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CautiousInvestor

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  • Weighing The Week Ahead: What Are The Lessons From The Market Turmoil? [View article]
    I think we see many things through the same lens but there may be nuances.

    Stocks are thinly owned in China, and I do not believe recent plunges are a threat to the global economy. Residential property prices, which have recently improved, are far more important than equity prices.

    Easily the biggest problem facing China is the staggering debt it has accumulated through allowing SOE's owned by local governments to expand through building excess capacity and empty cities. Local governments circumvented prohibitions on borrowing and used profits from SOE's to assist in this incestuous, if not circular, financing scheme.

    The benefits of all this activity was an increase in GDP in which investment approached a highly unsustainable 45% or so.

    This is where the true problems lies although exports can be included in the list of problems. And though they account for only 2.5% of GDP, when things are going south every dime counts. Hence devaluation of yuan, lower rates and lower reserve requirements.

    After relying exports and then investment, China want to rebalance its economy and move to a consumption driven model and, at the moment, Chinese consumers are spending largely as a result of firming residential property prices and wage increases and consumption expenditures now comprise 36% of GDP.

    China's problems include debt and excessive investment compared to personal consumption. And it will be an enormous challenge to maintain 7% growth (which many think is closer to 5.5%) while shrinking investment, dealing with piles of debt and increasing consumption with a personal saving rate of 40%.

    In addition to the reforms mentioned in the article linked below, China has to broaden its social safety net and increase interest rates on savings to encourage consumers to spend more.

    http://tinyurl.com/op9...
    Aug 30, 2015. 04:03 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: What Are The Lessons From The Market Turmoil? [View article]
    I agree that to suggest that the impact will be limited is nonsense.

    China has contributed as much as 40% in some years to global growth and whether China crashes or slows in an orderly manner, the inevitable slowing of growth in China as it moves to a consumption led economy will dampen global growth and weigh heavily upon countries most exposed to China including Japan, Russia, South Korea, Brazil, US, Taiwan, Germany, Hong Kong, Canada, New Zealand, Australia, Thailand and Maylasia.

    The response dynamics are complex as they are intertwined with oil, commodity prices and economic policy choices (usually poor) but a number of countries heavily exposed to China are already experiencing economic corrections. Japan, Russia, Brazil and Canada have all recently reported negative rates of economic growth. And there may be others.

    Global economic growth could easily fall from the 3% range to the 2% range.
    Aug 30, 2015. 11:24 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Are The Lessons From The Market Turmoil? [View article]
    Thanks Jeff for addressing the largest question hanging over the markets.

    And I will add "wow" what a past two weeks.

    The S&P was down 5% over a two day period and then dropped close to 4% on Monday, which was the first 4% drop since 2011. After falling 12.5%, the market became seriously oversold with an inversion in the VIX term structure and the VIX spiking to 53, the highest level since 2009. And a measure of VIX volatility, the VVIX, closed at 168.75 which was 17% above the previous highest close since its inception in 2007

    In response to these extreme conditions, the market found its footing between some weekly highs and lows near the lows of October 2014, tested it on Tuesday and on Wednesday surged around 3.5% with the Dow posting its third largest point in its history. By the end of the week it overhead resistance near the 50% retracement from fall from 2135.

    As Jeff observes, the big question confronting investors is whether this is durable V recovery or simply a technical bounce from extremely oversold conditions to be followed by more volatility and wild price swings.

    On the surface, it might be tempting to think this will prove to be a V recovery as its visually resembles October, 2014.

    Additionally, sentiment surveys, which act as contrarian measures, are coming off record lows and suggest there is plenty of powder to fuel a continued V recovery. Further, as Dana Lyons notes, the markets respected an important support level ( mid-430's) in the Value Line Geometric Composite.

    Conversely, the topping process in October, 2014 took a matter of weeks compared to months needed to complete the recent head and shoulders which led to the recent correction. And the price behavior we have recently witnessed is not indicative of a healthy market.

    Some believe the markets are demonstrating a classic crash pattern in which volatility spikes and sharp sell offs are often followed by powerful rallies. "As with previous crash patterns, we would expect markets to continue to gyrate wildly for around the next 8 weeks, and likely retest the lows established in the first few days of the rout."

    Support from this view comes from many technical analyses including Pension Partner's observation that while anything is possible, the odds of a V after the S&P has fallen >9% below its 200-day MA are not high. And Dana Lyons observes the occurrence of 4 consecutive down days of at least -1% in the S&P 500 is a rare event. "In fact, since 1950, it is only the 8th time this has occurred."

    In the context of his study, the recent correction of 12.5% is significant and likely foreshadows a retest and, possibly, deeper lows.

    Along the same lines, Gave Kal offers us unique insight into some of the market internals and concludes a retest is highly likely. http://tinyurl.com/pl3...

    Lastly, we have seasonality to deal with as the second half of September can be merciless and could provide the backdrop for the perfect storm, which is something I am expect to see.

    Eventually, I think this will prove to be more like October 2011 than October, 2014 with volatility and large price swings over months, not days. Hopefully, prices drop no lower than the recent lows but deeper cuts cannot be ruled out.
    Aug 30, 2015. 08:17 AM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: The Start Of Something Big? [View article]
    I apologize to all as the measured move down from 2040 would be 95 points ( 2135-2040 ) not 75 as I posted in haste. This takes the move down to 1945 which is close to the 61.8% retracement from the Oct lows of 1943. Additionally, there is some structural support in the area making it a level of considerable interest. Should this prove to be the bottom, it would yield a correction of 9% mentioned in my comment. I have too many numbers in my head and need to slow down when writing.
    Aug 23, 2015. 04:40 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: The Start Of Something Big? [View article]
    One other item to watch. In ES futures (SPX) there is a substantial line of support at 1933 and should the SPX, which trades about three points higher than the futures market, close below this level I believe it would be a warning sign of a correction deeper than 9.3%
    Aug 23, 2015. 10:24 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: The Start Of Something Big? [View article]
    "In the short term, we are likely to see a retest of recent highs or the upper boundary of the recent trading range and then a broad retreat based upon the realization earnings have either peaked or will decline. The credit markets are confirming my longer term view."

    I posted that August 16th when the market was still dealing with a complex head and shoulder formation that started forming in February and which, by definition, is certain to fail. The deterioration of internals only confirmed what was already preordained. (Plus you get lucky every once in awhile)

    Now that the shoulder base of 2040 has been breached, its not unreasonable to expect the market to visit the 1965 area (not far from Friday's close) to complete the violation of 2040 and dropping the height of the head and shoulder formation (75 pts) starting at 2040.

    In my view that is the most benign view, as this correction stems from a complex formation months in the making and is unlikely to be resolved through a shallow V. Further, the many catalysts behind this correction are unlikely to be favorably resolved anytime soon.

    Additionally, two supporting points come to mind. A 5% drop in two days is highly unusual is NOT found in healthy markets as historical instances include the years 1973, 1987, 2002 and 2008. H/T Ryan Detrick.

    The second points comes from Dana Lyons who in July penned a piece looking at what happens in the rare instances when the advance decline summation index turns negative at the same time the high low summation index turns negative while the market is near a high.

    "That rare combination took effect as of today’s close. Specifically, each of the Summation Indexes were below 0 while the S&P 500 was within 1.5% of its 52-week high. This was just the 59th such occurrence since 1970.
    The 59 occurrences all took place in 4 distinct periods, though most of them happened within 2 clusters:

    August 1972 (13)
    November 1999-March 2000 (44)
    September 2007 (1)
    July 2015 (1)"

    One data point was removed from the sample and in the remaining 58 instances, on all occasions, within one year of the event, markets were down an average of 9% and in two years they were down 22%. There were varying movements after several months, but the long term outcomes are historically solid.

    With credit spreads continuing to widen, the largest 5-day advance in the history of the Volatility Index and extreme put call activity, I'm inclined to be believe this is not a garden variety correction and will be a protracted affair with the depth of the correction in the 9% to 19% range.

    As Jeff has said on many occasions, nobody can predict the market over the long run but its fun trying.
    Aug 23, 2015. 09:57 AM | 7 Likes Like |Link to Comment
  • Something Is Still Ridiculously Wrong [View article]
    One of the problems the market is wrestling with is the higher dollar and its impact on commodities and our export competitiveness. Interestingly, history reveals most rate hikes are followed by a fall in the dollar which, in the current environment, should be a net positive. The long end of the curve, though, suggests deflation which will limit the ability of producers to increase prices which will weigh upon upon profits. Tough call.
    Aug 16, 2015. 11:45 AM | 2 Likes Like |Link to Comment
  • The Stock Market And The Economy: Out Of Sync? [View article]
    From Factset:

    Due to companies beating earnings estimates in aggregate, the blended earnings decline for Q2 2015 is now -1.0%. This is a smaller decline than the estimate of- 4.6% at the end of the second quarter . Due to companies beating revenue estimates in aggregate, the blended revenue decline for Q2 2015 is
    now -3.3%

    And depending whether you read Factset, Reuters or S&P IQ, yoy performance is likely to be weak (negative) through the balance of the year. This, of course, is based upon analysts estimates which can vary widely and are often just plain wrong.

    Including the US, the global macro global macro economic backdrop is anything but robust with more vulnerabilities than opportunities. China's problems are well understood and likely precipitated the depreciation of the yuan; Europe's growth disappointed; and emerging markets are struggling amid lower commodity prices and the corollary of the higher buck and remain susceptible to shocks. Emerging markets are most exposed to dollar denominated debt with weakening currencies.

    And most of the items discussed above have been touched upon by executives during the most recent earnings reporting season. In terms of worries, in order of importance executives mentioned the dollar, Europe and China. In looking at each of the three issues, its difficult to see a near term resolution to any one of the problems.

    As to the market, it is caught in a traffic circle and it's not quite sure which turn to take. Consequently, we keep going around and around with three competing ideas that weak commodity prices are owed either to: (1) the dollar's strength (2) overproduction by producers that has led to a supply glut or (3) an actual slowdown in end demand that is being exacerbated by the dollar's strength.

    If the market is to break out to the upside, it needs to see data that corroborate the Fed's stated basis for a rate hike. Right now, the data only corroborate that the FOMC is caught between a rock and both a hard and soft place when it comes to interpreting the data and dealing with the market's expectations.

    My greatest concern looking forward is growing deflation, which China just contributed to, and the weight of this upon the ability of producers to increase prices which is tightly correlated with earnings.

    In the short term, we are likely to see a retest of recent highs or the upper boundary of the recent trading range and then a broad retreat based upon the realization earnings have either peaked or will decline. The credit markets are confirming my longer term view.
    Aug 16, 2015. 10:53 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Soft Economic Data Confirm The Commodity Price Story? [View article]
    Some of the history in graphic form: http://bit.ly/1SwqbvS
    Aug 2, 2015. 10:54 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Soft Economic Data Confirm The Commodity Price Story? [View article]
    Sorry for duplicate replies. But add dollar strength to the list of worries and risks as Blackstone and others expect the buck to continue to strengthen. From CME:

    When the dollar is on the upswing, U.S. domestic products and services become relatively more expensive and less competitive to international customers. Companies across industries, from consumer products giant Procter & Gamble Co. to technology industry leader Microsoft Corp., are losing traction in the marketplace and experiencing subsequent revenue dips. Historically, this is not a surprising outcome. According to a story in TIME magazine, the five major declines in corporate profitability since 1970 all occurred following periods of relative dollar strength. But companies in today’s globalized economy are more reliant than ever on foreign consumption. The slightest fluctuations in exchange rates can immensely impact not only corporate profitability, but also labor markets, capital flows and interest rates.
    Aug 2, 2015. 09:49 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Will Soft Economic Data Confirm The Commodity Price Story? [View article]
    Thanks Jeff,

    There is little doubt that falling global economic growth (think China) is weighing upon different commodities but exchange rate mechanisms are also impacting prices through dollar strengthening. Commodities priced in euros or yen are higher than commodities priced in dollars.

    From my perch,the big story this week has been the continuation of trading in a rather narrow band and extending the time in the 100 point range to close to six months. Further, the range of the band has led to a 20 year low in weekly bollinger bandwidth. http://bit.ly/1Sw1YFY

    What I find interesting about the above is that market tops are often formed over a six month period with a narrow trading range and a decay in internals. And we have seen some of this with a modest decline in the S&P advance decline line (and the NYSE) along with fewer new highs and stocks priced above their 50 day moving average, giving legitimate reason to be concerned

    But, while most sectors are off their advance decline highs, the deepest weakness has been seen in energy, materials, industrials and, to a degree, technology. While not welcome, it should be noted that three of the four economically sensitive sectors are holding up in terms of ADL and price to market: XLF, XLY and XLK. At the moment, tech is a bit of an oddball in terms of price and ADL. And until I see capitulation among economically sensitive sectors and a significant increase in the price of defensives relative to the market, I will respect the long term trend of the market.

    Jeff is right about predicting prices but last week I suggested a bounce of sorts and then a quick stop at the 200 DMA. There was no bounce, only a quick touch of the 200 DMA and then a 1% day to the upside. From here, I am seeing/smelling some weakness and maybe a retest of the 200DMA or perhaps lower to where investor expectations can be reset.

    Thus far, I think this has been a market correction through time, not price. And as measured by sentiment and other metrics, it may be getting close to oversold though risks abound, including earnings, China and emerging market debt. And while we might see a bounce off the retest, the long term call is difficult.
    Aug 2, 2015. 09:01 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Soft Economic Data Confirm The Commodity Price Story? [View article]
    Thanks Jeff,

    There is little doubt that falling global economic growth (think China) is weighing upon different commodities but exchange rate mechanisms are also impacting prices through dollar strengthening. Commodities priced in euros or yen are higher than commodities priced in dollars.

    From my perch,the big story this week has been the continuation of trading in a rather narrow band and extending the time in the 100 point range to close to six months. Further, the range of the band has led to a 20 year low in weekly bollinger bandwidth. http://bit.ly/1Sw1YFY

    What I find interesting about the above is that market tops are often formed over a six month period with a narrow trading range and a decay in internals. And we have seen some of this with a modest decline in the S&P advance decline line (and the NYSE) along with fewer new highs and stocks priced above their 50 day moving average, giving legitimate reason to be concerned

    But, while most sectors are off their advance decline highs, the deepest weakness has been seen in energy, materials, industrials and, to a degree, technology. While not welcome, it should be noted that three of the four economically sensitive sectors are holding up in terms of ADL and price to market: XLF, XLY and XLK. At the moment, tech is a bit of an oddball in terms of price and ADL. And until I see capitulation among economically sensitive sectors and a significant increase in the price of defensives relative to the market, I will respect the long term trend of the market.

    Jeff is right about predicting prices but last week I suggested a bounce of sorts and then a quick stop at the 200 DMA. There was no bounce, only a quick touch of the 200 DMA and then a 1% day to the upside. From here, I am seeing/smelling some weakness and maybe a retest of the 200DMA or perhaps lower to where investor expectations can be reset.

    Thus far, I think this has been a market correction through time, not price. And as measured by sentiment and other metrics, it may be getting close to oversold though risks abound, including earnings, China and emerging market debt. And while we might see a bounce off the retest, the long term call is difficult.
    Aug 2, 2015. 09:01 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message Of The Market? [View article]
    Long time no see but I see you continue to produce outstanding work.

    Among macro economic and inter market developments, we continue to see weakness in semiconductors (the new copper), falling commodity prices and correlated weakness in the currencies of commodity exporters, looming problems in dollar denominated debt in emerging markets, alarming weakness in junk bonds and structural weakness in both China and Brazil.

    And major market internals continue to deteriorate with % of stocks above their 200DMA falling to 48%, about two standard deviations below the mean of 68%. And net new 52 week highs has fallen to around minus 45, again about two standard deviations below the mean of 28. Recent extremes have been in the area of three standard deviations below the mean.

    And the NYSE advance decline line has been in serious decline since July 10th.

    Notwithstanding this disturbing landscape, some indicators suggest the course may reverse before resuming its decent to around the 200DMA which as of late has been a battleground for resolving market direction. The reasons supporting this include a decisive rejection of a price close to the 150 DMA, simply horrible sentiment (actually good) and favorable end of month seasonality.

    Nobody can be certain about the possible depth of any larger correction but we do know that bear markets are usually brought on by recessions and I think we should view current price action in that context as few believe a recession is at hand. Unless there is a sudden deterioration in fundamentals or an exogenous shock, I think we are seeing volatility in a pretty range bound market.
    Jul 26, 2015. 12:12 PM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For An Upside Breakout? [View article]
    Thanks Jeff. S&P prices had been in somewhat of a neutral pattern of a converging wedge/triangle but now have been reconfigured into an ascending triangle which augurs well and may foreshadow a violent break to the upside. I think your prior macro global theme (Greece) will delay this breakout until either the problem has been fixed or a Grexit is announced but with sufficient conviction that existing firewalls and circuit breakers will contain both the obvious damage and unforeseen consequences. Between May 6th and May 12th Greece must turn over around euro 1 billion in interest and principal payments to the IMF and in my view this may stall market advances until this issue has been resolved. The market seems Ok with earnings............for the time being.
    Apr 26, 2015. 11:07 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: The Start Of An 'Earnings Recession'? [View article]
    One other thought.

    First quarter earnings results aren't expected to be very good. According to data compiled by S&P Capital IQ, S&P 500 earnings per share are currently projected to be down 3.2% versus the same period a year ago. And while energy is the elephant in the room, four other sectors are expected to experience declines. But what is believed ahead of a reporting period, is not necessarily what is taken away at the end of a reporting period. The final S&P 500 earnings per share (EPS) growth rate typically ends up being two to three percentage points higher than what is expected at the start of a reporting period. A case in point was the fourth quarter of 2014. The final EPS growth rate for that period was 7.8% versus a 4.6% growth rate projected on January 9. The market may be pricing this in. Maybe
    Apr 12, 2015. 09:16 AM | 2 Likes Like |Link to Comment
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