Posts Tagged ‘downtrend’
We have been in a continuous uptrend since March 1, 2016 (with the exception of a few days in June 2016). This is unprecedented and speaks volumes about this bull market and how strong it has been over the last two years.
We did, however, get a shift in direction yesterday as the market went into a downtrend.
The markets entered a new downtrend yesterday.
After an extraordinary long uptrend, lasting 105 days, we entered a new downtrend yesterday. The Fed tapered its bond buying with another $10bn to $65bn. The market has been very strong for several months and the correction we have experienced over the last few days has been expected. The S&P 500 has corrected only 4%, but it has closed below its 50DMA over its last four sessions. It has closed below this average three more times during the past 12 months, and gone above it fairly quickly again afterwards. But that does not mean that it will happen again. There have been more days of heavy selling now than during those earlier cited instances.
The market corrected on huge volume yesterday and pushed with that the market into a new downtrend. The previous uptrend had by now lasted one month.
The stock market went into a new downtrend yesterday.
With both the S&P 500 and the Nasdaq experiencing major down days yesterday the market went into a new downtrend. As I warned in the blog post of June 14th there was a chance that the previous uptrend would not follow through. The market action in the previous two days certainly proved this to be true.
The market went into a downtrend again yesterday with all major indexes falling hard on high volumes. The Nasdaq closed below it 50 day moving average for the first time this year.
The uptrend that started just a little over a week ago was short lived, and ended officially with the market action yesterday. We are now back in the downtrend again that started on April 11th.
All eyes are on Europe these days, and for good reason. A spike in bond yields in Spain and Italy Thursday last week continued to fuel contagion worries. In addition bonds in central European countries like France, Belgium, Finland and Austria got unloaded, indicating that investors are starting to discount systemic risk in all EU countries not just the PIIGS. How anyone can believe that the current debt levels and valuations can be sustained continues to amaze me. Market action since early August shows that investors as well are getting increasingly uncertain about the sustainability of our current financial and economic model. To me the main uncertainty when it comes to Europe right now is not if, but when: How long can they keep the illusion alive and which country will leave the Euro first. When the illusion falters, the stock markets will enter a massive crash.
The market has been exceptionally choppy all year and the choppiness increased several-fold after the early August crash, which still holds as the date for the start of a new bear market. The October 27th start of a new uptrend was nothing but a start of a new uptrend, it was rather an indication of an intermediate market top. Not getting follow-through on trend change signals is a sign of a weak market. Since then the market has been just that; with strong selling pressure. NYSE down volume was 93% of total volume last Thursday. Losers led winners by a nearly 9-to-2 ratio on the NYSE and by a 5-to-2 ratio on the Nasdaq. Both indexes failed at breaking above their 200 day moving averages (DMA) and have now fallen below the 50 DMA. The Nasdaq and S&P 500 have fallen below support at 2,600 and 1,220 respectively. In addition the S&P has made five lower highs since its 10/27 top. Top names like Apple and Amazon have also experienced heavy institutional selling—an indication of risk aversion. All contributing to shifting the model to a DOWNTREND. Note that after such intense days of selling it is not unlikely that the market can bounce back for a few days. The next downside support levels for the S&P 500 are at 1,175 and 1,125.
I presented the chart below the first time in the August 7th, 2011 Newsletter. And so far the similarity of the index’s path is striking.
S&P 500 weekly high-low bars
Usually interesting chart patterns like this one does not track for long, but this has now tracked since first half 2010. If it continues to do as well as it has done for about 18 months now, it does not bode well for stock markets going forward and the start of next year will be absolutely devastating. My sincere recommendation since summer to exit your stock portfolios is not at all based on this chart, but I must admit that it is starting to show strong support.
More importantly for that view is that Europe and the US are facing their biggest financial challenges in history now. Much greater than those that led to the financial crisis of 2008, and they are quickly running out of ammunition to deal with it. Ammunition or not, I believe that the situation will not be corrected before we see much more financial suffering in the form of very high inflation or a massive debt deflation. Both will lead to massive inflation adjusted stock market crashes.
China is still a country that many believe will continue to be untouched of the problems in Europe and the US. I however believe that China will see much larger problems than the West; largely due to their own structural challenges. It is getting increasingly difficult for small and medium sized businesses to get credit at banks. Official price inflation is 5.5%, which means that actual price inflation is likely a few percentage points higher and individual savings rates are at 3.5%. This means that Chinese, who have very high savings rates, are seeing their wealth being eroded by inflation. Chinese savers have tried to avoid inflation by investing in real estate which I believe have created a real estate bubble, that could pop at any moment. With only 35% of GDP coming from consumption (compared to 70% in the US) the Chinese economy is still extremely dependent on exports to Europe and the US, which is likely to fall back significantly when eventually the European and US economy starts to slow.
A falling Chinese economy will contribute to ensuring that there is no safety to be found by investing in commodities. Commodity prices as well as silver and gold will together with stocks go down in the coming market crisis. Gold is still the “last man standing.” But remember that gold took its largest hit not in bull years, but in the crash year of 2008. I have earlier suggested that you buy a little gold each month; between 5 and 10% of your net savings depending on how much “insurance” you feel you need. Despite expecting the gold price to fall I continue to suggest that you buy some physical gold each month. Falling prices will just mean that your “insurance policy” will get cheaper. Hopefully you will never have to sell or use that gold you are buying.
In an environment with falling stocks, commodities, precious metals, and most other major asset classes, the one thing going up will be the USD.
We have had an unusually high number of high volume down days lately, which were topped off with a massive down yesterday, July 27th. The Nasdaq with its 2.6% had its largest loss in five months. Market action in the major indexes constituted yet another 90% panic selling down day.
I have said several times earlier that third year bull markets typically are trendless, and this year is continuing to prove to be typical in that respect. The S&P 500 has mainly traded between 1,250 and 1,350 all year. IBD illustrates the lack of trend in the market well in today’s newspaper: “Last year, the Nasdaq had an eight-week win streak in the first half and then rose in 10 of 11 weeks in the second half. Those kinds of streaks make for good trading. So far this year, the longest up streak on the Nasdaq has been three weeks.” This market action calls for increased patience and continued adherence to your trading rules. Remember that a new trend will eventually emerge.
The reason for increased volatility lately is due to the lack of agreement between US politicians on how to handle the debt situation. But such discussions are not a new phenomenon; they have been going on for about three quarters of a century. As Ritholtz.com reports: “The regular debt ceiling limit dance seems to evoke a fairly standard set of behaviors in the two major US political parties: Whichever party is out of power (White House, or Congress or both) threatens not to support raising the debt ceiling. Which ever party is in power talks about how irresponsible and dangerous such a move would be.”
I don’t think the market has much to fear as I assume that they will reach a solution shortly. Yet another short-term solution that is. But yesterday, uncertainty became a little too high for the market participants to handle and a enough collected their chips to turn the market around. There is a clear risk that the US will be downgraded, and as I have stated many times before I believe this will eventually happen, and I also believe that the US will go bankrupt, or come into a situation that would seem like a close relative to it. But if that decline to bankruptcy starts with this downtrend or not I cannot tell. History shows that no systematic changes are made until our whole financial system collapses, first at that point is there enough political will to make any substantial changes. And substantial changes are what is needed. The way we run our economy, on borrowed and printed money, is not sustainable in the long term. This is an economic experiment that we to a more or less extend have been running, and gotten addicted to, since the Great Depression. The longer it has run the more we have gotten addicted to it. If you feel like reading more on this topic read this excellent column from Bloomberg News.
I have no clear perspective on the exact time for this collapse, and since I do not do any short term forecasting (only medium term and long term) I continue following my model which will in due course indicate when it is safer to enter a long-position in the market again. Remember that this is the same model that kept you out of the stock market during the crash of 2008 and indicated that it was “safe” to enter the market again on March 16th, 2009 just a few days after the market bottomed out. The model would have helped you avoid one of the last 100 year’s largest declines and also let you know when to return to the market again to participate in one of the last 100 year’s most rapid upturns!