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The Stock Market Is In Trouble – How Bad Can It Get?
Submitted by Pater Tenebrarum via Acting-Man.com,
A Look at the Broader Market’s Internals
We have previously discussed the stock market’s deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively.
When more than 60% of stocks in the broader market trade below their 200 dma with the SPX not too far off an all time high, it is clear that cap-weighted indexes are helped up by an ever smaller number of big cap stocks. This typically happens near important trend changes, but it is not always certain that the market will decline significantly when such a divergence occurs.

Is he about to make his entrance?
Cartoon via wallstreetsurvivor.com
One possibility is also that the market merely corrects, and resume its rally once a sufficient number of stocks becomes oversold. That said, the broader market hasn’t made any headway in more than half a year, with the volatility of major indexes and averages declining to multi-decade lows. It is certainly tempting to classify this period as one of distribution, especially given recent weakness.
In the short term, the large number of stocks in a downtrend may actually help produce a bounce, especially as some sentiment indicators such as equity put/call ratios have increased to a level usually associated with short term lows. However, we believe one has to take a differentiated approach to interpreting sentiment and positioning data at this juncture and we will explain why in more detail further below.
First let us look at the NYA internals mentioned above. In addition to the percentage of stocks below their 200 and 50 day moving averages, we show the cumulative NYA advance/decline line in the second chart below. The A/D line has been in a downtrend since late April.
The NYA and the percentage of stocks still above their 200 and 50 day moving averages. The market’s momentum peak occurred more than a year ago, in early July 2014 – click to enlarge.
The cumulative NYA A/D line has peaked in late April – then a divergence between the A/D line and the NYA was created in May. Such divergences don’t have to be meaningful, but they do occur at every major trend change. In other words, there doesn’t have to be a trend change when such divergences are spotted, but no trend change happens without them – click to enlarge.
The CBOE equity put/call ratio is currently at 0.81 – this is in the general area (0.70-1.10) that is often associated with short term lows – click to enlarge.
The Sentiment and Positioning Backdrop
Several recent articles at Marketwatch are trying to make the point that a “contrarian bullish situation” now exists. One author writes “Great News: Investors are Dumping US Stocks”, but goes on to explain that they are instead buying international and more specifically, primarily European stocks. This makes no difference in our opinion – as long as they are buying stocks, they are not bearish.
There continues to be a widespread conviction that retail investors have to beat down the doors and rush into the market before it can top out. We believe this is actually a “bearish hook”. This has been a “bubble of professionals” for 6 years running and this isn’t going to change anytime soon. First of all, retail investors have been burned twice over the past 15 years by two of the worst bear markets in history. Secondly, demographics dictate that retiring boomers will become sellers of stocks for a number of years. They simply cannot take the risk of buying into an overvalued market again in their retirement years.
Anther article discusses recent sentiment/positioning data and is more interesting from our perspective. As to its assertion that “insider buying has increased and has therefore turned bullish”, we would note that insiders have been dumping stocks left and right for three years running. One or two weeks of buying are hardly making a dent in the longer term picture. Moreover, we are not appraised of the sectors in which the buying is occurring. We only know fur sure that it isn’t happening in the stocks that are actually holding the market up – i.e., assorted big cap tech, biotech, retail, etc. stocks.
As we have recently reported, there has been a huge surge in buying by insiders in the gold sector – this is very rare, and therefore worthy of attention. We strongly suspect that insider buying is also occurring in other beaten down commodity stocks, but these stocks cannot be expected to push up the market as a whole – their share of total market cap is too small (their collapse hasn’t dragged the indexes down either after all). If e.g. the stocks of copper and iron ore producers were to rally, this would be a great relief to long-suffering holders of these shares, but it wouldn’t help the overall market much. Commodities are quite oversold though, and a rally in these sectors wouldn’t surprise us.
Let us look at some of the other factors mentioned in the article:
1 The Investor’s Intelligence Bull/Bear Ratio, which polls investment pros on their market outlooks, fell last week for the third week in a row, to a 10-month low of 2.16. A reading below is a clear buy signal, and we are pretty close.
2 The Chicago Board Options Exchange (CBOE) put/call ratio, on a three-day basis, recently rose to 0.8. Anything above 0.7 is bullish because it represents excessive pessimism, in that the number of puts purchased compared to calls has reached relative highs. Remember, put options give the right to buy a stock at a preset price. So they can be seen as insurance against a market decline, or a bet that a drop will happen. The put/call ratio measured over the 10 days also shows a high level of pessimism, which is bullish, says Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co.
3 The Ned Davis Research Crowd Sentiment Poll recently showed extreme pessimism, also bullish in the contrarian sense.
We will address these in more detail further below (except for the put/call ratio, which we have already commented on above), but for now we would note that all of this is important only for the short term – and it may actually not even be overly relevant to the short term. Remember what we said above: this is a “bubble of professionals” – which has made sentiment indicators highly unreliable on the way up, as many of our readers probably recall. The question is, why should they be any more reliable on the way down?
Furthermore, all sentiment indicators that are relevant for the long term, are in the “beyond good and evil” zone and have been there for quite some time. Three of those are shown below: Margin debt, the mutual fund cash ratio, and retail money fund assets as a percentage of the S&P’s market cap. We are commenting below the charts as to their significance.
Margin debt is just off an all time high, well above previous peaks. If the market weakens beyond a certain point, this huge amount of margin debt could easily trigger an avalanche of forced selling. It isn’t going to sink the market per se, it just creates the potential for a very large sell-off – click to enlarge.
Mutual fund cash to assets ratio. At an all time low of 3.2%, mutual fund managers are definitely “all in”. They are not going to be buyers if the market declines – on the contrary, if they are hit with redemptions, they will turn into forced sellers as well – click to enlarge.
Retail money market funds as a percentage of the S&P 500 market cap sits at an all time low as well, far below previous historic low points. We can safely conclude that retail investors aren’t going to step up to the plate either – click to enlarge.
At the end of June we sent a list of objections to a friend with respect to the widely touted phrase that this is such a “hated” bull market. Many of the data in the list have been put together by Robert Prechter of EWI and we added a few observations of our own. The list inter alia contains references to the Investors Intelligence (II) Poll and an indicator published by Ned Davis, which are both mentioned in the Marketwatch article quoted above. We have highlighted them.
Once again, this list shows you something that is relevant from the perspective of a different time frame – namely the long term. A dip in the II poll may help create a short term low, but the long term data on this poll are actually nothing short of frightening. Given that this was posted in late June, some of the percentages may look slightly different by now, but not by much.
- The percentage of cash in mutual funds has been below 4% for all but one of the past 70 months. At the peak of the late 1990s tech mania in 2000, it stood at 4.2%
- Rydex bear assets have practically been wiped out. The amount left in bearish Rydex funds is now so small, that the ratio between bull and bear assets has soared to nearly 30. It was at approx. 18 at the year 2000 peak.
- Margin debt is at an all time high (approx. 82% above the peak level of 2000 in nominal terms), and investor net worth is concurrently at an all time low, in spite of soaring asset prices (people have borrowed so much to buy stocks, that they have record negative net worth in spite of the SPX nearly at 2200 and the NAZ at a new ATH.
- If the CAPE (Shiller P/E) and Tobin’s Q ratio were to peak here, it would be their fourth, resp. second highest peaks in history (since at least 1876, so we may assume all of history, as markets never got this overvalued prior to the fiat money era). The previous peaks that were close to the current ones are the who’s who of bad times to invest in stocks, to paraphrase John Hussmann: 1929, 2000 and 2007 – that’s it. No other time in history is comparable.
- The valuation of the median stock and the price/sales ratios are both at all time highs (even exceeding the year 2000 peak, which hitherto stood alone as a monument to stock market insanity).
- The ratio of bullish to bearish advisors in the Investor’s Intelligence survey finally eclipsed the peak of August 1987 last year. The 30-week moving average of the bear percentage is at a 38 year low, while the 200-week moving average of the bear percentage (at 21.44%) is the lowest in the entire history of the survey. There has never been similarly persistent bullishness, which is astonishing in light of the fact that the past 15 years have seen two of the four worst bear markets in history. By the way, all these sentiment-related data are the exact opposite of their readings in 1982, when the secular bull market began. Back then, people were extremely cautious and bearish, in spite of the fact that the market was up nearly 100% from its late 1974 low.
- The ratio of money in retail money funds to market cap is – you guessed it – at an all time low, by a huge margin. It is nearly 50% below the levels recorded in 2000 and 2007. People are evidently convinced that cash is trash.
- The DJIA’s dividend yield has been below 3% for 96% of the time since 1995, i.e., over the past 20.5 years, the dividend yield has been above 3% in only 9 months. Prior to 1995, it managed this feat only in a single month: in September 1929.
- According to Ned Davis, the stock market allocation of US households is at its third highest since 1952 – the only two exceptions are 2000 and 2007 (not the happiest moments in time to be loaded to the gills with stocks).
We continued as follows:
Admittedly, none of this tells us how much bigger the bubble will become. Money supply growth is still fairly brisk (TMS-2 above 8% annualized) and administered interest rates remain at zero, with the Fed evidently scared of the 1937 precedent (their entire policy is informed by a single and highly unusual event in economic history, the Great Depression). It could thus become still crazier.
However, it would be a big mistake to call this bull market “unloved” based on anecdotal data like postings in financial forums. In reality, it is not only one of the most overvalued, but definitely one of the most over-loved markets in history, perhaps even the most over-loved overall. Many will remember the day trading craze and CNBC’s ratings in the late 1990s, and it is true that the underlying mood seems outwardly more subdued this time around (this is no wonder, as many people have a very negative assessment of the real economy. After all, the fact that the BLS is simply not counting people as unemployed once they have been jobless for a certain time period makes them no less unemployed).
Let us not forget though, it is not opinions that count, but human action. And by their actions (as evidenced by the positioning data listed above), investors have never been more certain that a bull market would continue than they are today.
There is certainly no reason to change this assessment, even though there are now signs that the market is getting sufficiently “hated” and oversold in the short term to allow for a bounce. One must not lose sight of the fact though that in spite of the strength in the major indexes, most investors are actually losing money, simply because most stocks are actually in a downtrend since April. Sentiment is simply following prices in other words.
Money Supply Growth
As we frequently point out, there is one reason not to get carried away with bearish projections either, at least not yet – and that is the pace of money supply growth. Below you can see that broad money TMS-2 has been growing at 8.4% annualized as of the end of July, while annualized growth of narrow money M1 has re-accelerated in the week to August 3 to slightly above 10%, after dipping to as low as 6.15% at the end of July. In both cases, growth is mired in a sideways to downtrend though, and may no longer be sufficient to keep the market going higher.
Annual growth of broad money TMS-2 – click to enlarge.
Annual growth of M1 – click to enlarge.
Conclusion
Even if it is short term oversold, this is actually a quite dangerous market – caveat emptor, as they say.
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flash crash brewing territory at 3:18 PM
Here comes the PPT Calvary!
But but but, my 401K.
The Calvary was slaughtered like Custer.... I wonder how many PPT troops were scalped....
How come the market didn't "break?" Hopefully they'll put that right for Monday.
/s
"One must not lose sight of the fact though that in spite of the strength in the major indexes, most investors are actually losing money, simply because most stocks are actually in a downtrend since April."
====
Gibberish - but hey, obviously the lobotomy worked.
I think you mean "cavalry," unless you're getting religious on us.
I don't understand all the gibberish. Can I just go ahead and submit all these buy orders now?
All that chart porn and shit makes my head spin.....and at the end of reading it all....the only thing I can take away from it is EVERYTHING IS FUCKING AWESOME!
perhaps this can answer how bad things will get...
Given the complete collapse of high consumer nations population growth and slight slowdown of low consumer nations population gains...the current 10yr period we enter represents about an est. 45% decline in new consumption from the previous 10yrs. By the time we get to '25-'34 net new est. consumption drops by 90%+ due to significant declines among high consumer populations not adequately offset by low consumer growth.
However, this really underestimates the rate of consumption slowdown due to the lack of population growth...as the marginal population growth sparks so much activity. It requires new infrastructure (highways, water & electricity grid buildups, hospitals)...it requires new homes and all the stuff to fill them...etc. etc. Without the high consumer population growth, overall activity tends to fall significantly more than "anticipated" and the knock on effects to low consumer nations (intent on moving to high consumption via exports to high consumption nations) crashes and burns.
This is a once in a millennia paradigm shift...time to re-examine and rethink everything we think we know.
http://econimica.blogspot.com/2015/08/population-growth-will-never-be-fix-to.html
You hear that White people around the World, Have babies, have many of them and have them quick!.
Tell the KKK and Stormfront there's nothing to be concerned about. I'm a Nordic white person (blond hair, blue eyes, all that nonsense), and I'm successfully reproducing.
Ham-Bone - Great point about the population decline in high consumer driven economies (USSA et al). What happens when more people see the hand writing on the wall and the homesteading / off-grid / slow culture / Fuck the FED and all Fiat movement accelerates the decline of consumerism.
Summon the Kraken!
Release the Growth!
They don't think to leave until after the third explosion.
How long will you wait?
There is a war going on.
On a long enough timeline the aspect ratio for everyone drops to zero.
Much worse than you can imagine, I hope
Karmic payback for manipulating markets higher for so many years
"short term oversold" = get in line for CNBS interview it's not too late!
38 minutes until The DEER! again!!
Cue "Loony Toons" music. That's all folks.
Hot damn she's cap-shitulatingTM
The golden fleece.
The new flight to safety, TWTR up 25 bps
I'm sensing a disturbance in the force. Shitty no revenue equities are having their asks hit up today...QE4 must be around the corner.
yellen eats margin debt for breakfast
It will get as bad as the years of corporate press, fed and equity-booster B.S. we have had to endure, which is probably around DJIA 10,000 bad.
It's only "short-term oversold" in terms of the ZIRP/QE grotesque perversion of fundamental analysis. By most traditional measures it's easily 33% over priced and if the economy really is in recession more like 50%.
exactly, it's all relative at this point... we were "short term oversold" yesterday at 3pm as well... how'd that work out
Hey guys...don't blame the fed:
http://www.washingtonpost.com/news/wonkblog/wp/2015/08/21/why-are-the-ma...
Nope they never get the blame for fucking anything, Greenspan is the meistro and bernanke is the savior...fuck
For several years many posters on ZH have highlighted how the stock market is dominated by intuitions and fixed by the banksters, and streeters--that there are not much "retail" investors.
Now they would like us to believe that such a market is falling outside the control of its fixers.
So, is the market fixed, and therefore its fixers are organizing this fall, or is it not fixed, and is really falling?
Zion is a scheme, not an ethnicity..
That's why you shouldn't play the fucking game. There's always a whole lot of losers and a few winners, you prolly ain't one.
The markets have been failing progressively since March 10th 2008, but they are propped up markets, and have been fixed for years to ensure an epic fail when anyone pulls their finger out of the holes in the damn dam. Clearly, everyone is now pulling their fingers en masse. Monday will be worse than this by a long shot.
This is the end, my friend, the one, and only, end. The Doors
kchrisc ---your comment/question put me in mind of a scene from north dallas 40 wherein lyle alzado goes ballastic on the coaches essentially saying when we say it is a game you fuggers say it is work and when we say it is work you fuggers say it is a game. ((pretend i posted youtube link))
Looking for -525 close...
GOOD CALL!
Congrats!
-530.94
The idiots on the Blowhorn and MSM don't understand that commodities are cheap because of lack of demand and over capacity.
Cheaper prices aren't going to create more demand when demand doesn't exist because people are tapped out credit and wage growth wise.
The reason China matters is because the U.S. is it's largest product consumer, and the U.S. isn't consuming. The U.S. is the patient and the lack of Chinese exports is the disease.
.
The pop coming in Gold is gonna blow many minds he he get positioned for it folks...history indeed does repeat.
Ho Lee Fuk
Sum Ting Wong?
Calm down, there is a rock hard bottom at zero, I can guarantee you.
Dow 4500
red makes me smile
are happy days here again?
if the markets were markets as defined by "not rigged and manpiulated" then today would be a downer.
so they can all go fuck themselves...
also, i have no pensions riding on this shit and no stocks. just wooded land and land with a home in the country. acres not tons or ounces, ha...
dow down 420, bright fucking red, nice!
s and p down 50 extra special nicer nice, ha...
anytime the market is down 300 points or more, it was a good day for liberty
no plunge protector team? say what, gone to the hamptons early?
fucken eh, i was gonna btfll
https://www.youtube.com/watch?v=-8h_v_our_Q
A better answer than Zero's Lazy-Boy cartoon.
Finally these fuckers don't have smiles on their faces on cnbs? Fuck you stock cheerleaders!
Don't worry, the Jesuit pope is coming to America.
Yes, we are being served the appetizers. The Black Pope wants to pontificate after the main course is served.
Agenda 21 is on the menu I believe.
Interesting you should mention this, since it has been on my mind ever since the Papal visit was announced.
Nostradamus spoke of a Papal assassination at a time when "... the Great Lady (the Church) will be in the Elysian Fields (the mythical lands far to the West, i.e. America)."
"Roman pontiff, beware of traveling near
The city that two rivers flow through.
Near there, your blood will spurt
You and others, when the Rose shall flourish."
Of course,
the magnitude or possibility of "correction" has little or nothing to do with:
upward concentration of wealth,
decades-long stagnant wages,
malinvestment in war street MIC and wall street TBTF,
neglected physical and social infrastructure,
never-ending self-destructive wars on drugs and terror
and an embedded financial system controlled by a self-serving inner cabal.
...
Otherwise, I am sure, the article would have mentioned those above factors.
Dow below 10k OR equal to gold and I might start buying...
The economy is a theater with four doors to four separate hallways...though one of them was bricked up a hundred years ago, with a fire of some intensity, from smoldering smoke to raging inferno, always burning behind one of the doors.
The four doors are:
- Stocks
- Bonds
- Cash
- Specie (bricked over)
Typically the crowd escapes from bonds to stocks and vice versa, as there is only very rarely a fire behind both doors. Times when there was included the entire 1930's & 1940's, 1970's, 1987, 2000, 2008, and now.
Historically, when there was fire in stocks and bonds, people went into specie or cash...which was just a fractionally-reserved chit representing a piece of specie in the same way that a valet-parking-ticket represents a car that can be picked up 'while supplies last'.
They bricked over the Specie Door when they internationalized the practice of Central Banking a century or so ago. That way, people would be forced into the 'cash' door...whether or not it actually was a receipt for specie. In that way people began to accept that cash now represented a G-man with a gun's ability to take a similar cash bill from someone else and give it to them (nevermind that it could similarly take from them).
No one envisioned the possibility, then, that there could be a fire behind the stock door, the bond door, AND the cash door.
But today stocks are in a bubble - which is another way to say that they've been the repository for too many dollars chasing too few assets.
Bonds are in trouble because too many dollars chasing too few assets means that many of the assets don't really exist, but are only there to catch stray dollars, and in doing so in such mass those stray dollars can evaporate at any time, INSTANTLY transforming too many dollars into too few.
And there are either too many dollars, or too few, depending on how much of the economy could possibly exist on its own merits rather than solely by virtue of the printing press and cronyism, such that G-man might be able to get 2-bills for one...or maybe only 1 bill for one-hundred.
And the specie door is bricked up.
Now cast your ballots for the question of the evening:
WHERE IS THE FIRE?
Good analogy.
This answers the question: https://youtu.be/rSjK2Oqrgic
Cramer said to buy Netflix and General Mills. Down 8% today. Can't go to zero,right? Same advice I got on Toth Aluminum.
Canny investors understand that they just need to rotate over to a counter-cyclical asset class.
Baldwin Locomotive and Studebaker are poised for huge gains.
I feel like a spark in a power keg... and I'm not even in stawks.