“Over the years, I’ve observed that overvalued, overbought, overbullish market conditions have historically been accompanied by what I call “unpleasant skew” – a succession of small but persistent marginal new highs, followed by a vertical collapse in which weeks or months of gains are wiped out in a handful of sessions. Provided that investors are in a risk-seeking mood (which we infer from the behavior of market internals), sufficiently aggressive monetary easing can delay this tendency, by starving investors of every source of safe return, and actively encouraging further yield-seeking speculation even when valuations are obscene. Once investors become risk-averse, as deteriorating market internals have suggested in recent months, vertical declines much more extreme than last week's loss are quite ordinary...
…The 8% subset of history matching present conditions captures a cumulative loss in the S&P 500 equivalent to turning a dollar into less than 7 cents.” – John Hussman, PhD. Weekly Market Commentary at…
http://www.hussmanfunds.com/wmc/wmc150824.htm
I don’t see this as the final top. When this correction plays out I expect new highs. We’ll see.
MARKET REPORT / ANALYSIS
-Monday, the S&P 500 was down about 4% to 1893 at the close. (That beat yesterday’s drop of 3.2%.
-VIX was up about 42% to 39.91.
-The yield on the 10-year Treasury fell to 2.00%.
Wow! - Another huge down day on even higher volume. The correction seems to have jumped directly into the “waterfall” phase when it heads nearly straight down for multiple sessions. A correction often makes a low at end of the waterfall phase that isn’t too much higher than the final low, but that assumes this is an “ordinary” correction in the 10-20% range. Monday could have been close to a bottom for this “ordinary” correction, or it could be the start of something much worse, such as a true bear market. After a long period of meandering with the options boys showing no fear, the world woke up to panic in short order. Too bad the options Pros weren’t doing a better job; it might have given me some more warning on this correction.
The Shanghai Composite has lost 38% since 12 June. With investors as jittery as they are, it is always possible that the US markets will follow China down.
The only good news is that I started this correction about 50% invested and that’s a conservative position. I hope to make some money on the back side by identifying a bottom, and buying heavily later on.
The S&P 500 fell below the 1973 level so that leaves a new test point at 1862 on a closing basis and that's only about 2% lower than Monday's close. The closing low of 1862 goes back to 15 October.
One indicator that the S&P 500 is near a bottom is that only 4% of stocks advanced on the S&P 500 Monday. Expect a bounce Tuesday.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 35% Friday vs. 42% Friday. (A number below 50% is usually BAD news for the markets. Again, New-lows outpaced New-highs Monday. The spread (new-highs minus new-lows) was minus-1256. (It was -611 Friday.) There were only 2 new-highs Friday.
The 10-day moving average of change in the spread fell to minus-45, Friday. In other words, over the last 10-days, on average; the spread has DECREASED by 45 each day. Internals remained negative on the markets.
NTSM
Friday, the NTSM long term switched to SELL. Price, VIX and Volume indicators are negative. Sentiment is neutral.
TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION AS OF MONDAY
G-Fund (Cash, risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
I’ll buy some XIV Tuesday if the VIX climbs higher Tuesday as a trade.
