Dark Clouds Gathering The Financial Markets

Sprout Money's picture

dark clouds financial markets

We have been on alert for the last few weeks as the financial markets are faltering. Not necessarily on the surface, as new all-time highs were put on the board in the past few weeks, but the wood is starting to show through the paint. Underneath the surface, there are a few things that do not make us feel very comfortable. It is not a feeling we are used to, as we have been positive on stocks in general since late 2010 due to the monetary inflation. Three years later, however, there are a few factors that have caused some raised eyebrows, including ours.

In the first place, volume is visibly dropping and the rally is losing momentum. In other words: the pool of (new) buyers is drying up and when a market hits its head on the ceiling a few times, it will come down; sometimes hard and fast! Another point we see, is that sector rotation is dominating the market. While 2013 was a year of spectacular profits for technology and other cyclical sectors, we are noticing that the strongholds of the market today are sectors like energy, utilities, telecom… boring traditional market segments, if you will, but also sectors investors reach for in times of uncertainty. The below chart from StockCharts.com clearly shows that these sectors were leading the market last month, while technology and other cyclical sectors could not hold on to their returns.

stocks sector rotation 2014

(Source: StockCharts)

With the second quarter of 2014 now well on its way, it is obvious that the markets have not really pushed onward this year, in stark contrast to the years before. We have not forgotten about the bad month of January, of course, and the tough first couple of days of the year for the stock market, as history indicates that a difficult start often weighs down the performance of the market for the rest of the year. Although we are only one quarter and a few days in, that is exactly what is happening however, and we fear that the coming months will not be a walk in the park as well. April is usually a great month for the stock market, but afterwards everything generally goes downhill quite quickly in May, June, and the summer months.

The question that we are most concerned with is the following: are we about to experience another mild correction, or is this the year when the market gets the wind knocked out of it? Considering the fact that we have been on the rise for a few years now, without any kind of correction that is worthy of mention, the latter option might be closer to the truth. Let it be clear that we would welcome a correction with open arms, as markets never rise in a straight line. Today, a lot of stocks also have a lot of expectations priced in them already, while the economy is not visibly picking up steam at the same time. The stock market is getting ahead of the facts and reality, which is never a great starting point for an investor.

As the profits of publicly listed companies – the driving force behind the stock market – are not showing a lot of promise, valuations are creeping up fast as well. If we do not see any positive developments in the coming months in that regard, it will be time to hold on to our hats, and economic indicators are not really helping to lighten up the mood. Even more, they are ominous and hint at darker days. A great example is the recent free fall of the CESI, the Citigroup Economic Surprise Index.

CESI 2014

(Source: Thomson Reuters / Twitter @beursanalist)

The CESI tracks economic expectations in relation to actual market data, and the number of positive surprises have been replaced by spikes to the downside, while the global markets (MSCI World index) are not budging. Now, you could say that the CESI also took a dive in 2012 and 2013 while the stock market held its own. Although that is correct, we have to underline that the central banks, especially the Federal Reserve, were always ready to step in with monetary injections to prevent the worst from happening. Ben Bernanke started his career at the Fed with a crisis of epic proportions in 2008, after which he switched on the printing press to prevent the financial markets from collapsing.

Janet Yellen, however, is slowly turning that printing press off, which is something investors are not too happy about. The question whether the markets will correct this year or not, is answered consequently with the next question: will the Fed come to the rescue again when the walls come crashing down? At the moment, it is anybody’s guess as Janet Yellen has no track record with regards to these types of situations.

Even if Yellen stays the course of scaling back quantitative easing, however, we do not expect a repeat of the crash of 2008 as interest rates and the inflation rate are still low, and will most likely remain that way for the foreseeable future. A decent correction followed by a period of consolidation seems like a more realistic scenario for now. However, clouds are gathering over the stock market and we are keeping a close eye on the developments, as a move from any central government could push it one way or the other. Also, a jump in inflation could cause markets to tumble quickly. That is why we are advising our subscribers to strengthen their cash positions and hedge (short) against a potential stock market decline (to protect their sizable returns). And last, but not least, buy some gold and gold stocks.

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q99x2's picture

Yellen gonna print or pipe out and around the back. You can do a lot with FRAUD that you can't with reality.

Polymarkos's picture

The market reminds me of a US Navy Aegis class vessel...during an inspection, one of the inspectors put his foot through the deck. It turns out many parts of the ship were solid rust, held together py layer upon layer of paint. One solid whack from an enemy peashooter would've put it out of commission. Our markets are now more paint and rust than anything else.

cynicalskeptic's picture

At least rust comes from something solid.

These markets are more like stage flats - all illusion - canvas and painted luan.   

Magooo's picture

The Fed will do anything it can to prevent a crash.   Including secretly printing money and buying the market.

Obviously this will blow up spectacularly at some point. 

nostromo17's picture

6 years now the thing hasn't really crashed. The lost generation those extincted from the labor force during them.

willwork4food's picture

Yea, be careful what you're waiting for. When it hits, it won't be pretty.

nostromo17's picture

Maybe just some put options are in order.

DangerWillRobinson's picture

There are corrections, and then there are C O R R E C T I O N S . The Fed will protect only itself in any event. The dollar will someday in the not so distant future be used only as butt fodder.

cifo's picture

That's not a good photo. NYC should have been pictured rather than Toronto.

nostromo17's picture

perhaps just careless confusion led to the Toronto pic?

mumbo_jumbo's picture

"we do not expect a repeat of the crash of 2008"


WTF!!  how could it NOT be?

caustixoid's picture

There won't be any sustained crash - 1987, 2000-01, 2008-09 - the Fed just keeps resurrecting the corpse.  It's frigging "Decades at Bernie's". 

Sure, Bernie needs a lot of makeup now, and they're having to inject silicon in his sagging cheeks, and the "did-someone-fart?" line is getting old covering up the smell, but dammit Bernie's still dancing and soon he'll be back from the taxidermist looking better than ever.


cynicalskeptic's picture

Maybe there's something to 'reanimating corpses'?    Maybe all the Zombie movies of late have some basis in reality?

Popular culture has an eerie way of referencing reality.

quasimodo's picture

True, but then there is a reason they say "don't touch the exhibits".

At some point, they all turn to dust, and we are fast approaching the period where a good stiff wind will be all it takes.

cynicalskeptic's picture

Lenin's corpse held up remarkably well.

moneybots's picture

"Even if Yellen stays the course of scaling back quantitative easing, however, we do not expect a repeat of the crash of 2008 as interest rates and the inflation rate are still low, and will most likely remain that way for the foreseeable future."


Who was expecting the crash of 2008 before it happened?


Is low inflation high, if in fact it should be deflation?  if interest rates are low and people do not have the ability to borrow, isn't it the same effect as if the interest rate was 20%?

Polymarkos's picture

I expected the crash of 2008, only I figured it was going to happen in 2007. I seem to occupy the leading edge in the economy, the part that goes off the cliff first. Every time I can't find work longer than 5 months, I know something is up.


But knowing something is up never helps me find another shitty job. I sure as hell can't spare a time to lose in the markets.

NYPoke's picture

I don't expect a repeat of the crash of 2008.  I expect a repeat of the crash of 1928-1932, only much faster.

elwind45's picture

Again you under estimate resolve and control of the Global Central Banking mechanism to corner the rest of the room before the paint dry? They don't call its massive asset storehouse a balance sheet for nothing! If you are correct than gold gets ouch'd?

Comte d'herblay's picture

I was always told that there, "Is silver cloud beind every lining". 

rsnoble's picture

Anything over S&P 450 is overpriced fucking garbage in this economic environment.  Exactly how far are people willing to pay into the future?

Kinda like college loans..........the system needs all the debt a person can generate from the 'getgo'.  No time to wait for them to screw up, hang them by the balls now.


HardlyZero's picture

awaken those Animal Spirits and skim off the 1% exceptional prospects.  It is vicious.

AdvancingTime's picture

If things get rough across the globe expect eyes to return to Europe, where they continue to talk. I have not written much about the Euro-zone as of late because nothing is really happening. The Euro-zone is engaged in a talkathon, with fear of an immediate collapse off the table the members of the Euro-zone much like their political counterparts in America just talk about solutions without any action. Below is an article updating what is not happening in Europe.


elwind45's picture

Given this weeks bond action shouldn't you be praying for Japanese bond epic fail?

rsnoble's picture

Didn't we just have a discussion on how 'talk' was the new weapon of choice?

The EU is a fucking disaster.  There's something to talk about.  Of course everone here already knows it.

falak pema's picture

Is that Janet Yelling : storm over  Central Park  or Christine Haggard from looking at rain in Spain?

BeetleBailey's picture

It's the stink of Bernanke's printing press, farting out exhaust from being on "Lunatic Speed" for the past 80 months....+

Stuck on Zero's picture

I fear no evil because the Fed is watching over me.


TheRideNeverEnds's picture

Remember when you look back upon your financial history and see only one set of footprints in the sand, its was then that the FED carried you.  

0b1knob's picture

Isn't that a picutre of the skyline of Toronto?  Does the author imply something about a Canadian real estate crash possibly?

cynicalskeptic's picture

The Hacker 'weather forecast system' installed in the CN tower must be 'malfunctioning' again.........

Having failed to get WWIII going with Iran, Syria, Libya and now with Russia over the Crimea, it appears that the US is following the plot to 'Canadian Bacon' and preparing for war with Canada to deflect attention from the impending financiual meltdown.