Is it just me? Last week while on vacation, the markets surged back to all-time highs as the Greek and China problems were solved. Unfortunately, as I left white, sandy beaches and clear ocean waters behind me to return to reality - so did the markets. Either it is purely coincidental or I should head back to Mexico. Personally, I am hoping for the latter.
As I discussed earlier this week (chart updated through Thursday's close):
"While the prices did manage to break out of the downtrend that has contained the market since mid-May, so far that rally has failed to attain new highs. Furthermore, the previous oversold condition that acted as the "fuel" for the recent rally has been exhausted with the markets are now back to an extreme overbought condition. This suggests that there is likely very little upside currently and that investors should consider using this opportunity to engage in prudent portfolio management practices such as taking profits, reducing laggards, and rebalancing allocations."
That advice has played out well as the markets have continued to deteriorate, along with a vast majority of internal measures. The question is now, and is the subject of this weekend's reading list, is the correction over? Or, is this just the beginning of something bigger?
1) The Thinnest New High In Stock Market History? by Dana Lyons via Dana Lyon's Tumbler
"When we posted yesterday's piece on the stock market's weak internals (If Beauty's On The Inside, This Market Wins The Ugly Contest), 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'."
Read Also: What Do 1987, 2003, 2009 And 2015 Have In Common by Chris Ciovacco via Ciovacco Capital
2) Doubling Down On A Summer Correction by Michael Gayed via MarketWatch
"This is not about opinion, and this is not a call. The odds simply favor some kind of heightened volatility, and volatility tends to coincide with corrections in stocks. Much like in July 2011 when stocks rallied and all seemed well before the Summer Crash of 2011 took place, so too a similar pattern and complacency is under way.
Perhaps this is precisely how it needs to happen — suck everyone in, and then refresh the fear when it seems like all is well, and when no one expects it."
Read Also: What's The Biggest Risk To Investors by Ben Carlson via A Wealth Of Common Sense
3) The Nasdaq Is Flashing A Dot-Com Era Signal by Anthony Mirhaydari via The Fiscal Times
"But beneath the surface, the situation is more vulnerable than it seems: By one measure, the Nasdaq is getting ahead of itself in a way not seen since just days before the dot-com bubble burst.
On the Nasdaq 100, this was only the second time that the index was up 1 percent or more to a new 52-week high amid net declining issues. The other day was March 23, 2000, just days after the dot-com bubble peaked."
Read Also: The Market Doesn't Care About Your Opinions by Joe Calhoun via Alhambra Partners
Read Also: The Most Boring Stock Market In Decades by Michael Driscoll via WSJ MoneyBeat
4) Magical Thinking Divorces Markets From Reality by James Grant via Financial Times
"The modern financial animal is wont to assume that he or she lives in an age of science. Just peruse the economic research that the great central banks produce. Even the titles of the papers are incomprehensible. Surely, the wit of man and woman has conquered the mysteries of money.
So much for appearances. The truth is we live in an age of pseudoscience. The central banks' forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity."
Read Also: Market Deterioration & Full Cycle Investing by Dr. John Hussman via Hussman Funds
5) China's Record Dumping Of US Treasuries by Tyler Durden via ZeroHedge
"The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.
This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2)."
Read Also: Investors Can't See Through Market Froth by John Plender via FT
Other Interesting Reads
Oil Warning: Crash Could Be Worst In 45 Years by Tom Randall via Bloomberg
The Buffett Ratio Is Bearish by Ed Yardeni via Dr. Ed's Blog
A Warning Signal For Growth Investors by Cam Hui via Humble Student Of The Market
Are Stocks Overvalued? A Survey Of Equity Valuation Models by Chris Brightman via Research Affilliates
"It wan't raining when Noah built the ark." - Howard Ruff
Have a great weekend.