WHAT’S NEXT? (Financial Sense)
2011 correction in red; current correction in black.
CHART SOURCE:
BLOOMBERGIn the following piece, Chris Puplava compared the correction to 2011 and 1998:
“…if…global growth does not pick up, China may indeed see a larger [currency] devaluation over the near-term and we could be in for a more protracted corrective period. This could be a tricky and volatile market just as it was in 1998 and in 2011 but I believe, ultimately, when the current rout ends we will see new highs in the stock market later in the year or at the latest in early 2016. Global central banks are already in a coordinated easing mode and, in light of the current weakness, may respond even more forcefully to push the bull market higher for one last leg. If this outlook holds true, I believe we should see a bit more volatility in the months ahead before a final blow-off top later in 2016 or, perhaps at the latest, 2017.” – Chris Puplava. Commentary at…
http://www.financialsense.com/contributors/chris-puplava/where-market-go-from-here
Excellent article; I highly recommend it.
In the near term the market is following a correction script that includes a failed first rally. Monday was the first down day in the failed rally. The norm would be a few more down days that will take us at or near the prior lows.
DEATH CROSS ON THE S&P 500
Friday, the S&P 500 signaled a “Death Cross” and it remains in effect today.
Definition: “On a stock chart, the Death cross occurs
when the 50-day MA [moving average] falls below the 200-day MA. As the name
implies, a Death Cross is associated with sharp downward price” From…
http://www.stockopedia.com/chart-signals/death-cross-5179/The above definition is a little too dramatic. In the last 5-years a death cross has only occurred during 2 periods: (1) At the bottom of the 2010 correction and a number of days after the bottom as the Index recovered. (2) One and a half months before the bottom in the 2011 correction. Is this 2010 when the bottom was already in? Or, is it 2011 when the market fell another 7% after the Death Cross signal appeared. Worse yet, could it be October of 2000 when the cross signaled a major bear market?
There is no comparison to 2008; the losses were huge. The current correction is tracking the 2011 correction reasonably well (as shown above), but whether that means the bottom is in (as it was in 2011) not clear. (BTW: Don’t expect the charting programs at Yahoo and Google to show an accurate Death Cross on their financial charts – they don’t.)
VIX is lower in the current correction, so far, and that may mean complacency remains. That would suggest there is further downside ahead. A complacent market is subject to sudden shocks when investors wake up due to bad news or simply risk aversion.
IF YOU NEED TO REDUCE RISK – DO IT NOW (Hussman Funds)
“The single most important thing for investors to understand here is how current market conditions differ from those that existed through the majority of the market advance of recent years. The difference isn’t valuations…The difference is that investor risk-preferences have shifted from risk-seeking to risk-aversion. That may not be obvious, but in market cycles across history, the best measure of investor risk preferences is the behavior of market internals, as measured by the uniformity or divergence of market action across a wide range of individual stocks, industries, sectors, and security types, including debt securities of varying creditworthiness…If you need to reduce risk, do it now…We fully expect a 40-55% market loss over the completion of the present market cycle.” – John Hussman, PhD. Commentary at…
http://www.hussmanfunds.com/wmc/wmc150831.htm
My cmt: I think the markets will make new highs after this correction ends; but that may depend on the news out of China and Russia and a few other variables.
MARKET REPORT / ANALYSIS
-Monday, the S&P 500 was down about 0.8% to 1972 at the close.
-VIX rose about 9% to 28.43.
-The yield on the 10-year Treasury rose to 2.2%.
I am revising my opinion of where we are in this correction. Carter Worth said on CNBC’s Options show Friday that we haven’t seen capitulation yet - the drop was too fast and came from nowhere. He concluded, “This market is going lower.” I have had similar thoughts recently, but Carter said it very succinctly.
Volume can measure capitulation. While volume was high at the recent high volume down day (1-day before the recent bottom), it wasn’t extreme. There have been much higher volume days as recently as 19 June 2015.
Let’s guess that we might have another 5-10% drop ahead of us. So far this still does not look like the start of a major Bear Market. 10% corrections occurred prior to recent bear markets so this may be a prelude to a bigger fall ahead in 2016.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 42% Monday vs. 43% 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-30. (It was -14 Friday.) There were 5 new-highs Monday.
The 10-day moving average of change in the spread fell to +2, Monday. In other words, over the last 10-days, on average; the spread has INCREASED 2 each day. (Conditions aren’t good now; they’re just better than a few days ago.)
Internals remained neutral on the markets.
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading.
They are usually right, but they are often late. They are most useful when they diverge from
the Index. In 2014, using these internals
alone would have made a 9% return vs. 13% for the S&P 500 (in on Positive,
out on Negative – no shorting). Of
course, few trend-following systems will do well in an extreme low-volatility,
nearly straight-up year like 2014.
NTSM
Monday, the NTSM long term indicator was SELL. VIX and Volume indicators are negative. Sentiment and Price are neutral. Friday, there was a “Death Cross” on the S&P 500, signaled when the 50-day moving average (dMA) crosses below the 200-dMA and that remained today.
MY INVESTED STOCK POSITION:
TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
G-Fund (Cash, risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
When I do move back into stocks, I will initially invest a high percentage into stocks and phase back if the Index gets to prior highs.
I will use technicals to call a buy at the bottom if possible. That will involve a re-test of the prior low so the market will have to fall back 100 points or so before we need to look for a bottom. That could be 1 to 2 months away. Currently the S&P 500 is at day 70 from the top. In 2011 the bottom was on day 108.
