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Weekend Reading: Is The Correction Over?

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

This past week saw the markets rebound off their lows which has brought the "bulls" rushing back claiming the correction is over. However, is that really the case? As I questioned earlier this week:

"As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic "short covering" rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.

 

Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another "reflexive rally" that will fail?"

SP500-TechnicalUpdate-100715-2

"While the 'seasonally strong' period of the year could foster a further rally in the market, it is highly likely that it will ultimately fail. As shown, since the turn of the century there have only been two previous times when the market traded in oversold territory combined with all three major 'sell' signals triggered. Both of these periods marked a much more severe bear market cycle."

SP500-MarketUpdate-100615

"Given the late stage of the current market cycle, the issue of rising global economic weakness and deflationary pressures and deteriorating earnings, many of the "bullish" arguments have been broken."

However, as always, it is important to look at the current market environment for opposing points of view to reduce the potential of "confirmation bias." This weekend's reading list provides a broad look at the current market environment from both the "bullish" and "bearish" perspective. Unfortunately, we will only know "who's right" after the fact. 

But here is the rub.  If you choose the "bearish" view and are wrong, you only miss out on some of the rather limited potential upside from current levels. If you choose the "bullish"view and are wrong, you suffer a real destruction of investment capital. 

This is a point that is rarely discussed, but is a harsh reality. As I stated last week:

 "Hoping to get back to even" has never been a successful investment strategy. 


THE LIST

1) A Major Headwind For Stocks by Jesse Felder via The Felder Report

“And if profit margins reverting to their long-term mean leads to falling earnings growth, is it any wonder that major peaks in profit margins don't just foreshadow major stock market peaks but economic peaks, as well? The chart below comes from Barclays. It demonstrates that only in 1985 did the economy avoid entering recession after a 60 basis point decline in profit margins, the degree of decline we have just witnessed.

 

Clearly, record-high profit margins have been a significant driver of both the economy and the stock market over the past few years. But this, 'most mean-reverting series in finance,' looks to be rolling over and now this powerful tailwind could is shifting into a headwind."

Profit-margin-barclays

Read Also: Buffett And Grantham Warned Us About This by Sam Row via Business Insider

 

2) A Bullish Pause Or A Bear Market by Tom Petruno via LA Times

“The forces weighing on stocks, including global economic fears, weak corporate earnings and expectations of rising U.S. interest rates, haven't diminished. That makes it a good time for a financial reality check to better prepare yourself for whatever markets bring.”

SP500-bull-bear

Read Also: Don't Be Fooled By Retest Of Lows by Avi Gilburt via MarketWatch

But Also Read: How Bad News Is Good News by Mark Hulbert via MarketWatch

 

3) Disregard Dow Theory At Your Own Peril by Jack Schannep via MarketWatch

“So where do we stand now? Thus far, the correction lows on Aug. 25 were some 12% to 13% below all-time highs, from which there was a three-week bounce into September. That being a qualifying secondary reaction, it set up the possibility of a reversal to a Dow Theory buy signal.

 

Later in September was a setback, which successfully tested and held above the August lows, which is encouraging, and now what is needed is for the Transports to join the Industrials in surpassing their bounce high of 8,215.44. For the Original Dow Theory, the interpretation to get a buy signal is really just that simple. The odds of the sell signal being profitable are quite favorable. There have been only seven of 24 such signals since 1953 that did not go into a bear market that year, making it hard to ignore any Original Dow Theory signal.

Dow-Theory

Read Also: The Bull Market Lives On by Brian Wesbury via First Trust

 

4) Bull or Bear? Market At A Crossroad by Michael Ashbaugh via MarketWatch

"And the S&P 500 has staged the U.S. markets' headline technical move.

 

To start, the index bottomed last week at 1,871, just above major support at the August low. It's subsequently knifed to major resistance, topping Monday just four points lower.

 

Price action within the range is technically bearish, though the S&P's response to the range top is worth tracking. The S&P's 50-day moving average (1,998) is descending to match resistance."

MW-DV840 201510 20151006092316 NS

Read Also: Margin Pressures = Subdued L-T Returns by Cam Hui via Humble Student

 

5) Despite The Rally, Charts Favor The Bears by Michael Kahn via Barrons

"Technically, Friday's drop and recovery following the weak September jobs report was quite bullish. Unfortunately, there are still too many negatives out there to rely on this one indication, and that means it is far too early to change teams from bear to bull.

 

To be sure, the big bearish signal of a drop below the August low has still not happened. That leaves the market in somewhat of a funk but with a downside bias.

 

In previous columns I suggested that the Standard & Poor's 500 was in a giant head-and-shoulders topping pattern spanning back nearly two years. The neckline, or support line, slopes gently higher but for simplicity let's just say that it comes in now at 1870 – roughly the same level as the August low."

Read Also: 10 Signs Stocks Are Overpriced by Doug Kass via TheStreet.com

Read Also: More Commodity Price Weakness Ahead by A. Gary Shilling via BloombergView


Other Reading


“When the music stops, you better have a chair.” – Barry Sternlicht

Have a great weekend.

 

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Fri, 10/09/2015 - 16:38 | 6650532 Lumberjack
Lumberjack's picture

The Devil’s Dictionary of Post-Crisis Finance

http://blogs.reuters.com/breakingviews/2015/10/09/the-devils-dictionary-of-post-crisis-finance/

American writer Ambrose Bierce published “The Devil’s Dictionary” in 1911. Bierce’s acerbic definitions ranged from government to commerce and life in general. He displayed a profound understanding of finance, for example defining “riches” as “the savings of many in the hands of one”.

Breakingviews published a pioneering appropriation of his form in 2007, when the global financial crisis was barely beginning. Call it “The Original Devil’s Dictionary of Finance”. But it no longer seems adequate for the post-crisis task. Herewith part one – for the letters A to K – of the sequel, updated and enlarged for the world of hedge funds, private equity, structured finance, subprime equity and the like: “The Devil’s Dictionary of Post-Crisis Finance.”

Part two will be published next week.

A

Activist: One who makes importunate demands for financial engineering*.

Alpha: An investment return above that of a benchmark index, usually achieved by luck or by “gaming” the index.

Analyst: A stock puffer whose purpose is to generate brokerage commissions. See Chinese walls.

Arbitrage: The time-consuming and risky activity of buying an underpriced asset whilst simultaneously selling an equivalent overpriced asset. Eschewed by Wall Street, which instead profits from regulatory arbitrage, accounting arbitrage, jurisdictional arbitrage and fiscal arbitrage.

Asset price bubble: The most noticeable consequence of the U.S. Federal Reserve’s easy money policy. See ZIRP.

Auction house: A place where Wall Street high-flyers blow their windfall gains. See Contemporary art.

Austerity: Also known as “sado-fiscalism”. A forlorn attempt to stave off government bankruptcy.

B

Bandwagon: That which every investor jumps upon. “If you see a bandwagon, it’s too late.” (James Goldsmith, financier.)

Bank: An institution which, by applying leverage and mismatching assets and liabilities, earns short-term profit and generates long run losses.

Bankrupt: A person who has run out of liquidity. Also, the intellectual state of modern economics.

Basel: The Swiss home of the Bank for International Settlements, an institution which creates global banking rules thus setting the stage for regulatory arbitrage and, thereby, precipitating crises at regular intervals.

Behavioural finance: The field of study resting on the notion that an asset price bubble is the result of “irrational exuberance” (see Greenspan*) rather than the inevitable consequence of bad monetary policy and conflicts of interest on Wall Street.

Bell curve: A visual representation of the false assumption, baked into most financial models, that outcomes are what statisticians call “normally distributed”.

Bernanke, Ben: Former Fed chairman who failed to spot the housing bubble before it burst and in 2007 claimed that U.S. subprime mortgage problems were “contained”. After the Lehman Brothers bust, Bernanke succeeded in re-inflating the Greenspan* superbubble. Soon after leaving the Fed, he was rewarded with a job at Citadel, a hedge fund, which presumably didn’t hire Bernanke for his market insights. See Revolving door.

Biotech: A pharmaceutical Ponzi scheme of a company. See Burn rate.

Bitcoin: A digital tulip bulb.

Black swan: A common bird on Wall Street, renowned for its fat tail.

Bonus: In banks, a large payment out of short-term profit to retain “talent”. While a bank’s profit is generally illusory, bonuses endure.

BRIC: A “Bloody Ridiculous Investment Concept” (Peter Tasker, fund manager and author). An emerging bull market acronym comprising the first letters of Brazil, Russia, India and China coined by Jim O’Neill, a former member of theGoldman Sachs marketing department.

Burn rate: The alarming pace at which technology and biotechnology companies run through their cash piles.

Business school: Networking hotspot where young people pay large sums of money to have their scruples expensively removed. See MBA.

Buybacks: Debt-funded purchases of a company’s own shares in order to enhance growth in earnings per share. A tool to maximize the value of a chief executive’s stock options….

Fri, 10/09/2015 - 16:52 | 6650575 coinhead
coinhead's picture

Head and Shoulder's commercial... we're rounding back down over the second shoulder this week.  Look out below!

Fri, 10/09/2015 - 16:51 | 6650572 Collapsed_Elast...
Collapsed_Elastic_Pants's picture

"Is the correction over". Oh Christ with the fucking charts. Charts Charts Charts. No it's not over. DUH! Fuckin TA sucks balls. Like Yogi Berra said."Youse your fucking eyes".

Fri, 10/09/2015 - 17:01 | 6650603 Collapsed_Elast...
Collapsed_Elastic_Pants's picture

Call me old fashioned, but I think a down vote should come with an explanation. If not you're just a fag. Seriously.

Fri, 10/09/2015 - 17:02 | 6650610 Collapsed_Elast...
Collapsed_Elastic_Pants's picture

A rebuttal if you will.

Fri, 10/09/2015 - 17:05 | 6650626 Collapsed_Elast...
Collapsed_Elastic_Pants's picture

I know it's not you Lance.

 

Must be Luke

Fri, 10/09/2015 - 17:09 | 6650642 Nenad
Nenad's picture

Obama will not finish his second term! Current Events Linked to Ancient Biblical Prophecy!

http://motivationdose.com/is-america-babylon/

Fri, 10/09/2015 - 17:14 | 6650665 CarpetShag
CarpetShag's picture

"prophecy" ..is it as accurate as Lindsey Williams's "forecasts" ?

Fri, 10/09/2015 - 17:51 | 6650799 o r c k
o r c k's picture

Wow, so the older something is the more accurate it is ?

Fri, 10/09/2015 - 17:11 | 6650656 CarpetShag
CarpetShag's picture

pun intended?

Fri, 10/09/2015 - 16:55 | 6650580 Bay of Pigs
Bay of Pigs's picture

WTF? How could the correction be "over" when it never even "started"?

Fri, 10/09/2015 - 16:58 | 6650591 FreeShitter
FreeShitter's picture

Its over. They got the little people to sell some their 401ks, and now the shit is going back to 18k and beyond.

Fri, 10/09/2015 - 16:59 | 6650596 Jethro
Fri, 10/09/2015 - 17:00 | 6650604 max2205
max2205's picture

Just don't hold overnight 

Fri, 10/09/2015 - 17:14 | 6650668 CarpetShag
CarpetShag's picture

She told you that?

Fri, 10/09/2015 - 17:04 | 6650614 CarpetShag
CarpetShag's picture

Spare us this utterly useless chart porn for mercy's sakes... You should be up in the header board with the other crap like Phoenix Capital Research and Fuc to Market.

Fri, 10/09/2015 - 17:38 | 6650749 Dragon HAwk
Dragon HAwk's picture

The correction is over, the crash that is following it.. now that's the main attraction

Fri, 10/09/2015 - 17:45 | 6650776 I Write Code
I Write Code's picture

The correction correction is over.  I think Janet has decided not to raise rates yet again in October, so she plans to take it down some more, and then start a real uptrend she can use to justify a tiny raise later ... November, January, 2016, 2061, whatever.

Fri, 10/09/2015 - 18:28 | 6650891 TheRideNeverEnds
TheRideNeverEnds's picture

Its Time.

Fri, 10/09/2015 - 19:53 | 6651096 buzzsaw99
buzzsaw99's picture

it wasn't even a correction it was just a bunch of assholes trying to front run a fed rate hike that never materialized. fake selling borrowed shares. pathetic.

Fri, 10/09/2015 - 20:34 | 6651197 Yen Cross
Yen Cross's picture

 Fukin -A-right Buzz.

 The only correction I witnessed this week, was bath~tub Barry getting his shorts ripped down by both Russia and China, followed by a nice Iranian "finger banging".

Fri, 10/09/2015 - 19:55 | 6651103 homebody
homebody's picture

They have forced many into the only game in town - now negative interest rates will finish the job.

 

Hope and change you Obama suck holes 

Fri, 10/09/2015 - 20:44 | 6651218 Zero-Hegemon
Zero-Hegemon's picture

Rally monkey see, rally monkey do

Sat, 10/10/2015 - 10:09 | 6652318 Who was that ma...
Who was that masked man's picture

"Is the correction over?"

No.  The correction has not yet begun.

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