The 1-Minute Market Report - August 5, 2019

Summary

The financial media blames the recent carnage on Trump's trade war with China and possibly Europe. They also blame the Fed for not cutting rates more aggressively.

I blame high market valuations and weak earnings growth.

The last 10 days and, especially, Monday's market action have moved the needle for our periodic return charts. The market has transitioned from a Goldilocks state to a worrisome one.

market direction

What happened last week.

What we're watching for next week.

What a day! And what a week! What's going on? The financial media blames the recent carnage on Trump's trade war with China and possibly Europe. They also blame the Fed for not cutting rates more aggressively. I have a different view.

I blame high market valuations and weak earnings growth. The headlines may have sparked this decline, but it was overdue anyway.

Chart of the Week - Market Internals

This table is a snapshot of market internals for Monday, last Friday, and one week ago. We can see the selling pressure building and ultimately ending in a rare 10-to-1 down day in terms of advance-decline issues and up-down volume.

These 10-1 days are so rare that market pundits, technicians and fundamentalists alike sit up and take notice. A day like Monday doesn't guarantee that the bull market is dead, but it does send a strong message to bulls and policymakers that this is the real deal.

The above table is from WSJ.com.

Chart 2. Worst Single-Day Market Drops

This table logs the worst days for the market since 1950. Monday's nearly 3% decline comes in at number 107 out of 17,500 trading days in the data set.

That works out to a 0.6% likelihood that the market would get slammed this hard. A rare event, as I said, but not unprecedented.

Chart 3. S&P Periodic Returns

The last 10 days and, especially, Monday's market action have moved the needle for our periodic return charts. The market has transitioned from a Goldilocks state to a worrisome one.

You can read the charts for yourself, but I'll highlight two items. The YTD gain has now dropped from 20.7% to 13.8%. That'll get your attention.

And perhaps the most worrisome of all is the year-over-year change, which was as high as 26.6% at the peak of the Trump rally and is now struggling to remain above water.

Final Thoughts

Last week's drubbing was significant, but not necessarily a fatal blow to the 10-year bull market. The last time we saw a 3% one-day drop was on December 24, 2018. That turned out to be a "flush" or capitulation event. It brought the market to the brink of bear territory, but the market rallied strongly the next day and didn't look back until 10 days ago.

This time around, we are starting from new highs. The market is only down 6% from the last high - not even a proper correction. What happens next is anyone's guess, but I'm comfortable with my 35% cash cushion for now.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.