When we noted the stock market’s weak internals yesterday, we weren’t sure if things could get any worse – and by how much – with the major averages still able to hold near 52-week highs. Well, the answers were “yes” and “a lot”... yesterday, July 20, 2015, was the thinnest new high on record in the U.S. stock market.
Bad breadth is everywhere in US equity markets...
As we await the final capitulation by the ECB, EU and IMF to provide Greece another bailout (or not), we have assembled a list of reading for you that has ABSOLUTELY NOTHING to do with Greece.
"You're cruisin' for a bruisin'." - Kenickie, Quote From "Grease"
"...excluding Energy and rate sensitive sectors such as Telecom and Utilities, which have been bringing down the average, most sectors continue to show very strong breadth. In particular, Healthcare, Consumer Discretionary and Financial stocks continue to show very strong uptrends."
"We have a problem with this, and that is central bank hubris. They now think that they are omnipotent, because, essentially the government has said we are going to pass over all control of the economy to the central banks, they say to everybody else including financial market participants that “you don’t know, you don’t understand, we have our models and they are right”. And that kind of hubristic approach is when you sow the seeds of your own destruction."
"It's starting to get ugly..."
When people think about crashes, they tend to think about an event – as if some massive, grotesque, red, scaly, fire-breathing, razor-toothed catalyst should be obvious beforehand. But we know from history that that’s not the way it works...
"The sharp rise in bond volatility over the past week or so is reminiscent of the VaR shocks of October 2014 in US rates and April 2013 in Japanese rates," JP Morgan says, before explaining how volatility induced selling (i.e. a VaR shock) is behind the rout in German Bunds. Predictably, QE has helped create the conditions which make such episodes possible.
We have never, ever, seen equity market breadth diverge from equity market performance for such an extended period...
With the "Great Greek Tragedy" now behind the markets, for the time being, all eyes have turned towards the Nasdaq's triumphant march back to 5000. (The graphics department at CNBC have been working overtime on banners and bugs for when it happens....watch for them.) For now, it is all about the hopes of a cyclical upturn in the Eurozone economy supported by the ECB's QE program starting next month. Market participants have been bidding up stocks globally in anticipation that the ECB's program will pick up where the Fed left off, and the flood of liquidity will find its way back into asset prices
Let’s focus on what happened in the lead up to the summer of 2011, right before the markets cratered on the back of everything that was going on in Europe and the downgrade of the US' credit rating by S&P. The leveraged loans index peaked at the start of the year and traded sideways up until that eventful August. This was a sign that something was not right in the credit markets; and equities pretty much followed the same pattern. If we fast forward to today, we can see that the leveraged loans index peaked in July 2014, indicated by the red line in the graph, and has noticeably declined since; at the same time equities continued to move higher, a divergence which is a novelty in this bull market. Is this telling us something? We believe so - it is a red flag for equities.
Not paying attention to the symptoms, failing to diagnose the problem and not taking any defensive actions will ensure that investors fall victim to the full-blown effect of any 'illness'. Even minor colds can have a lasting impacting on portfolio performance over time, and making up previous losses has never been a prescription for long-term financial health. Is this a "suckers rally?" Maybe, but only time will tell. However, taking some action in portfolios to reduce risks, take some profits, and rebalance your allocation model is always a great way to prevent coming down with a "cold."
"...the underlying cause of a crash will be found in the preceding months or years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translating into accelerating ascent of the market price (the bubble). According to this ‘critical’ point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability."
From Bitcoin to the Swiss gold referendum, and from Chinese trade and North Korean leadership, Jim Rogers covers a lot of ground in this excellent interview with Boom-Bust's Erin Ade. Rogers reflects on the end of the US bull market. citing a number of factors from breadth to the end of QE, adding that he agrees with Albert Edwards' perspective that now is the time to "sell everything and run for your lives," as the "consequences of [The Fed] are now being felt." Most notably though, Rogers believes the de-dollarization is here to stay as Western sanctions force many nations to find alternatives. Simply put, Rogers concludes, "we are all going to pay a terrible price for all this money-printing and debt."