A multi-decade Credit Bubble is coming to an end. The past seven years has amounted to an incredible blow-off top and the ongoing worldwide collapse in financial stocks provides powerful support for the bursting global Bubble thesis. Few are yet willing to accept the harsh reality that the world has sunk back into crisis as mal-investment, over-investment and associated wealth destruction remain largely concealed so long as financial asset inflation persists. This is true as well for wealth redistribution. The unfolding adjustment process will deflate asset prices so as to converge more closely with deteriorating underlying economic fundamentals.
While on any given day, stocks may tumble or surge as marginal buyers send increasingly illiquid indices lower or higher on ever lower volume, a more important question is what is taking place below the surface: are large holders looking to offload large exposure (by selling), or vice versa. For the answer we go to Bank of America, which has models to measure precisely this.
Has the market bottomed? Are stocks poised to rally to new highs? Let's find out!
The deterioration of the indicators highlighted below point to a downside break for the late-stage cyclical bull market from 2009, according to BofAML. Should 1,867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is a top that projects down to 1,600-1,575; and derspite the last 2 days' bounce, volume and breadth suggest a market under distribution or selling pressure, not primed for new highs.
The real enemy of investors is not these fairly routine 10 or 20% downturns. The real enemy is the bear market that is associated with a recession or crisis, the one that knocks your equity block down by 40 or 50%. And actually it isn’t even the depth that is the real enemy. For most investors the enemy is time.
"...this is the real world where 'trend followers' do battle with 'mean reverters'... US (and global) equities may be finally responding to tactical oversolds with what we believe is a sell strength relief rally..."
As BofA admits, "this sell-off differs from a typical growth scare in that parts of the recession playbook are failing miserably." So until we have clarity on whether or not this is a garden variety correction or a true bear market, here is BofA's advice on what to own in an "equity death spiral"
It is the “Core of the Core” that now concerns us the most. That is where Federal Reserve (and global central bank) policies have left their greatest mark. It is at the “Core of the Core” where momentous misperceptions and market mispricing have become deeply entrenched. It’s the “Core of the Core” that has attracted enormous amounts of “money” over recent years. It’s also here where I believe leverage has quietly been used most aggressively. Over recent years it became one massive Crowded Trade. Now the sophisticated players must contemplate beating the unsuspecting public to the exits.
“Fed Chair Janet Yellen will be forced to either acknowledge labor market tightening as reason to continue with the four-hike schedule for 2016 or risk her credibility, belittle job market stability and sound a warning about the risks of lower oil prices and cheap gasoline (sacrilege to regular Americans) by slowing the hiking pace after a single 0.25 percent increase last month. If she gets it wrong, things could get ugly fast."
JPMorgan's 2016 Outlook for the S&P 500 Index favored a continuation of a broad and volatile range into the first half of the year, below 2,100 and above 1,820-1,870 longer-term range support. While the unexpected early-January weakness has not violated the Oct 2014 and Aug 2015 lows and other support parameters near that area, the nature of the current decline raises some concern for what has been a constructive longer-term view.
The first week of July 2013 was the last time the Russell 2000 traded at these levels. That is 30 months of buy-and-hold for no return. Despite the constant clammer from "Small Cap fund managers" that they are the plaxce to be for protection against a soaring USD (since they are dominantly domestically focused), it seems the fact that small caps are much more sensitive to credit market conditions is the real reason and that market is carnaging.
The beaten-down Russell 2000 Small-Cap Index has reached a confluence of significant potential near-term support levels. Should this level fail to provide as much as a speed bump and the Russell 2000 slices right through it, then perhaps a more devastating market decline is already at hand.
"After suffering the worst start to a new year in history, the U.S. stock market has entered correction territory which is defined by a drop of 10% from its old high. The following "hateful eight" charts pretty much speak for themselves... This doesn't bode well for U.S. stocks which are now in the riskiest position since the bull market started seven years ago."