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  • Weighing The Week Ahead: Will Global Weakness Drag Down The U.S. Economy? [View article]
    Thanks Jeff for offering valuable insight in a very challenging environment.

    Because everyone now foresees a retest of recent lows, I'm less inclined to believe there will be one though it cannot be ruled out.

    If it happens, though, it is likely to take place next week or the following week owing to seasonality factors and take us to around 1840. The last two corrections were resolved in the first half of October.

    Once we work our way out of this correction brought on by sudden moves in China, exaggerated fears of a hard land landing and the collapse of emerging market currencies, then what?

    With global growth slowing, the US economy confined to 1.5 to 2.5% growth and a strengthening dollar, corporate profits are likely continue to be challenged. Weakness in sales, margins and earnings will likely persist notwithstanding ebullient forecasts up by analysts for next year.

    There is simply no foundation for this optimism in light of the discussion above and persistent deflation which will further weigh upon profits. Additionally, the credit markets continue to flash caution.

    In response to all of the above, the market may enjoy a brief bounce once the current correction is resolved but then adjust to the reality that the cyclical, if not secular, outlook for profits has changed.

    It is at this point valuations, earnings and growth prospects will be re calibrated and during this process we could see deeper lows (possibly) followed by historically modest gains and/or a frustrating trading range.

    Lastly, I found it interesting that Harvard is ditching its traditional approach of assessing the likely risk and return of each separate asset class and instead focusing on five key factors: the outlook for global equities, US Treasuries, currencies, inflation and high-yield credit.

    They are clearly looking at the big picture and also looking for managers who are nimble and know how to short the market.
    Sep 27, 2015. 02:53 PM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Has The Fed Assumed A Third Mandate? [View article]
    I would politely disagree and point you to a brief article by Larry Summers who sees the data quite clearly:

    "Data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressures. Employment growth appears to have slowed down, commodity prices have fallen further, and the general data flow has been on the soft side. Comprehensive measures of data surprises, such as the Bloomberg Economic Surprise Index, bear out this impression and the Atlanta Fed’s GDP Now model is currently predicting only 1.5% growth in Q3."
    Sep 20, 2015. 04:49 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Has The Fed Assumed A Third Mandate? [View article]
    Thank Jeff for another great installment of WTWA.

    Yellen's decision to pass on a rate hike is an admission there are potentially serious macro global headwinds stemming from the slowdown in China and inter linkages with emerging markets. They hold $3 trillion or so in dollar denominated debt which becomes increasingly difficult to service with EM currencies in a free fall.

    Because of this and the strengthening dollar, close to 13% (gross exports) of our economy is exposed to contraction contagion although some of this should be offset by lower oil prices. And the Fed statement tied international weakness into US economic performance when they noted exports were “soft.

    Yellen also mentioned improving manufacturing utilization but did not mention we remain below the highs of 79% of last November.

    In addition to the above and reduced rail loadings, the ratio of inventory to sales has crept up to 1.36 against the backdrop of uncertain retail sales. Should this continue to increase, a classic inventory correction could destabilize the economy.

    If QE was to stimulate demand through increasing the value of financial assets, then recent stock-market corrections could easily reduce demand and amount to financial tightening at a time when consumer confidence seems to be peaking in a narrow channel.

    And if you dig deeper into the unemployment figures there's a bit more slack than the headline rate suggests. Around 9 million workers have left the labor market since October of 2009, making it easier to realize declines in the unemployment rate. Manufacturing employment fell.

    And when you look at the ratio of coincident to lagging indicators it raises serious questions.

    Lastly, we have possibly entered a period of secular stagnation heavily impacted by lingering debt overhangs, persistent demographic shifts in savings preferences, global wage arbitrage, falling productivity and stagnating capital spending, which are powerful and long lasting, and likely to color our economic outlook for many years to come.
    Sep 20, 2015. 10:07 AM | 6 Likes Like |Link to Comment
  • Weighing The Week Ahead: To Hike, Or Not To Hike? [View article]
    Jeff, you and Felix made a great call last week. I saw it early in the AM of the 7th while futures were trading.

    The internals of the market have improved, the VIX term structure is no longer inverted and there are many indications of the market remaining oversold. More strength than weakness.

    Most see the S&P trading in a converging triangle and the narrow trading range last week clearly suggests the market is waiting for the Fed decision and further insight into earnings.

    Though the macro global economic backdrop is weak, I would like to see a small rate hike to confirm strength rather than demurring and prolonging uncertainty. Such a policy move, though, would rattle emerging markets currencies and heighten the risk attending dollar denominated risk. To avoid this, the Fed is likely to stay the course.

    As to earnings, analysts expect CY 2015 to beat the prior year by 1 to 2% and then surge 17% in CY 2016. I do not see this nor does David Tepper, suggesting this correction could last longer than most expect. The folks at McClellan see the correction process continuing through September 2016.

    I still expect a lower low and increasingly the correction is taking on the personality and structure of the 1998 correction which was resolved through a lower low (13 pts) after tagging the 200 DMA.

    But who really knows?
    Sep 13, 2015. 01:19 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Revise The Year-End Market Targets? [View article]
    Jeff, the S&P was officially launched in in 1957 but it is my understanding Standard and Poors used available data to reconstruct its starting date as 1950.
    Sep 7, 2015. 11:07 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Revise The Year-End Market Targets? [View article]
    Thanks Jeff for another great installment of WTWA.

    As we said last week, volatility was to be expected until the August 25 th low was tested while noting the second half of September can be brutal. Since saying that, the market has continued its wild swings with but without a clear bias. A number of technicians look to history as a guide to what we might expect in the future as the market has an incredible memory.

    Dana Lyons recently looked at all times the S&P 500, since 1950, in which the index dropped at least 10% within 10 days and summarized what typically follows The main takeaway is that we should expect this process of bottoming to continue through September with the odds favoring a deeper cut. This view is supported by others including Sam Stoval of S%P Capital IQ who observes “In the 11 times that the S&P 500 fell by more than 5% in August, it declined in 80% of the subsequent Septembers, and fell an average of nearly 4%." And Ryan Detrick makes a similar observation: when the S&P declines by more than 2% on the first day of trading in September, there is an 80% chance it will fall another 5.3% by the end of the month.

    Lets hope this is the extent of it as Louise Yamada, who can only be dismissed at your peril, said this could be part of something larger because the 10 MMA of the NYSE index crossed below the 20MMA, noting she preferred looking at the averages on monthly charts to filter out all of the noise and observe larger trends. Historically, these crosses are rare and signal deeper corrections.

    While I take no pleasure in saying this, some credible support can be adduced to support the view that this will prove out to be more than a 12.4% correction. First, Lance Roberts posted a blog with a raft of low frequency weekly and monthly momentum indicators flashing sell signs. Secondly, Nautiluus Research tweeted highlights of research showing summer swoons have led to especially bad Septembers. To be balanced, though, this could overlap with the Stoval statement. And lastly, most of the internals continue to deteriorate and are simply awful.

    But there is little in sector rotation to suggest deep seated economic fear as in the last fifty days, utilities, staples and cyclicals have been the strongest sectors. In last twelve days, energy, cyclicals and technology have been the strongest sectors. No panic is evident at the moment though I did read hedge funds are becoming a bit more defensive, particulary Goldman "whose top picks are trending toward more towards defensives than cyclicals for the first time since 2011."

    I remain in the camp of expecting a retest with a strong likelihood of a lower low in the 1840 area where there is strong weekly support and resistance. In the unlikely event the S&P creeps below the lows of last October it could get very ugly as there is much room to fall before there is solid support.
    Sep 6, 2015. 08:13 AM | 9 Likes Like |Link to Comment
  • 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.
    Aug 30, 2015. 04:03 PM | 1 Like 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 | 3 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.

    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 | 6 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 | 4 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:
    Aug 2, 2015. 10:54 AM | Likes Like |Link to Comment