Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

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.


© 2005-2017 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

Catching a Falling Financial Knife