Monday, February 15, 2016

Chinese Imports & Exports Collapse … Chinese Banks on the Brink … Companies are Buying Back their Shares – Bullish? No! … Blame the FED … Short Covering Rally Underway … Stock Market Analysis

China's exports fell 11.2 percent on-year in January, while imports declined 18.8 percent, clocking far bigger slides than expected by analysts.” Story at…
My cmt: The article goes on to state that the Chinese economy grew about 7% year-over-year in Q4 of 2015.  I am sorry, but the import export data now makes it pretty clear that the Chinese economy is collapsing, not growing 3-times the rate of the U.S. That would explain why the Shanghai stock market is down 47% since its peak in June of 2015.
“Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should the Chinese banking system lose 10 percent of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass, the founder of Dallas-based Hayman Capital Management, wrote in a letter to investors obtained by Bloomberg.” Story at…
My cmt: I saw the above story last week, but I thought it was a sobering reminder since many will be saying that the stock market has bottomed, so I am posting it now.  I don’t think it has: (1) Technicals haven’t signaled a bottom. (2) The world’s economy is very fragile – especially China, but Japan is a disaster. Australia, Canada, Britain, Germany and France are already in Bear Markets. For more, see…
It still seems unlikely that the US can avoid a bear market.


Chart from Factset “Buyback Quarterly” at…
My cmt: One would think that if corporations are buying back their stocks at a near record pace that it should be bullish.  Who better to know their stock value than companies? Unfortunately, this is not the case.  Corporate buybacks are yet another topping indicator.
"[The Fed] waited too long to begin the tightening process," noted [Former Dallas Federal Reserve President Robert McTeer]…The central banker's critique echoed that of other economists, whom have argued that the trillions of cheap dollars flooding the system have exacerbated the current downturn, and made the market addicted to the liquidity.” Story at….
“The underlying economy is weak, corporate earnings are not likely to be good, global growth rates are horrible, there is a liquidity crisis in terms of new money as that is defined by The Investment Rate (TM), and we are in the third major down period in us history akin to the Great Depression and stagflation, so the problems are not going to go away, but the market has been beaten down recently, and it is ripe for a short-covering rally.” Story at…
- Monday, the NYSE is closed to observe Washington’s Birthday/Presidents Day, but it is a good day to review the big reversal in new-high/new low data last Friday. This is important because these large improvements sometimes signal an end to a correction.
Friday the number of new-highs remained below the number of new-lows, but the difference improved by 556. The spread (new-high minus new-lows) was -672 on Thursday and -116 on Friday.
This level of improvement has occurred 5-times in the last 6-years, and most recently on 20 Jan 2015.  Then, the market improved by about 4% after the positive spread change over a period of 13-days and then resumed its decline.  Three of the five were during the 2011, 19% correction. In 2011 they were: 8-weeks before the bottom; 6-days before the bottom; and 2-days after the correction bottom.
The 5th incident was 25 August 2015 when the S&P 500 bounced up from 1867 and rallied for 5-1/2 months before closing Friday at nearly the same level. Thus, in about 40% of the recent record an improvement of 500 new-highs to new-lows resulted in an end to selling, but not necessarily an end to market troubles.
Looking at improvement on a standard deviation basis would expand the record to about 10-instances with 4-cases where the improvement signaled an end to a decline.
Bottom line…in roughly 40% of cases a significant improvement in new-highs over new-lows indicated an end to selling. In 20% of cases the improvement ended corrections.
Given the lack of other supporting evidence at the low Friday {e.g. improved internals (other than new-highs/new-lows), a volume reversal, lack of evidence of capitulation selling, etc.} it appears unlikely that Friday was a bottom. It could, however, bring a rally lasting from 2-weeks (with a rise of about 4%) to 2-months (with a rise of about 10%).  The shorter duration is more likely.