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3 Warnings For Market Bulls

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

Lowry Sees Bull Market Ending 

There is a very interesting podcast at Financial Sense with Richard Dickson, who is the Senior Market Strategist at Lowry Research. The reason that this particular interview is so interesting is that Lowry Research has been one of the primary supports for Jeff Saut's uber bullish view on the markets over the last couple of years. To wit:

"[May 2, 2014] In fact, the SPX has been in a flat-line pattern for almost two months, having only gained 0.03% since March 7th, causing many Wall Street wags to proclaim a major "top" is at hand. However, as Lowry's writes:

 

'The 88-year history of the Lowry Analysis shows that such stalemates are relatively common developments during most bull markets. They simply reflect periods in which investor buying enthusiasm is temporarily fatigued, at the same time that sellers are reluctant to part with their stocks, in anticipation of eventually higher prices. Thus, there is not enough Demand to push prices up to new bull market highs, and there is not a strong enough desire to sell to drive prices sharply lower. Eventually, sideways trading patterns are usually resolved through the process of a short-term correction, in which investors become impatient and sell, pushing prices low enough to revitalize buying enthusiasm and launch the next leg of the bull market.'

 

Obviously I agree with the astute Lowry's organization, and I will say it again, 'It is too early to know if this is the beginning of a 10%-12% correction.'"

That was so last year. However, very similarly this year, markets have once again been locked in a stalemate with "buyers" fatigued and "sellers" unwilling to part with stocks from fear of missing the next leg higher. 

So what is Mr. Dickson saying now? 

Dickson says when the broader indexes are approaching a top, the advance is led by fewer and fewer stocks, which has been seen at every major market peak they've studied.

 

This phenomenon registers in the market's widely followed advance-decline line, however, Dickson points out that relative under-performance by small-cap stocks often provides an earlier warning signal to potential trouble ahead. He notes that small-cap stocks began to deteriorate almost a year ago, and many have already entered bear market territory. This is not healthy action, he says.

 

Based on research conducted at Lowry, this predicts a market top within 4 to 6 months. In the interim, Dickson will be watching a variety of other technical indicators for confirmation, such as buying power and selling pressure.

Here is a chart of the advance-decline line and small-cap performance relative to the S&P 500. 

SP500-Adv-Decline-080615

 

McClellan: Market Lacking "Escape Velocity"

Tom McClellan, a family famous for the "McClellan Oscillator" recently issued a note discussing the importance of the number of advancing and declining issues and "escape velocity." To wit:

"To understand this important point, we need to explore and define a principle of rocketry known as 'escape velocity.' This term is variously (and sometimes confusingly) defined as the velocity which a projectile needs in order to escape the gravitational field of a planet or other body, and/or the velocity needed to achieve stable orbit as opposed to falling back down to Earth. My purpose here is not to defend either definition; for our purposes, the idea is the same, that there needs to be sufficient energy to keep from falling back down.

 

The Summation Index can show us that. For this discussion I will be using the Ratio-Adjusted Summation Index (RASI), which factors out changes in the number of issues traded... the RASI gives comparable amplitude levels with which to evaluate available financial market liquidity."

RASI July2015

"The +500 level for the RASI is the important go/no-go threshold for this concept of 'escape velocity.'

 

Since the 2009 bottom, the Federal Reserve has made sure that there was liquidity available to the financial markets, at least for the most part. The cutoffs of liquidity after both QE1 and QE2 led to vacuums in the banking system, and stock prices fell into those vacuums. 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, as highlighted in this historical chart. When the RASI failed to climb back up above +500, it said that there were liquidity problems which ended up keeping the stock market from being able to continue itself higher."

RASI 1998-2008bb

"My leading indication from the eurodollar COT data says that we should expect a major top in August 2015, and so there is not all that much time left for the RASI to get back up above +500. An upturn from this oversold condition should be able to produce a marginally higher price high, but if it cannot produce a RASI reading above +500, then we will know that the end has arrived for the bull market."

Effron: M&A Activity Looks A Lot Like 2007

In a recent interview on CNBC, Blair Effron, co-founder of Centerview Partners and one of Wall Street's biggest dealmakers, highlighted the similarities between the current M&A environment to that of 2007. 

Currently, M&A activity is at its highest level since 2007 with global volumes hitting $2.9 Trillion since the beginning of 2015. According to data from Dealogic, that is a surge of 38% as compared to the same period in 2014. 

Importantly, Effron also notes that the high valuations paid for M&A deals are, in large part, being driven by the current low interest rate environment.

Of course, with low interest rates, that means the majority of those deals are being funded by debt issuance. via WSJ:

"According to Dealogic, the Americas accounts for 83% of global acquisition related bonds, with a record $241.7 billion issued so far this year, compared with just $62.6 billion this time last year. In Europe, 38% of all high-yield bond issuance in the first half of the year has been related to M&A activity, according to Credit Suisse."

MA-DebtFinancing-080615

That is an interesting point since that is the same argument for high stock valuations, stock buy backs and dividend issuance and the housing market. Given that the vast majority of analysts currently believe interest rates are on the verge of rising, logic would suggest that such will likely be a negative for the bullish mantra. 

While we have seen this same game play out repeatedly before, this time is surely different...right?

 

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Thu, 08/06/2015 - 16:37 | 6398897 JLO
JLO's picture

looks like about 7 years is all it can take at full throttle before needing a refill.

Thu, 08/06/2015 - 16:38 | 6398898 Headbanger
Headbanger's picture

ONLY THREE!!?

Thu, 08/06/2015 - 16:42 | 6398914 JLO
Thu, 08/06/2015 - 18:10 | 6399199 sodbuster
sodbuster's picture

Conclusion?...........BTFD

Thu, 08/06/2015 - 16:44 | 6398910 Ham-bone
Ham-bone's picture

Whatever...My understanding of what is rally happening...on the front end is declining population growth in a system premised on perpetual growth of everything (# of consumers and consumption, amount of debt, ever lower rates) – the middle is mounting debt, leverage, manipulation to hide the delta between slowing growth and projected growth (expected growth...growth necessary to make the debts repayable and new investment profitable) – the back end have price dislocations as finance and economics have completely deviated from one another before eventually (likely soon) tragically recoupling.

I believe it all starts globally here…

http://econimica.blogspot.com/2015/08/the-imminent-demographic-collapse.html

and domestically here…

http://econimica.blogspot.com/2015/06/0ne-simple-chart-explains-great.html

FYI...annual population growth peaked in 1990 at +90 million a year...it's now down to +83 million a year but the trend is clearly broken and the economic / credit / leverage trends are all likewise broken.

Thu, 08/06/2015 - 17:13 | 6398999 Headbanger
Headbanger's picture

Pumping one's own blog doesn't usually go over too well here.

But your demographics info is very interesting and well presented.

So I bookmarked your blog.

Fri, 08/07/2015 - 01:21 | 6400252 Ham-bone
Ham-bone's picture

Thanks HB - fyi...all proceeds from my blog go to Special Olympics...I have a job and just started a blog to have a forum to raise the issues seemingly no one in the financial press or wall st. or or or will delve into.  That's probably why my articles are a mess and my graphics suck...still, independent ideas have an outlet.  I'm selling nothing and ask for nothng...just hope to change the conversation.

Thu, 08/06/2015 - 18:02 | 6399181 bbq on whitehou...
bbq on whitehouse lawn's picture

Central Banks own the markets, they push up prices on things that are valuable to them and crush prices on things that hurt them.
How many 1000$ paperclips are you willing to buy, what if the central bank set paperclip prices to 1000 or 100 or even 10 because a central bank can do that.
Its not population, or commodites because real things dont effect fantasy things.
As long as the central banks are willing and able to control prices, fantasy wins out over reality.

Thu, 08/06/2015 - 18:22 | 6399185 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

 

 

http://www.worldwatch.org/node/6038            Personally, I think the population growth rate needs to become negative, slowly of course.

Thu, 08/06/2015 - 16:41 | 6398911 KnuckleDragger-X
KnuckleDragger-X's picture

The markets are going to collapse under the weight of their own bullshit. The Fed and the Treasury has been artificially supporting this mess for far too long and instead of letting the system clean the crap companies out, they've been throwing huge wads of money at the worst actors. We've reached the point that it'll take everybody down, everywhere......

Thu, 08/06/2015 - 16:50 | 6398945 mayhem_korner
mayhem_korner's picture

PErhaps the Fed should just raise interest rates 100 bps. That would get the market going again.

Thu, 08/06/2015 - 16:52 | 6398949 A_latvian
A_latvian's picture

Have a look at the 10yr for UNP: http://data.cnbc.com/quotes/UNP/tab/2

Anyone else find it alarming that the PLUNGE of this railroad stock over the last year has been MUCH MORE precipitous than the "crash" during the financial crisis of 2008?  Perhaps it really is different this time.  It might be MUCH worse.

Thu, 08/06/2015 - 23:20 | 6400003 3rdWorldTrillionaire
3rdWorldTrillionaire's picture

Interesting... couple thoughts on UP though: perhaps this is oil related as their tanker shipments have fallen, or perhaps this is related to their intermodal business with the west coast port strikes? Nonetheless, all transports have been getting crushed in the last 12 months.

Thu, 08/06/2015 - 16:56 | 6398966 wmbz
wmbz's picture

"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".

 Yea, go ahead and shovel in more and more coal/FRN's into the boiler so this bitch can really get going!

That next rally is just around the corner... problem is a brick wall is waiting for it.

Thu, 08/06/2015 - 17:30 | 6399078 Perseus son of Zeus
Perseus son of Zeus's picture

I just read best-selling author Jim Rickards’ new book, The Big Drop, and frankly, it scared me to death.

Being scared is not a bad thing, though, if it motivates you to prepare for what’s coming.

In the book, Jim provides a complete plan for how to protect your savings and get ready to survive a financial crisis so big, it might make the 2008 crash look like a minor setback.

You, and everyone you know, need to read this book right now. Fortunately, Jim has found a way for us to get you a free copy.

Click here to claim your copy of The Big Drop today.
http://research.agorafinancial.com/research/html/awn_bigdrop_0315?code=L...

You literally can’t afford not to read it.

Thu, 08/06/2015 - 19:09 | 6399331 Consuelo
Consuelo's picture

Oh - I can afford NOT to read it, trust me...   Sp00ks hawking their wares actually don't scare me much either so...   Back to the bot algo generator...

 

 

Thu, 08/06/2015 - 17:35 | 6399098 Redart
Redart's picture

Every argument counts for the market to.... Go up
What are those indicators? Seems pretty fuzzy to me. And regarding advance decline, lets just suppose that now some stocks had a correction and the market goes up due to heavy buying in those falling stocks. What would advance decline tell then. Those indicators tell nothing. The only thing that matters in the market is the buy sell pressure during specific interval times of the day. Today was around 10a.m. Who thinks the big players care about a 2% index decline? That advance decline line would scare me a lot if I was short. BTFD, ask nanex to tell what they have on 10a.m..

Thu, 08/06/2015 - 17:54 | 6399161 JC-BI
JC-BI's picture

It's all getting ready to crash folks... any minute now... now...

Thu, 08/06/2015 - 18:02 | 6399180 lasvegaspersona
lasvegaspersona's picture

The problem with bull and bear terminology is that by the time you reach the criteria for the definition a lot of your money is gone. You can be sitting 9% down and they are still refusing to call it a bear market until you lose that last 1%. (or 11% if you use a 20% drop as the definition).

What I'm seeing is a market way above what it should be soley due to low interest rates and easy borrowing. the economy is tanking yet we are only a few percent off highs.

I say a small rise in the Fed rates should do it...should give the market the final nudge it needs.

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