S&P500 Resumes its Decline

October 31, 2016

While not a whole heck of a lot, the S&P500 did fall by almost 0.7% last week on modest volume. Volatility crept higher—the VIX Index rose from super low levels to the mid-teens; this is still nothing to worry about, but it shows that investors are getting worried…..even as the overall S&P remains not too far below all-time record highs which were achieved in the summer months.

In US macro news, the week got off to a poor start with the Chicago Fed National Activity Index printing another negative result. Then the Case Shiller Home Price Index registered another disappointing number—prices fell on average across 20 major cities in the US. Consumer confidence dropped. The Richmond Fed also disappointed with a negative print. New home sales missed. Durable goods orders also missed; although ex-autos, durable goods orders were slightly better than expected. Initial jobless claims disappointed. And consumer sentiment also missed. On the positive side, pending home sales beat consensus estimates. International trade also beat estimates, and Q3 GDP came in slightly stronger than expected, but that was due to inventory builds rather than growth in spending which did not drive this growth in GDP.

The short-term topping pattern that began to take shape at the end of the summer has only been reinforced by last week’s modest loss in the S&P500. This topping pattern is now clearly visible not only on the daily charts, but also on the more important weekly charts. As valuations (based on price-to-earnings, price-to-sales, and price-to-normalized earnings) cling to the extremely high end of long-term historical ranges, the signals coming out of technical analysis become more important because they often provide some of the earliest warnings that prices are headed for a fall. And the signals coming from even the most basic interpretation of the price and momentum indicators is that the S&P500 is poised for a more meaningful retreat.

Words of Wisdom…..from 1929

October 24, 2016

Last week, the S&P500 took a pause from its recent string of retreats and inched back up 0.38% on light volume. Of course, S&P volatility crept back down in sync with the rise in equity prices. That said, the VIX Index is still closed higher than the lows reached during the summer doldrums. Essentially, last week’s action constituted a small reflexive bounce, a tiny bounce that’s very normal even during more extended periods of decline or topping in the markets.

It was a fairly light week in terms of US macro reports. On the negative side, the Empire State manufacturing survey plunged; it was supposed to increase. Industrial production missed badly. Housing starts missed. And jobless claims were worse than expected. On the positive side, existing home sales beat consensus estimates. And the Philly Fed business outlook survey beat expectations. Leading indicators and headline consumer prices met expectations, so no surprises here.

Technical analysis still points to a clear topping pattern on both the daily and the weekly charts—despite last week’s small gain in the S&P500. Upward momentum is still weak or absent, so all signs still point to more downside risk. Last week’s measly 0.38% dip does not qualify as a true retreat.

Finally, in his most recent weekly commentary, investment manager John Hussman posted the following quote:

“The recent collapse is the climax, but not the end, of an exceptionally long, extensive and violent period of inflation in security prices and national, even world-wide, speculative fever. This is the longest period of practically uninterrupted rise in security prices in our history… The psychological illusion upon which it is based, though not essentially new, has been stronger and more widespread than has ever been the case in this country in the past. This illusion is summed up in the phrase ‘the new era.’ The phrase itself is not new. Every period of speculation rediscovers it… During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have changed, that old economic principles have been abrogated… and that the expansion of credit can have no end.”


This was published by Business Week in November……..1929.  The point Hussman was making is this—something very similar is happening today, in US equity markets. And no matter what the explanation, the reasoning, or the analysis—the resolution to today’s “exceptionally long, extensive and violent period of inflation in security prices” will not end any differently.

It never has ended differently…..over the history of US equity markets. And it won’t end differently this time either.

And as Hussman points out—to believe that just because a huge market pullback, more accurately a collapse, has not yet happened so therefore it will not ever happen, means one is making a serious mistake. This is the same mistake investors make before every major (and minor) bull market ends…including the one that ended in 1929. And it’s the same mistake investors are making today.

S&P500 Set to Retreat?

October 17, 2016

The S&P500 fell back another 1 percent last week on light volume. Volatility inched higher, as would be expected during a down week. But the VIX Index is still in fairly complacent territory, nowhere near levels associated with fear, much less panic.

Last week’s economic news was mostly disappointing. Jobless claims were a bit better than expected, and business inventories grew slightly more than predicted. But other than that, things were ugly. The labor market conditions index fell …… again. The JOLTS survey missed badly—job openings came in well below expectations. Producer prices, both headline and core, were hotter than predicted. And consumer sentiment crashed; instead of rising as expected, it fell considerably.

So all in all, the same old story for the US economy—very sluggish growth, with no improvement on the horizon.

As far as US equity markets go, the outlook is becoming even more troubling in the near term. As outline here over the last couple of weeks, the S&P500 has been forming a short-term topping pattern, and after last week’s 1 percent retreat in the S&P500, this topping pattern has been reinforced….if not confirmed. First, the uptrend line that began after the big bounce in February 2016 first began has now been violated. Last week’s decline broke this uptrend. Second, almost every major momentum indicator has already diverged bearishly several weeks ago, and now that the S&P has declined for a couple of weeks, this bearish divergence is being confirmed. Third, the most recent significant low point reached in early September (roughly 2,120 on the S&P) was broken last week. All this suggests that some sort of more meaningful retreat in the S&P is now more likely to occur in the near term.

And the lows reached in late June, immediately after the Brexit vote, would become a natural target for an impending downside move. This is roughly around 2,000 on the S&P, which represents a 6% drop from last Friday’s close.

Note that this is still a call for a relatively modest retreat. Given that the latest cyclical bull market is now about six years old (very mature), and given that corporate earnings have been falling for about two years, and given the super-high valuations in the S&P relative to long-term historical standards, a more severe retreat in the S&P would lop off about 50% of its value, which would take the S&P back only to average valuations. Any overshoot to the downside—which almost always occurs in bear markets—-would chop off far more than 50%.

S&P 500 in a Short-Term Topping Pattern?

October 11, 2016

After inching up very modestly the prior week, the S&P500 gave back almost 0.7% last week on light volume.  Meanwhile, volatility inched higher—the VIX index rose for the week, but that’s to be expected during a period when prices fell back.

In US economic news, the bad news returned, unsurprisingly to us. The week began with a poor reading from the PMI manufacturing index, which fell from the prior month’s reading. Then construction spending registered a disastrous negative print, instead of a positive one as expected by economists. ADP employment missed badly. International trade was much more negative than predicted; this will hurt the next GDP report. On the positive side, ISM manufacturing was a bit stronger than expected and sow was the ISM services index. But the biggest number of the week—and the biggest disappointment—was the US payrolls report which missed badly. On top of that, the unemployment rate rose; it was supposed to remain unchanged. And worse, average hourly earnings growth disappointed. So while many on Wall Street keep on shouting—as they have for over six years—that the US economy is steadily recovering and growing, the truth, especially on Main Street, is the opposite:  the US economy has never fully recovered from the Great Recession and it’s still….fully seven years after coming out of this recession…..struggling to attain strong, organic growth.

Finally, the picture that technical analysis is painting has just become more ominous….for the S&P500. While last week we pointed out that the S&P has essentially gone nowhere for the last two full years, after last week’s loss, the short-term picture has now become more worrisome. After topping in August, about two months ago, the S&P500 has now been creeping downward slowly but surely ever since. And if it fails to hold at its September lows (roughly around 2,120) then there’s a lot more downside immediately ahead of it.  The next level of support will come into play at roughly 2,000. So because this support level of 2,120 is not that far away from Friday’s close, and if it doesn’t hold, then we’d be looking at roughly a 6% loss from there if 2,000 is reached.

Sure that’s not a huge loss in the long-term history of this index, but over the last couple of years—when the Fed’s support of the US equity markets has become so dominant in levitating stock prices—such a loss would hurt the psyche of many traders who have come to believe that even such minor losses are no longer very possible outcomes in US equity markets.

US Stocks Have Gone Nowhere for Two Years

October 3, 2016

Last week, the S&P500 inched up a very modest 0.17% on light volume. Volatility actually moved up a bit, in contradiction to the slight uptick in prices. While still very low, the rise in the VIX index suggests that investors are somewhat more nervous than they were a week ago.

Last week’s economic news was mixed, but certainly not showing any signs that US economic growth is about to accelerate. The Dallas Fed manufacturing survey came in negative….again. While new home sales beat expectations (slightly), the Case Shiller home price index missed badly, and pending home sales plunged (they were expected to rise). Consumer confidence beat expectations, and so did durable goods orders (but only because they didn’t fall as much as expected!). The Richmond Fed manufacturing index fell again. Wholesale trade also fell again. Personal spending missed; personal income only met expectations. Chicago PMI and international trade both beat expectations.

The technical picture for the S&P500 is not strong. More and more, it resembles a market that’s “hanging on by a thread”. Stunningly, over the past two years, the S&P500 has essentially gone nowhere—it’s now up only a couple of percent from where in was in late 2014. Remember, it’s now late 2016.

As an example of how hard it’s been to make money over this period, Cornell University—which has one of the largest university endowments in the US and some of the best & brightest advisors around—just reported that it LOST 3,3% in its most recent fiscal year. Cornell officials blamed the “low-return environment” for its horrible results.

So when all the pundits on Wall Street, and all the financial news reporters who echo them, scream every week that the US markets are doing well and that everyone should be jumping in with both feet, stop and think about the reality of the situation. The truth is that risk asset markets are very fully valued already, that these markets have gone essentially nowhere over the last couple of years, and that even the smartest and most sophisticated investors are struggling to make money from them.

In short, be careful.