From both and fundamental and technical viewpoint, there is mounting evidence that the current decline might just be sending a signal that there is more going on here than just an "overdue correction in a bull market." While it is too soon to know for sure, there seems to be little risk in being more conservative within portfolio allocations currently until the market environment clears. However, the proverbial "elephant" is margin debt.
So now comes the era of gluts, shrinking profits and a drastic deflation of the giant financial bubble that the world’s central banks have so foolishly generated. And this time they will be powerless to stop the carnage. Yet the beleaguered central bankers will launch desperate verbal and market manipulation ploys to brake the current sell-off and thereby preserve the bloodied remnants of their handiwork. When in response the gamblers make their eighth run at buying a dip that is now rapidly turning into a crater, it will be an excellent time to sell anything in the casino that isn’t nailed down.
Over the weeks, months, and years ahead we’ll begin to understand more about the fallout from the death of the petrodollar and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that's fueling speculation about the viability of the dollar peg. As Bloomberg reports, the current situation mirrors a "very scary moment" in Saudi Arabia’s history.
Even if it is short term oversold, this is actually a quite dangerous market – caveat emptor, as they say.
"When all the experts and forecasts agree – something else is going to happen."
Both the 10Y (2.13%) and 30Y (2.80%) yields broke below crucial technical support levels this morning (2.14% and 2.81% 200-day moving averages) - both nearing 3-month lows (in the biggest yield drop in 2 months).
"Any rally that occurs over the next few days from the current oversold condition should be used as a "sellable rally" to rebalance portfolios and related risk."
The carnage is contagious. The S&P 500 just broke down below its 50- and 100-day moving averages unable to hold the ubiquitous pre-EU-close ramp highs. Treasury yields have plunged since the weak spending and ISM data with the 5Y breaking below its 200-day moving average and 30Y yields testing 3-month lows...
The disconnect between economic underpinnings, market internals and "bullish" investor optimism leaves many investors/advisors "mentally conflicted." If they "sell" too soon, they might miss a further advance in the market. But if they wait too long, well, they have lived through that scenario previously. This week's reading list is a smattering of conflicting views about the markets and the economy.
"The reality is that business and investment spending are the true leading indicators of the economy and the stock market. If you want to know where the stock market is headed, forget about consumer spending and retail sales figures. Look to business spending, price inflation, interest rates, and productivity gains." The Skousen index suggests that the current economy is significantly weaker than headline statistics state.
"Look at the data, and you’ll realize that our present concerns are not hyperbole or exaggeration. We simply have not observed the market conditions we observe today except in a handful of instances in market history, and they have typically ended quite badly..."
We love reading quotes from Hussman in 2000 and 2007. The air is getting pretty thin up here. A stock market driven by Google, Apple, Netflix and a few other tech darlings with no earnings does not make a market. Time is running out for the bulls. The same morons on CNBC ridiculed and scorned his facts then and they scorn and ridicule him now. Do we trust Jim Cramer and Steve Liesman or John Hussman? Guess.
Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning: "I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble."
Trying to make sense of the global capital markets.
For all of the longer-term, ancillary red flags and concerns that have materialized in the latter portion of this cyclical bull market (many of which, we have laid out), bulls have had the same response: price is all that matters. It appears to us, however, that a great many bulls preaching “price patience” have failed to recognize one thing: there is already evidence of a breakdown in prices. The “stock market” consists of many segments, not just the S&P 500, So it depends where you are looking.