Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Get Ready for Inflation Mega-trend to Surge 2021 - 4th Mar 21
Stocks, Gold – Rebound or Dead Cat Bounce? - 4th Mar 21
The Top Technologies That Are Transforming the Casino Industry - 4th Mar 21
How to Get RICH Crypto Mining Bitcoin, Ethereum With NiceHash - 4th Mar 21
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Stock Market Sound the Alarm

Stock-Markets / Stock Markets 2015 Aug 25, 2015 - 11:48 AM GMT

By: Bob_Loukas

Stock-Markets

We saw an amazing capitulation event in equities these past three sessions. It’s clear that market internals were weak, but no one could have foreseen the degree and rapidity of the selloff. The major US indices have already entered into official corrections (-10%), while many world markets are approaching bear market (-20%) territory. And it’s unlikely the declines are over. Friday’s drop was a massive distribution day, with 93% of volume trading lower. With a 1,433 point decline, that was the largest three day DOW decline on record.

The VIX spiked sharply, showing the sort of extreme panic/fear in the market that is typically reserved for the end of Investor and Yearly Cycle declines. If we use the the four-year rally in equities as our guide, this type of sell-off corresponds with markets completing a Cycle Low, after which they should turn higher and rally for 10-20 weeks in a new Cycle.


That’s the script if we believe the bull market is intact, but I don’t think that’s what’s going to happen, not this time. I believe this time is different, primarily because the Investor Cycle count is so early (week 6 of 22-24 weeks). With so many weeks left to complete the Investor Cycle, the current waterfall decline is extremely concerning, and could be an omen of significantly lower prices in the near future.

Equities VIX

If I’m wrong about the Investor Cycle count, if we are at the end of the previous Investor Cycle, then the current sell-off is likely to be just about over, and the bears will once again be punished by a sharp move higher. If that’s the case, the four-year advance, which has been punctuated by a long series of “buy the dip” moments just like this one, will again drive a windfall for astute bull market traders.

But that’s not my primary expectation, since I believe that a much deeper shift is occurring in the equity markets. The nine month rounding-top pattern has resolved itself lower, and this has real implications for the longer term trend. In addition, the character of the market appears to be changing, with fundamentals beginning to matter again, and blind “buying the dip” being a path to losses. The markets have shifted to become more efficient, with new developments being quickly and efficiently priced into equities. This change in character is a process, and is being propelled by the realization that the world, and in particular China, is slowing rapidly. Analysts are coming to understand that the next wave of deflationary pressure is now upon us.

Last week, we had further evidence from China that the world’s manufacturing hub is slowing rapidly. The Caixin Purchasing Managers Index, a gauge of Chinese manufacturing activity, fell to a 77-month low in August. It showed that China’s growth is nowhere near the 7% target, and that, in fact, China’s manufacturing base is contracting!

No wonder the Chinese have been quick to devalue the Yuan. Their exporters are being hit with slowing demand worldwide, and lower prices through currency devaluation is one of the few levers the Chinese can pull. As a result, the Chinese stock market is down a massive 35% from its peak, and has given back the entire speculative blow-off of the past 12 months. The current decline, after a similarly large speculative blow-off driven by retail buyers, has all of the characteristics of a bull market top. And ominously, the equity decline is signaling that the Chinese economic engine is in serious trouble.

China

Turning to Europe, as the fallout from a slowdown in the Chinese economy spreads across the globe, Germany’s stock market has suffered more than most. Germany joins China in being among the world’s largest manufacturing and exporting nations. And like the Chinese market, the DAX is telling us that demand is slowing. The DAX experienced its own blow-off, and has since retraced more than 20% from the peak, comfortably into bear market territory.

DAX

Declines in Chinese and German equities are evidence of weakening economies, and it’s no surprise that weaker manufacturing is putting pressure on global commodities prices, particularly oil, coal, iron, copper, and steel. The commodity price crash that began in 2014 was a signal that equity declines were on the way. In the short term, weak demand and lower prices for commodities is often considered bullish for stocks, since the cost of manufacturing is lower, but the longer term implications are decidedly more bearish.

What’s most important to other markets in the longer term is why commodity prices have fallen. In this case, commodity declines are due to weak underlying demand for raw materials. Such a situation can only be driven by weak demand for finished goods, and this calls into question the very foundations of the equity bull market.

One thing is certain: if the mining companies that produce the world’s raw materials are performing poorly, there is no way the world can be in a constructive, secular bull market Cycle. Mining companies rarely, if ever, perform poorly during the expansion period of a bull market. So, with mining companies down 50% from their highs, it appears that the business Cycle is turning lower and that world equity markets are about to begin to “efficiently” price that in.


8-22 Mining companiesSource: WSJ.com

For the US equity markets, a 10% decline in just three sessions could almost be considered a crash; that significant a decline just doesn’t happen very often. It was the first ‘three day’, 10%+ decline in over four years (correction), and now the S&P appears to be close to a normal Daily (40 day) Cycle Low. The panicked dumping of equities is a sign that market participants are waking up to how unhealthy the market has become, and that it’s likely to decline further in the not-too-distant future.

Equities Daily S&P 500

In the short term, the bloodbath left the S&P 80 points below the lower Bollinger Band. The S&P will almost certainly bounce back this week – unless it continues to crash. Both are real possibilities. The current collapse has opened the door to a much larger correction, but that would be a process that would take time to unfold. Especially since the S&P is so far oversold in the short term.

The recent action has left the S&P at extreme levels when compared to its 50 day moving average, and other metrics are also many standard deviations below their normal levels. Plus, since the current Daily Cycle is on Day 35, the current sell-off is likely to form a Daily Cycle Low in the next few sessions, with price then reversing higher in a new Daily Cycle and recovering a large portion of this week’s declines.


8-22 S&P below moving averageSource: Bedspokeinvest.com

Along these lines, we’ll examine the VIX, a “fear gauge” that measures traders’ estimates for how volatile stocks will be over the next 30 days. Occasionally, futures contracts based on the VIX will drop below the VIX spot price, suggesting that traders expect volatility to fall soon. It’s rare for futures contracts that don’t expire for a number of months to have a lower-price than the near term futures, and when they do, it’s called backwardation. As per the below chart, whenever we have seen significant backwardation in the VIX, an Investor Cycle Low and a significant rally have occurred in equities.


8-22ViXSource: Sentimentrader.com

As I described earlier, if equities have reached the point of an actual Investor Cycle Low, we’re about to see a monster, face-ripping rally. But traders should keep in mind that the character of the equity market appears to have changed, so any rally might be short-lived. My favored Cycle count shows the current Investor Cycle is beginning week 7 but has already failed, so there is plenty of time for more downside.

This week’s collapse was a significant breach of support and, for the first time in 4 years, we have a negatively sloped 26 week moving average. The trend appears to have changed, and the current market action more resembles the 2011 collapse than it does the action since. The market has shown amazing resiliency during the past 4 years, and has given its fair share of head fakes. But, based on the Cycle count, I really doubt that’s what will happen this time. I believe that we’re likely headed into a severe, 12-16 week market correction.

Equities Weekly s&P 500

An Investor Cycle failure (such as happened Thursday) is a sign that the Yearly Cycle has topped. And with the market in the timing band for a Yearly Cycle Low – the last YCL was in October of 2014 – I believe that’s the path we’re on. Yearly Cycle declines occur rapidly and violently, and in the recent past have quickly given way to rallies that led to a new all-time high. This time, however, the Yearly Cycle decline is coming off of a very significant eight-month rounded topping pattern, and has very weak technical indicators and poor internal breadth. Because this Yearly Cycle much more closely resembles the correction of 2011 than the three previous bullish Cycles, I believe that the overdue market correction is already well underway.

Equities Monthly

No one can say whether the current bull market in equities is over, and I’m not prepared to make such a statement at this point. Especially with the FED actively engaged in the market and having demonstrated a willingness to sustain it at almost any cost. But that does not preclude the market from experiencing a correction; no external force is capable of preventing those. Students of market history know that it is never different this time when it comes to reversion to the mean.

At this point, the question becomes how deep the current correction will be and what policy response it will induce from the FED. The combination of slowing growth, debt deleveraging, disinflation, and equity market declines is likely to spur the world’s central banks to action. I expect them to launch another attempt to artificially sustain the economy, even though the outcome is likely to be only a bigger, more epic asset bubble.

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

You’re just 1 minute away from profitable trades! please visit http://thefinancialtap.com/landing/try#

By Bob Loukas

http://thefinancialtap.com

© 2015 Copyright  Bob Loukas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules