"Markets Crash When They're Oversold"
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Peddling Fiction
On Tuesday, as I watched the President’s State of the Union Address, the President made the following statement.
“Anyone claiming that America’s economy is in decline is peddling fiction.”
While I certainly understand the need to put a positive spin on the current economic backdrop during your last SOTU address, there is a good bit of misstatement in that comment.
The President is correct when he stated that the impact of technology on wage growth and jobs was not a recent development. It is, in fact, an impact that has been occurring since the 1980’s as shown in the chart below.
While the big driver of the decline in economic growth since the 1980’s has been a structural change from a manufacturing based economy (high multiplier effect) to a service based one (low multiplier effect), it has been exacerbated by the increase in household debt to offset the reduction in wage growth to maintain the standard of living. This is shown clearly in the chart below.
The problem for the President is that while sound-bytes of optimism certainly play well with the media, the average American is well aware of their current plight of the lack of wage growth, inability to save and rising costs of living.
The decline of economic growth is, unfortunately, a reality and an inevitable outcome of decades of deficit spending and debt accumulation. Can it be reversed? I honestly don’t know, but Japan has been trapped in this cycle for 30-years and has yet to find a solution.
Here’s Real Fiction – Low Oil Prices
Over the last couple of years, economists from Wall Street, to the Federal Reserve, to the White House have repeatedly made the following statement:
“Falling oil prices are great for the consumer as it gives them more money to spend.”
I have written many times over the past couple of years, as oil prices fell, that such was not actually the case. To wit:
“The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.
The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.
Example:
- Gasoline Prices Fall By $1.00 Per Gallon
- Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
- Gas Station Revenue Falls By $16 For The Transaction (-16)
- End Economic Result = $0
Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of ‘rearranging deck chairs on the Titanic.'”
Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care.
Most importantly, the biggest reason that falling oil prices are a drag on economic growth, as opposed to the incremental “savings” to consumers, is the decline in output by energy-related sectors.
Oil and gas production makes up a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve.
The obvious ramification of the plunge in oil prices is eventual loss of revenue leads to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all CapEx expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.
The issue of job loss is critically important. Since the financial crisis the bulk of the jobs “created” have been in lower wage paying areas such as retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.
Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.
Why do I remind you of this basic economic reality – because it only took the Federal Reserve 18-months to figure it out. In a recent speech San Fran Fed president John Williams actually admitted the truth.
“The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.”
No S*^t!
Markets Crash When Oversold
Earlier this week, I discussed the oversold nature of the market and the likely of a “bounce” to “sell into.”
“With all of the alarm bells currently triggering, the initial ‘emotionally’ driven response is most likely an urge to go look at your portfolio statement and start pushing the ‘sell’ button. Don’t Do It!
On a short-term basis, prices oscillate back and forth like a rubber band be pulled and let loose. Physics state that a rubber band stretched in one direction, will initially travel an equal distance in the opposite direction when released.
Take a look at the chart below.”
“In particular note the top and bottom portions of the chart. These two indicators measure the ‘over-bought’ and ‘over-sold’ conditions of the market. As with the rubber band example above, you will notice that when these indicators get stretched to the downside, there is an effective ‘snap back’ in fairly short order.
With the markets having issued multiple sell signals, broken very important support and both technical and fundamental deterioration in progress, it is suggested that investors use these ‘snap back’ rallies to reduce equity risk in portfolios.”
I reiterate this point because the market continued to slide on Wednesday which led to several comments about the inability of the markets to get a sellable bounce. There is an important “truism” to remember.
“Markets crash when they’re oversold.”
Let’s step back and take a look at the past two major bull markets and subsequent bear market declines.
(Note: I am using weekly data to smooth volatility)
The top section of the chart is a basic “overbought / oversold” indicator with extreme levels of “oversold” conditions circled. The shaded area on the main part of the chart represents 2-standard deviations of price movement above and below the short-term moving average.
There a couple of very important things to take away from this chart. When markets begin a “bear market” cycle [which is identified by a moving average crossover (red circles) combined with a MACD sell-signal (lower part of chart)], the market remains in an oversold condition for extended periods (yellow highlighted areas.)
More importantly, during these corrective cycles, market rallies fail to reach higher levels than the previous rally as the negative trend is reinforced. All of these conditions currently exist.
Does this mean that the markets will go straight down 20% without a bounce? Anything is possible. However, history suggests that even during bear market cycles investors should be patient and allow rallies to occur before making adjustments to portfolio risk. More often than not, it will keep you from panic selling a short-term market bottom.
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And they're OVERSOLD because Money itself has become the MAJOR Problem >> http://wp.me/p4OZ4v-2GY
Agreed. Money is valueless, so sell MORE. Great Link.
A 2-week-old ZH avatar agrees with and upvotes another 2-week-old spam-posting avatar. Nothing suspicious here!
Julia's jealous because no one upvoted her. :-( except she UPVOTED herself. Nothing suspiscious there either.
Next time you make phantom accounts to combat the barrage of negative feedback, try not registering them on the same day. Spread out your comments. When both of your ego's show up in the same thread time after time in the same sequence, it doesn't look good on the resume. Shuffle them around. Next time pretend the 2nd guy says something and the 1st one agrees.
Or better yet - stop posting spam.
Markets crash when the manipulators run out of tricks to get the muppets to buy and need to reset the prices in order to start the manipulation cycle over again.
Charting is now just graphical depictions of what the manipulated market has already done.
Is that what you do JuliaSS? Or SHould I say alias Sanity Bear? Should write a book. Probably won't sell. Thanks for the tip. I'll stick to just my account thank you very much.
Why don't you log in though your 3rd account. Let's pretend we're having a good discussion.
http://www.zerohedge.com/users/jurgster
http://www.zerohedge.com/users/goliath-slayer
http://www.zerohedge.com/users/minions
You forgot:
http://www.zerohedge.com/users/napoleon
http://www.zerohedge.com/users/super-villain
http://www.zerohedge.com/users/despicable-me
lololololol
Not to forget:
http://www.zerohedge.com/users/samson-and-delilah-and-juliaS
lolololol
I haven't forgotten the last 2 accounts of yours that were banned "JC-BI", "BI2". Keep talking. The jig is up.
I remember these of yours were cancelled too:
mossad - moosad eats children - mossad kills babies - mossadgetsitinthe@$$
Jig is up. Vacate the Middle East.
lololololo0lol
Sorry, but that's all I could come up with since APPARENTLY you know - NOT - my whole life story.
PS - You are Yen Cross too? Wow!
there's nothing sadder than a troll who doesn't know his jig is up
i might have said pathetic but . . . yes.
You go Girl. We need more of you.
I never wasted my time reading comments from untrusted sources.
I hope you have you have your head screwed on straight, and don't hang out in dive bars.
You should see the intervention on Facebook some serious overtime there as well ...... Well your tax dollars hard at work.......
Whaaaaaat? Wassup with dat JUDiAS?
Desperate times call for desperate measures???
Almighty Yahweh does not celebrate lies....ever.
That is against the Torah which you supposedly espouse.
Or are you into that Satanic Kabbalah worship?
The evidence has been demonstrated.
You must be as you present yourself as a false witness. Pretending that you are someone else when you are not is witnessing falsely. And as the Torah proclaims you will be held accountable as a member of the Synagogue of Satan...a COUNTERFEIT.
You had best see your rabbi and repent of your wickedness as time does grow short to the advent of the Messiah. The Anointed One shall return and with His double edged sword to demonstrate His wrath against all who oppose Him.
Praises be to the Anointed One, as the ones. who you claim as your ancestors, crucified Him.
COUNTERFEIT...COUNTERFEIT. JUST LIARS WHO SUBMIT TO THE FATHER OF LIES. THAT IS WHAT YOU ARE.
Fire and brimstone await you as you fulfill your destiny.
Amen.
They are oversold because they have been using QE to buy back stocks for free ..........
Agreed. The aggregate oupouring of liquity from QE causes money to be worthless, so they pour it there to hopefully give it some value.
Money isn't nearly as big a problem as is blog pimping.
wooops see below
Some people have nothing better to do apparently. They can't comment on the article, so they comment on the comments. lolololololol Or they're brainless. lololol Or they can't read no longer than a tweet. lololol Or JuliaS is SanityBear = the 2 accounts she was explaining above. I get it.
It's funny how markets can go up day after day without the talking head windbags ever screaming over-bought but after the slightest decline they all scream over-sold.
Or year after year.
the fed has traveled so far down the primrose path that they have officially reached bizarro world. every fund that has gone long equities and junk bonds over the past six years with the fed's blessing, nay, encouragement, nay coercion, now has every right to gripe if the fed raises rates. every hedge fund is right to expect a bailout. normally they would raise rates when oil prices are high and cut them when prices are low but they have gone so far round the bend that they zirped oil prices into oblivion and now must raise rates into a crash. no matter what happens their heavy handedness has assured that if ANYTHING goes wrong THEY will be blamed. they own this frankenstein eCONoME and there's no way it can turn out well.
Cheap oil is destroying smaller oil companies (the competition).
http://marcellusdrilling.com/2015/11/list-of-36-oil-gas-companies-that-f...
“So far this year, our firm has been engaged in more than three dozen energy industry out-of-court workouts or Chapter 11 bankruptcy cases,” said Ian Peck, chair of the firm’s Bankruptcy and Business Restructuring Section."
http://www.manhattan-institute.org/html/who-really-owns-oil-companies-57...
"...oil and gas companies, like most large American corporations, are not owned by a few wealthy individuals. Instead, they are owned by millions of ordinary Americans and foreigners, often through their retirement savings. Contrary to popular belief, only about one percent of the shares of the five major oil companies are held by officers and directors of these companies. The rest is held by institutional investors and individual Americans, mostly in retirement accounts."
http://www.washingtonsblog.com/2014/12/big-banks-conspire-bp-oil-company...
"And the U.S. Federal Energy Regulatory Commission says that JP Morgan has massively manipulated energy markets in California and the Midwest, obtaining tens of millions of dollars in overpayments from grid operators between September 2010 and June 2011.
And Pulitzer prize-winning reporter David Cay Johnston noted in May that Wall Street is trying to launch Enron 2.0."
Like the avatar.
Just like the "gas wars" Standard Oil created.
"Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care."
Well duh.
He was pointing out the obvious as the Central Banksters seem to be in denial of what is obvious.
Give him a break...You know it. I know it. He knows it.
We all know it unless we are as insane as any Central Planner.
Great analysis on the macro picture, thanks.
Regarding the President's assertion that, “Anyone claiming that America’s economy is in decline is peddling fiction," his JOB relies on him continuing to be the Fiction-Peddler-in-Chief. Specifically on the subject of the federal government's looming insolvency.
Clinton left a national debt of $5 trillion, Bush II left a national debt of $10 trillion, Obama will leave a national debt of $20 trillion, while Stockman estimates that, to keep things on an even keel, it will have to hit $40 trillion during the next two presidential terms or so.
The notion that what cannot continue will is worse than fiction, it's a damn lie.
Great article. Well written concise, accurate, to the point.
I'm going to enjoy studying the charts in depth.
The markets aren't even close to being oversold.
Falling oil prices would be a net zero to the economy if all oil were produced in the US. Since most of the oil consumed in the US is imported, then lower oil prices mean more $$$$ staying in the US.
Either stop screaming about how low commodity prices are ruining the Canadian economy, or admit the money you are not spending outside the country is staying in the US.
Everyone keeps forgetting all those " out of contango" tankers polluting global harbors?
Offshore Storage Capacity<
Yen rubbed the CL pumpers, in the wrong way.
What he forgot to add is that the $16 saved on gas goes in the door of the convenience store to buy 8 Powerball tickets. About 80% of that will end up in goverment hands buying very little of value.
What he forgot, and he draws a beautiful spectrum of charts.
Reality is Off Shore Storage. H/T to the Tyler that gave those wonderfull video's pertaining to the Caspian Sea development.
The size /scale of that project is amazing.
We're bantering on about the Chinese building fake islands...lol
The Chinese are wrong according to Maritime Laws. Those weren't ever Islands. Sinking Coral Atolls
I love ZH.
Where contributors can line up 16 dollars of earnings with 16 dollars of revenue and net them to zero.
When the Gas Stations fail to produce revenue then employees are laid off or hours are cut as there are no funds to cntinue employment.
The consumer may spend the "savings"...meaning spending less...in other venues. Or perhaps he may retire debt.
There is a spiral of destruction due to declines in corporate revenues as this system require growth for sustainability.
It is like those stupid, fucking, brain dead cashiers at the Supermarket when you slide your card. They proclaim, "You saved $5.20." Of course I would retort, "I saved NOTHING YOU STUPID FUCK. I SPENT $16.51." Well...I did not say, "YOU STUPID FUCK" but I certainly was thinking about it...
Then I would be a smart ass and ask, "Just what account is my savings in? I want to cash them out."
People as yourself have CONVOLUTED THE LANGUAGE AND INTENTIONALLY SEEK TO CONFUSE SAVINGS WITH SPENDING.
When you save money it means that you do not spend it. When spending less it means that you spent less.
SO FUCK YOU.
Uh, $16 of sales to a gas station is about .80 in profit. The station loses less than a buck, but the driver saves the full $16. So instead: Fuck You!!
The Station must replace INVENTORY so they can sell another day. That requires a capital expenditure.
So fuck you.
What an idiot.
deleted by author
Ah, so you noticed that, did you?
Nice article. "Markets crash when oversold" = good point that should be obvious, but things have been a little topsy turvey ever since markets became "markets."
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.
http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
I don't care how oversold they are, they have a very long way to go before they are more oversold than they are overbought... I said.
Low oil prices are a a direct result of high prices. High prices draw motivated drillers, drilling increases output, huge output swamps consumption and prices collapse. This is a normal process. However, when you distort it with years of ZIRP and lots of easy money, then way too many drillers drill, the production surge is much bigger than it otherwise would be - and the collapse is that much worse. Simply put: You can't get something for nothing - and QE/ZIRP is the real problem here.
Hey Ahole, $16 saved is used to buy more food, pay for outrageous health caer, buy electronic good so on and son. Yes the ship is sinking Why should i have to pay out of my ass to keep the ship afloat. Flawed argument. If your argument is true than raise it to $8 a gallon. Cheaer oil and gas resultes in lower food transportation cost, lower food cost, lower cost of good sold which should translate to a better economy. Oh yeah they money doesn't leave the us to fund terrorist.