The first change often occurs below the surface. The deterioration of the market’s internals typically occurs in the lead-up and development of a cyclical market top, but this dynamic too can persist for an extended period. However, eventually these divergences reach a head, and the most egregious cases have historically occurred within close proximity to major, cyclical market tops. The deterioration of the broader market is so great that the resultant foundation of support below the surface of the popular market cap-weighted averages is nearly non-existent. Once the relatively few leaders propping up the market begin to collapse under the weight, the inevitable cyclical decline can commence.
"The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the 'ingredients' for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.' Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst, they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."
Another day, another technical breakdown, only this time not for the US but for the entire world. As BofA points out, "the weekly global A-D line shows a 2011-style breakdown", which it notes "is a market risk", although it remains unclear if central banks, and China's National Team in particular, use technicals when deciding to manipulate stocks.
The US equity market struggled last week but the S&P 500 held the rising 200-day MA once again, but as BofAML notes, the much broader-based NYSE stalled at 200-day MA resistance last week. The NYSE has a potential head and shoulders top as well as a breakdown for the NYSE stocks only advance-decline line through the March low. Similar to the NYSE Comp, the Russell 2000 also shows a potential head and shoulders top with a breadth breakdown a big risk to 1200 support...
"The question for 2015 is whether Fed actions are going to take away the liquidity punch bowl, and create a problem for the next rally's ability to achieve escape velocity... We saw this principle of diminished liquidity back in 1998-2000, and again in 2007-08..."
When we first exposed the shockingly dire lack of breadth in US equity markets, it was shrugged off by the mainstream media as yet another 'worry' in the wall to climb. It seems, however, that facts inevitably force their way to the surface and so both Bloomberg (more than 100% of this year’s increase in the S&P 500 Index is attributable to two sectors, health-care and retail. That’s the tightest clustering for an advancing year since at least 2000) and The Wall Street Journal (Amazon, Google, Apple, Facebook, Gilead and Walt Disney Co. account for more than all of the $199 billion in market-capitalization gains in the S&P 500) have been forced to expose the ugly truth about US equities... it is not a stock market - it's a market of 6 tail-chasing momentum stocks.
When we noted the stock market’s weak internals yesterday, we weren’t sure if things could get any worse – and by how much – with the major averages still able to hold near 52-week highs. Well, the answers were “yes” and “a lot”... yesterday, July 20, 2015, was the thinnest new high on record in the U.S. stock market.
With 10% declines following the past 5 occurrences, the after-effects of this development have not been kind to the Nasdaq.
While there were certainly concerning bits of evidence piling up regarding the longer-term fate of U.S. stocks, the most important factors in the immediate-term – such as the ongoing confirmation of new highs by the NYSE Advance-Decline Line – continued to support the bull market. That may be starting to change...
After a test of the breakout level in March, the index moved to new highs again in April. However, over the last few weeks, the VLG’s triple top breakout has shown initial signs of cracking.
The current equities bull run seems unstoppable. No amount of geopolitical concerns, Greek default fears, rate hikes, US dollar strength, crude oil price volatility, Russian sanctions or whatever else you can think of can put a dent on it. Perhaps we should take a step back and try to understand what is driving this strength. OK, we know that central banks continue to spike the punchbowl, but what is the actual transmission mechanism that directs all this liquidity into equities – as opposed to commodities for instance, which continue to struggle?
Let’s focus on what happened in the lead up to the summer of 2011, right before the markets cratered on the back of everything that was going on in Europe and the downgrade of the US' credit rating by S&P. The leveraged loans index peaked at the start of the year and traded sideways up until that eventful August. This was a sign that something was not right in the credit markets; and equities pretty much followed the same pattern. If we fast forward to today, we can see that the leveraged loans index peaked in July 2014, indicated by the red line in the graph, and has noticeably declined since; at the same time equities continued to move higher, a divergence which is a novelty in this bull market. Is this telling us something? We believe so - it is a red flag for equities.
When the most persistent, most aggressive, and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption, and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken.
Rogers tells us he's buying Chinese financials, remains long the yen and thinks gold could be going much lower.