Daily State of the Markets
Wait, what? On Wednesday, stocks blasted higher on the back of Super Mario singing a dovish song, word that China was about to sack the head of its central bank in favor of someone more modern, and not one, not two, but three Fed Governors suggesting that the Fed would likely take their time when it comes to raising rates.
Bam, just like that the worries about the effects of a rising dollar, where rates might go next, and all things geopolitical were put on the back burner. No, on Wednesday it was time to just BTFD! Stocks recovered all of Tuesday's losses as well as some of Monday's decline, and it looked like the bulls were back in business.
But a funny thing happened on the way to the rally recovery on Thursday. In short, traders forgot about all the good stuff from Wednesday and the market got blasted. Technical levels were broken. Good charts turned into bad charts. The league-leading NASDAQ suddenly looks sick. And the much-maligned Russell 2000 smallcap index continued diving, winding up near the low of the year.
For the record, the Russell is now down -5.5% on the month and -4.5% on the year. So anyone thinking that the S&P's "healthy" advance was representative of the overall market has another thing coming. Heck, the Dow is only up 2.2% in 2014.
Frankly, the charts below really tells the story of this market. First, as indicated on the chart of the S&P 500, it appears that yet another pullback - the 5th in the last 10 months - is underway.
S&P 500 - Daily
And then, as we've been discussing, the divergence on the chart of the Russell 2000 grows more glaring with each passing day. And frankly, these two charts don't even look like the same asset class.
Russell 2000 - Daily
As we've discussed, the issue here is that such divergences tend to be present during major tops in the stock market.
Another big data point to consider on the subjects of divergences and narrow leadership is the fact that, according to Bloomberg, 47% of the stocks on the NASDAQ are currently down 20% or more from their peaks in 2014. And again, narrow leadership is another classic indicator of a market top.
And while I am reticent to bring it up because it's a little on the ridiculous side, there has been an awful lot of jawing about the so-called "death cross" (which occurs when the 50-day moving average crosses below the 200-day moving average) seen on the Russell. However, there it should be pointed out that such an occurrence when the 200-day is rising has been a pretty good buy signal - but that doesn't stop the press from fawning all over the possibility of something REALLY bad happening (and given the recent ratings of CNBC, they could use a good crisis right about now!).
Why the Dive?
When the stock market makes a big move in either direction, there is usually a reason. However, yesterday's dance to the downside did not have any single catalyst. The selling seemed to be a culmination of a bunch of things, some of which include:
Taken alone, none of the above would normally warrant significant selling in stocks. However, these days, once a trend in the market gets started, the computers jump on board and ride the wave for all its worth. And in my humble opinion, this is why so many moves (January 24, April 10, July 31 and yesterday for example) become exaggerated on an intraday basis.
The Big Question
The question of the day, of course, is if the current selloff is "THE" correction that everyone under the sun has been looking for. In fact, a former Federal Reserve economist and fellow CONCERT Wealth Management Investment Committee member posed that very question to the committee via email after the close yesterday.
In my response, I pointed out that what's different this time compared to the other pullbacks we've seen this year, is the rise in the dollar, the classic divergences present, the narrow leadership, and the weakness in many underlying indicators. I said that this combination has, in the past, led to meaningful declines as well as bear markets.
Yet at the same time, I was forced to point out that a topping process can take a considerable length of time and that the above stated concerns are not, in and of themselves, catalysts.
Finally, I pointed out that we don't make predictions or "market calls" at my firm (I learned a long time ago that Ms. Market doesn't give a hoot about what I think might happen next in her game) and that our goal was to stay in line with what "IS" happening in the market as well as our market environment models, which have been neutral for some time now.
The conclusion was that while no one can be certain whether or not this is THE correction, the indicators DO suggest that this is a time to play the game less aggressively. So, the bottom line is that now is the time to let price be your guide. Unlike so many indicators, price, by definition, cannot deviate from itself and therefore, will tell us when THE correction is upon us.Turning To This Morning
Although stocks were trashed on Wall Street yesterday, the global markets didn't really follow suit. Sure, Japan and Hong Kong were lower. However, European bourses are higher across the board on the back of talk that Thursday's move in the U.S. was overdone. Here at home traders will be focusing on the second revision of the nation's GDP, which is expected to come in at 4.6%. Of interest here is whether or not the report is "hotter" than expected.Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Crude Oil Futures: +$0.45 to $92.98
Gold: -$2.40 at $1219.90
Dollar: lower against the yen, higher vs. euro, and pound.
10-Year Bond Yield: Currently trading at 2.499%
Stock Indices in U.S. (relative to fair value):
Things turn out best for the people who make the best of the way things turn out. -John Wooden
Wishing you green screens and all the best for a great day,
Positions in stocks mentioned: none
Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)Advertisement
Will You Be Ready For The NEXT Bear Market?
Heritage Capital Research's NextGen Active Risk Manager Can Help
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.
Mr. Moenning is also the owner of Heritage Capital Management (NASDAQ:HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.
Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.