Not surprisingly, the S&P500 gave back recent gains last week. What was surprising was the magnitude of the loss…..almost 2.5% which is one of the worst weekly losses of the year. Volumes jumped, lending support to the price retreat. But volatility, while rising, only crept up slightly to end the week (VIX) at a level still well below 20. This suggests that true panic selling—and the formation of a tradable bounce—is still a risk to be concerned about.
On the macro front, the US economy continues to limp along….at best. ISM services missed expectations, and this is important because services represent the largest share of the US economy, far larger than manufacturing. Initial jobless claims beat expectations but were artificially suppressed due to the massive hurricane that slammed into the Northeast. Import prices were far higher than expected and this will hit corporate profits and hurt consumers. The trade deficit was better than expected, but as usual for the wrong reasons—it fell not because of greater exports, but because of decreased imports, which is a sign of a slowing economy.
Technically, the S&P500 is at a crossroad. On the one hand, the equity markets are oversold in the short-term. After several straight weeks of selling, a bounce would be very normal. On the other hand, volatility never hit a crescendo and the S&P is still not oversold on a weekly basis. This leaves analysts to wonder and worry about getting an oversold bounce; specifically, if a bounce does not materialize soon (as in next week or the next several weeks) then the stock markets can sell off much further.
How much further?
Well Marc Faber, one of the most well known and accurate market analysts in the world, is warning about the possibility of a major post-election sell-off.
Faber sees the obvious status-quo in terms of the presidency and the congress and concludes that the US will have a hard time not going off the fiscal cliff. And this will result in a recession, if one hasn’t started already.
Even the Fed’s additional easing programs will not, according to Faber, be able to prevent a recession and the consequent reduction in corporate earnings.
So Faber sees a 20% sell-off as the minimum, and a larger 50% sell-off sometime next year as a downside limit.
Where does he keep most of his money? His largest holdings, as a percentage of assets, is in gold and then high-grade corporate and government bonds. Sure he holds equities too, but they represent far less than 50% of his portfolio, which is exactly what you’d want to see if you expect a meaningful sell-off over the next several months.