions.

We can't know the extent of the risk.

We continue to think the VIX is in complacencyville.

We're short S&P 500.

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(Picture: Bulls, this milkshake (picture) is on us. You may need to cool off after reading about the risks we see ahead this hot summer week. If you are a bear, sorry, no free milkshakes.)

We've started putting out our best guess for weekly performance of the S&P 500 ETF (NYSEARCA:SPY) on SA. We want you to track it. This will be the 6th installment. You can click the links to see our SA reports that came out over each weekend. We do not include the difference between Friday's close and Monday's open in the performance because there generally is no easy way to react to our calls over the weekend.

These weekly calls bias our trading immensely. As many of you know we are bearish medium term but when we feel that the week can be in that direction it adds to our conviction.

Weekly Open Close Week Total
Mon, June 20, 2016 SPY Down
Mon, June 13, 2016 SPY Down 209.36 206.52 1.4% 3.8%
Mon, June 06, 2016 SPY Down 210.7 210.07 0.3% 2.5%
Tues, May 31, 2016 SPY Down 210.56 210.28 0.1% 2.2%
Mon, May 23, 2016 SPY Up 205.51 210.24 2.3% 2.0%
Mon, May 16, 2016 SPY Down 204.96 205.49 -0.3% -0.3%
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The following events are most critical to us and can feed into our expectation of down stock market prices this week:

Tue, June 21st : 10 AM : Janet Yellen Speaks With Congress

Tue, June 21st : 2:30 PM: Jerome Powell Speaks

Wed, June 22nd: 10 AM: Janet Yellen Speaks With Congress

Wed, June 22nd: Existing Home Sales

Thurs, June 23rd: Jobless Claims

Thurs, June 23rd: Stress Test Results

Thurs, June 23rd: Brexit Outcome

Fri, June 24th: Brexit Outcome

Let's go one by one.

Tue, June 21st : 10 AM : Janet Yellen Speaks With Congress

We've reported that we think the Fed is understating inflation's risk to the economy (Fed Mulls Letting Stock Market Float). We think as Mrs. Yellen gets grilled by congress, inflation questions will likely come up.

We see recent rates of CPI and PCE picking up in the last few months. We also see the dollar weakening and oil strong which should add to inflation numbers.

All of the capital that the Fed has spent has not moved the economy. The economy is slowing but the cash is going somewhere and that is helping prices go higher.

Here is the slowing economy. The Fed's spending spree has not worked.

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Yet inflation is picking up.

Nov Dec Jan Feb Mar Apr May 12 Mos
Topline 0.1 -0.1 0 -0.2 0.1 0.4 0.2 1
Core 0.2 0.2 0.3 0.3 0.1 0.2 0.2 2.2
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Click to enlarge

Core CPI has been steady at Fed's mandate 2.2%. Top-line CPI has recently picked up as oil bounced off of its lows.

There is a double whammy from the weak dollar on the topline number. One, a weak dollar caused import prices to go up. Two, a weak dollar lets the cap off oil prices. As the dollar goes down foreigners can afford more oil, pushing the price up.

Here's import prices.

Import prices
May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May
1.1 0.1 -0.9 -1.8 -1.1 -0.3 -0.6 -1.2 -1.3 -0.5 0.4 0.7 1.4
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That May number is up 16.8% annualized. That matches the flip in oil (from it's low) and dollar (from its peak). (See our report Fed's Key Inflation Measures Up 16%)

Given all the inflation data picking up, the Fed is surprisingly mum on the subject. We think the Fed is worried about hitting the market with that reality in their commentary (as we wrote here Fed Mulls Letting Stock Market Float... we also think you'll enjoy the read).

We think with growth slowing and inflation picking up, any open forum of Fed questioning could be a risk.

Tue, June 21st : 2:30 PM: Jerome Powell Speaks

This event has very interesting timing. This event is The Alternative Reference Rates Committee (ARRC)." Who cares about this? You'd be surprised. You do. Why? Let's see what they are discussing.

The ARRC is a group made up of the Fed and most of the major banks to change the variable rate that most of the world leans on from LIBOR to a Fed rate measure.

They recently wrote that "the secular decline in wholesale unsecured short term funding by banks poses serious structural risks for unsecured benchmarks such as LIBOR, Euribor, and TIBOR."

They believe the liquidity is not there and so the system is replete with risk.

Wait a minute, is that "L"ibor and "Eur"ibor as in London and Europe? Yes. The Fed and banks have been worried about the system and so are looking for ways to reduce exposure from it.

Good thing there isn't any risk coming for these markets, right? Wrong. A major test is coming to pressure these ARRC termed "risk" markets.

This meeting could be timely to understand the risks of Brexit itself on the financial system. The Fed and major banks are already working fast to sidestep LIBOR. Since the LIBOR market is thin, global rates, that everyone depends on can be easily pushed (rigged) by only a few players in relatively small transactions.

This type of meeting gives us a heads-up of the unknown level of risk we all face when this thin market is put to the test Thursday and Friday.

Wed, June 22nd: 10 AM: Janet Yellen Speaks With Congress

See what we said above.

Wed, June 22nd: Existing Home Sales

First, keep in mind there are many economic data points reported every week. We just focus on the ones we think are most important.

So far existing home sales have remained strong. This is a key element in the Feds liquidity spending spree. Keeping rates low should drive interest rate sensitive purchases like homes.

Here's the chart.

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Many growth measures have been slowing despite the amount of liquidity and lax monetary policy. That is a worry. If growth measures slow during a wealth of liquidity, if policy ever tightens we're in trouble. One important metric that has not fallen yet is housing. It needs watching. If it were to fall it would be worrisome.

Just as a reminder, we think inflation is increasing and could be a reason for rates to rise. If so that would slow housing turnover, which is a critical cog in the economy.

Thurs, June 23rd: Jobless Claims

Here's the chart.

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Here's another data point that's turned into a double whammy. If jobless claims go up it's negative because it means growth is slowing. If jobless claims go down it means we are further at "full employment." That should be good, right? Wrong. Why? Non-farm payrolls are falling off. Non-farm payrolls are a better measure of the economy.

Here's that chart. This is what has the Fed spooked.

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So if jobless claims are good (they go down) it still doesn't tell you if more people are working. It could mean, like it's been telling us, that the workforce is shrinking. We think it's shrinking mainly due to baby boomers coming out of the workforce. This is a negative economic trend for two reasons.

1) Less people working slows GDP

2) A tighter labor force pushes up wages and inflation.

Either way jobless claims numbers go, it's a negative. Up, we're slowing, down, inflation. Therefore we give it the official Elazar Double Whammy rating.

Thurs, June 23rd: Stress Test Results

We went out on a limb in our report, "June 23; Bank Stress Tests Bigger Than Brexit?"

You can see what we wrote there. In a nutshell, we think that the Fed will raise capital ratio requirements which hurts banks and hurts the economy. We think their reasons are fair but it will negatively impact the economy, specifically banks.

We've been bearish on the financial system ever since we wrote, "Living Will Meltdown Hypothesis" on May 16th.

Here's a chart of the financial ETF (NYSEARCA:XLF). The vertical lines represent bearish reports we put out on the sector (see here).

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The blue line shows the S&P 500 . You can see how the XLF is leading the market lower.

We think most analysts are pretty upbeat about the stress test result prospects. We are not.

We think when the Fed holds up the CT-scan living will results against the stress test results, banks' capital requirements will go higher.

That is a bank, economy, and stock market negative.

The other thing that scares us on this one is that so few people are bearish about the market because of stress tests and living will failures. That means the market is likely underpricing this clear and present risk.

Thurs, June 23rd: Brexit

This is a huge unknown. See what we said under the catalyst "Jerome Powell" speaks (above). That event ominously previews Brexit. The simple fact that the Fed and major banks want out of the LIBOR and EURibor highlights some of the risks of the financial system there.

The entire globe is entangled in London and European banks and rates. There have been many cases about "rigging" of the system mainly because the system is thin and fragile. Ouch, a thin and fragile system is about to have a major pig-in-the-python event either way.

If the UK stays or leaves you can bet that there will be huge amounts of either unwinding or taking of positions. There is going to be volatility either way in currencies and interest rates. That can have counter-party domino risk. There is no way to know the extent of risk in this upcoming event.

We called the low in VIX, which wasn't rocket science

See our report June 4th, "VIX Mismatch."

We simply said that there was too much risk ahead for the VIX to be complacently sitting at its lows. Soon after it bounced hard.

Here's the most recent chart.

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When looking at it on a longer time scale (above) it is about in the middle of its historic range. We think the amount of risk ahead is much higher than the VIX currently reflects. We think the market still is not pricing in major risk events.

Major risk events that the VIX is not fully factoring in

1) Brexit

2) Stress test bank capital requirements going higher

3) Inflation picking up (dare we say jumping)

4) Economy slowing

5) Fed stuck (See here)

6) Many people waiting for new ATH (All time highs)

We think the market has lulled us all into a false sense of security.

When comparing VIX to the location of SPY, in a realistic perspective, it is worrisome. (Bulls, sorry about this next chart.)

Here's the SPY chart.

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When we saved the file of this SPY chart to post it here on SA we could only think of one title, "SPY ouch." This is a wide range.

If you are a bull and you say to me, "Elazar we are at ATH and we're definitely going to hit new ATHs!"

....we are going to answer you, "the market has had a very very wide scary range with fast moves. Are you sure about those ATHs?"

Again, you are going to get much smarter people than us on SA telling you every reason the market is going up and down. We're just here to point out the facts.....

LOOK AT THAT RANGE. OUCH. Can it happen again? Of course it can.

We're (still) short ES S&P 500 emini futures (which can change at any time).

Good luck and please be in touch. All of your comments teach US a ton.

See more from Elazar Advisors, LLC on SA

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