It’s a bear market

The S&P 500 broke primary support at 4170 to confirm a bear market. A Trend Index peak at zero warns of strong selling pressure.

S&P 500

The Nasdaq 100 similarly broke support at 13K, confirming the bear market.

Nasdaq 100

Dow Jones Industrial Average, already in a primary down-trend, confirmed the bear market with a break below 32.5K.

Dow Jones Industrial Average

The Transportation Average lags slightly, testing primary support at 14.5K. Follow-through below 14K would be the final nail in the coffin.

Dow Jones Transportation Average

A plunging Freightwaves National Truckload Index warns that we should not have long to wait.

Freightwaves Truckload Index

Conclusion

All major US stock market indices now warn of a bear market. Weak retracement, to test new resistance levels, should not be confused with a buy-the-dip opportunity.

S&P 500

Tech heavyweights pause for breath

Good progress has been made combating the pandemic but daily COVID cases seem to be struggling to break through a floor between 50 and 60 thousand. The vaccine roll-out is ahead of schedule but people need to stop listening to idiots like Rand Paul — who went to the Senate gym while infected — and listen to the Chief Medical Adviser whose advice is to wear a mask.

Daily US COVID Cases

Stocks have paused after the recent run up in Treasury yields. When both stocks and bonds are being sold, there is nowhere to hide.

The Nasdaq 100 is testing support at 12000. At this stage the correction looks mild, with declining Trend Index remaining above zero, but breach of 12000 would signal a test of the Sep 2020 low.

Nasdaq 100

The S&P 500 is performing better but Volatility troughs above 1.0% still warn of elevated risk.

S&P 500 & Twiggs Volatility 21-Day

The big five tech stocks are a mixed bag. Alphabet (GOOGL) and Facebook (FB) show strength. Microsft (MSFT) looks stable, while Mazon (AMZN) and Apple (AAPL) are trending lower.

AAPL, AMZN, GOOGL, FB, MSFT

When leaders no longer lead normally signals the final stage of a bull market. The chart below shows the Russell 2000 small caps ETF (IWM) clearly outperforming the large cap Nasdaq (QQQ) and S&P 500 (IVV) indices with all the tech heavyweights.

IVV, IWM, QQQ

@Schuldensuehner

The steeper yield curve benefits banks, who profit from the wider net interest margin. Major banks have climbed 60% to 80% over the past six months, with Goldman Sachs (GS) leading and Bank of America (BAC) the laggard.

Major Banks

Consumer durables sectors are, again, a mixed bag. Household Goods (HG) is flat, Apparel Retail (RA) is climbing steadily, while Automobiles (AU) is down sharply — mainly because of Tesla (TSLA).

Consumer Durables

Though light vehicle sales were down a million units in February.

Light Vehicle Sales

And heavy truck sales were down 4,000 units compared to January.

Heavy Truck Sales

Prospects for the tire industry are improving. Goodyear (GT) retraced to test its new support level after breaking out above its high from late 2019. Respect would confirm another advance.

Goodyear Tyre Co. (GT)

Conclusion

The recovery is going to be a long hard slog with frequent setbacks. Banks are doing nicely but stocks generally are over-priced and ripe for a major adjustment. There are signs that this is the final stage of the bull market and market risk is elevated.

Nasdaq: Devil take the hindmost

I am fond off quoting Jesse Livermore’s maxim “You don’t argue with the tape” but Livermore was a keen student of market conditions and based his decisions on far more than just price action in the market.

We are witnessing a spectacular stock market rally, driven by retail investors and hedge funds piling into the market while institutional investors are sitting on the sidelines.

The Nasdaq 100 broke through resistance at 10,000, new highs signaling a fresh primary advance. Bearish divergence on Twiggs Money Flow index may warn of selling pressure but it is hard to argue with the tape. Only a fall below 9500 would signal another decline and that seems unlikely at present.

Nasdaq 100

Even retail sales (ex food) have recovered sharply, from -15.3% in April to -1.4% in May (annual % gain).

Retail Sales (ex Food)

Light vehicle sales are more sluggish but June sales of 13.05 million are still a sizable bounce.

Light Vehicle Sales

So why are many old investment hands acting with such caution?

We know that the efforts to contain the COVID19 outbreak are struggling, with over 60,000 new cases per day, but the economy still seems in good shape.

COVID19 Daily Cases

Source JHU CSSE

Let’s look at where the money is coming from.

Federal Debt

Treasury debt has expanded by more than $3 trillion in the last four months (March 9 – July 9) as the government does everything in its power to cushion the economy from an unprecedented shutdown. Rescuing airlines, bailing out Boeing, emergency business loans, job preservation schemes, and supporting Fed purchases of a wide variety of financial assets to keep the plumbing of financial markets open. Every way they can, government has been flooding the market with money and some of that has found its way to the stock market. Whether through boosting stock purchases, enabling companies to raise debt or boosting consumer spending to buoy up sales, the market is flying on borrowed money.

Steep up-trends like this typically end in a blow-off. A trend is self-reinforcing if rising prices attract more investors who in turn bid up prices even further. A steady influx of new investors is required to sustain the trend, else it dies.

Similar self-reinforcing cycles are evident in nature, where they expand violently outward at an exponential rate until they run out of fuel. The fuel driving the event may differ, from dry tinder in a forest fire, warm ocean temperatures in a hurricane, consumable vegetation in a locust plague, …..or exposed population in a virus outbreak. The cycle expands, feeding on itself, until the fuel is exhausted.

A stock market blow-off is no different. The up-trend will continue for as long as rising prices are able to attract new investors. It will stop when the source of new money dries up. In this case, when Treasury tries to slow the unsustainable growth in federal debt. Then it becomes a case of devil-take-the-hindmost as a preponderance of sellers attempt to offload their stocks on a rapidly shrinking pool of buyers.

S&P 500 and Europe: New deal or a false dawn?

Donald Trump and is making noises about an interim trade deal with the CCP, while Boris Johnson appears to be making progress on a Brexit deal with Ireland premier Leo Varadkar.

Trump’s announcement is little more than a sham, intended to goose financial markets, with nothing yet committed to writing:

“Trump said the deal would take three to five weeks to write and could possibly be wrapped up and signed by the middle of November….”

…what could possibly go wrong?

The economy continues to tick along steadily, with unemployment and initial jobless claims near record lows.

Unemployment & Initial Jobless Claims

But high levels of uncertainty are likely to create a drag on consumer spending and stock earnings.

At the outset of Donal Trump’s presidency, value investor Seth Klarman, who runs the $30 billion Baupost Group hedge fund, predicted the impact that Trump would have on financial markets:

“The erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making…..

The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty…. Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”

In his letter, Mr Klarman warned: “If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst.”

While not entirely prescient — we have low interest rates and low inflation — Klarman was right about the decline in dollar hegemony and the rise in global angst.

Markets are clearly in risk-off mode.

US Equity ETFs recorded a net outflow of $824m this week, compared to a net inflow of $2,104m into US Fixed Income. Year-to-date flows present a similar picture, with a 3.3% inflow into US Equity compared to 13.9% into US Fixed Income (Source: ETF.com).

ETF Flows YTD

Long tails on the S&P 500 candles indicate buying support. Expect another test of our long-term target at 3000. Volatility remains above 1%, however, indicating elevated risk. Breach of 2800 is unlikely at present but would offer a target of 2400.

S&P 500

According to Factset, the S&P 500 is likely to report a third quarter this year with a year-on-year decline in earnings.

S&P 500 Earnings

The Nasdaq 100 paints a similar picture, with another test of 8000 likely.

Nasdaq 100

It is becoming impossible to justify current heady earnings multiples when reported earnings are declining.

Europe

If Johnson’s “free trade zone” for Northern Ireland can break the Brexit impasse, then there may be room for optimism over the future UK – EU relationship.

Europe seems to be stirring. Trailing a distant third, to North America and Asia in terms of investment performance, there are some early encouraging signs. A higher trough indicates buying pressure and breakout above 400 on DJ Stoxx Euro 600 would signal a primary advance.

DJ Euro Stoxx 600

The Footsie shows similar early signs of a potential recovery. A higher trough on the trend Index indicates buying pressure. Breakout above 7600 would signal a primary advance.

FTSE 100

Let us hope that this is not a false dawn and the UK and EU are able to resolve their differences.

For the present, our outlook for the global economy remains bearish and equity exposure for International Growth is a low 34% of portfolio value.

S&P 500: Donald Trump and the next recession

Treasury yields continue to fall, with the 10-Year testing long-term lows at 1.50%. A sign that investors are growing increasingly risk averse.

10-Year Treasury Yields

Crude oil prices remain weak; a bearish signal for the global economy. Breach of support at $50/$51 per barrel would warn of a decline to $40.

Nymex Light Crude

Volatility (21-Day) above 1.0% on the S&P 500 is flashing an amber warning. Breakout above 2940 is likely and would signal another test of 3000. But expect stubborn resistance at our 3000 target level.

S&P 500 Volatility

Bearish divergence (13-Trend Index) on the Nasdaq 100 warns of secondary selling pressure. Breach of 7400 would warn of a test of primary support at 7000.

Nasdaq 100

Robert Shiller maintains that Donald Trump is unlikely to survive a recession:

“So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn….the end of confidence in Trump’s narrative is likely to be associated with a recession.

During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.”

I would go further and argue that Trump’s management style is likely to cause a recession.

Some of the aims the President is attempting, like addressing China’s unfair trade practices, are vitally important to long-term US interests and he should be given credit for tackling them. But his constant hyperbole, erratic behavior, with a constant mix of bouquets and brickbats, and on-again-off-again tactics, has elevated global uncertainty. Consumers are likely to increase savings and cut back on expenditure, while corporations may cut back on hiring and new investment, which could tip the economy into recession.

GDP growth contracted to 2.3% in the second quarter, while growth in hours worked contracted to 0.92% for the year ended July 2019, pointing to further falls in GDP growth for the third quarter.

Real GDP and Hours Worked

August employment figures are due for release next week and will either confirm or allay our fears.

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

Hope is not a strategy

Bob Doll’s outlook this week at Nuveen Investments is less bearish than my own:

Trade-related risks seem to be growing. President Trump looks to be holding out hope that the U.S. economy will stay resilient in the face of escalating tariffs and rising tensions. So far, the U.S. economy has not faltered, thanks largely to continued strength in the consumer sector and labor market. But if business confidence crumbles (as it has in parts of Europe), it could lead to serious economic damage…..

The president’s recent actions to delay the implementation of some new tariffs show that he is sensitive to the market impact of his trade policies. But the erratic nature of his on-again, off-again approach adds too policy uncertainty. At this point, we can’t predict the ultimate economic impact from these issues. Our best guess is that the U.S. remains more than a year away from the next recession, but risks are rising. In addition to the solid consumer sector, we don’t see financial stress in the system. Liquidity is still broadly available, and fixed income credit spreads are generally stable outside of the energy sector.

With additional Federal Reserve rate cuts already priced into the markets and bond yields falling sharply, the only catalyst for better equity market performance could be improving global economic data. We hold out hope that the global economy will improve, and still think there is a better-than-even chance of manufacturing activity and export levels to grow. But those improvements will take some time, suggesting equities will remain volatile and vulnerable for now.

Where we seem to differ is on the inevitability of the US-China trade war escalating into full-blown disengagement. This week’s events have not helped.

China’s national English language newspaper, Global Times, under the People’s Daily, announced new tariffs.

Global Times

Followed by an admission that the timing of the announcement was intended to cause maximum disruption to US stock markets.

Global Times

The inevitable Twitter tantrum ensued.

Donald Trump

The President also tweeted “Now the Fed can show their stuff!”

He is deluded if he thinks that the Fed can help him here. The best response would be announcement of a major infrastructure program (not a wall on the Mexican border). Otherwise business confidence will decline due to the increased uncertainty. Business investment will contract as a result and slow employment growth.

Retail sales have shown signs of recovery in recent months but will decline if consumer confidence erodes.

Retail Sales

Especially consumer durables such as light motor vehicles and housing.

Consumer Durables Production

The global economy is already contracting, as indicated by falling crude oil

Nymex Light Crude

…and commodity prices.

DJ-UBS Commodity Index

Volatility (21-Day) is rising as the S&P 500 tests support at 2840. Breach is likely and would test primary support at 2750.

S&P 500 Volatility

Bearish divergence (13-Week Money Flow) on both the S&P 500 and Nasdaq 100 (below) warn of selling pressure. The Nasdaq 100 is likely to test primary support at 7000.

Nasdaq 100

The Russell 2000 Small Caps ETF (IWM) is testing primary support at 146. Follow through below 145 is likely and would signal a primary down-trend.

Russell 2000 Small Caps ETF

Fedex breach of support at 150 would also warn of a primary down-trend and slowing activity in the US economy.

Fedex (FDX)

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value because of elevated risk in the global economy.

Approaching stall speed

With 89.7% of companies having reported, S&P are projecting 4.4% earnings growth for June quarter 2019 compared to the second quarter in 2018. Even more interesting is their projection of 3.4% growth for the September quarter. With EPS growth boosted by a stock buyback yield of 3.5%, this warns that the economy is close to stall speed.

S&P 500 Earnings per share Forecast

The daily chart for the S&P 500 shows support at 2830/2840, while a higher trough on 21-Day Money Flow indicates (secondary) buying pressure. I expect another test of resistance at 3030; breakout above resistance at 2940 would confirm.

S&P 500

But divergence on 13-Week Money Flow, as on the Nasdaq 100 below, warns of longer-term selling pressure.

Nasdaq 100

Small-cap stocks, as depicted by the Russell 2000 ETF below, are not enjoying the same support as large caps. A sign of rising risk aversion.

Russell 2000 ETF

Bellwether transport stock Fedex is testing primary support at 150. Breach would warn of a primary decline, suggesting a slow-down in activity for the broad economy.

Fedex

We maintain a bearish outlook on the global economy and maintain less than 50% exposure to US and International equities. Our view is that probability of a US recession in the next 6 to 12 months is as high as 70% to 80%.

We expect stocks to rally for another attempt at the 3020/3030 high for the S&P 500 and will use opportunity to further reduce our exposure to equities.

S&P 500: Flight to safety

10-Year Treasury yields are near record lows after Donald Trump’s announcement of further tariffs on China. The fall reflects the flight to safety, with rising demand for Treasuries as a safe haven.

10-Year Treasury Yield

Crude found support at $50/barrel. Breach would warn of a new down-trend, with a target of $40/barrel. Declining crude prices reflect a pessimistic outlook for the global economy.

10-Year 3-Month Treasury Spread

The S&P 500 found support at 2850. Rising volatility warns of increased market risk. A test of support at 2750 remains likely.

S&P 500

Declining Money Flow on the Nasdaq 100 reflects rising selling pressure. Expect a test of 7000.

Nasdaq 100

The Shanghai Composite Index broke support at 2850. A Trend Index peak at zero warns of strong selling pressure. Expect a test of support at 2500.

Shanghai Composite Index

India’s Nifty is testing support at 11,000. Breach would offer a target of 10,000.

Nifty Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is testing primary support at 368. Strong bearish divergence on the Trend Index warns of a double-top reversal, with a target of 330.

DJ Euro Stoxx 600

The Footsie is similarly testing support at 7150. Breach would offer a target of 6600.

FTSE 100

I have warned clients to cut exposure to the market. It’s a good time to be cautious.

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.”

~ Jesse Livermore

The eye of the storm

“On Wednesday, the US Department of Commerce added Huawei – and 70 other companies – to its “Entity List.” …. Huawei cannot buy parts or components from US companies without the explicit approval of the US government.” (Trivium China)

We are sliding towards a fully-fledged trade war. Following straight after the imposition of tariffs by both the US and China, US action against Huawei will be taken as a direct attack on Chinese industry.

The CCP is already stoking nationalist sentiment to bolster public support.

“Last night and today, CCTV replaced regularly scheduled programming with two films about the Chinese army fighting the US in the Korean War.” (Trivium China)

Market response is so far muted. On the daily chart, the S&P 500 correction is modest. Expect another test of 2800. Breach would offer a target of 2600.

S&P 500

The Nasdaq 100 retreated below its new support level at 7700 but Money Flow remains strong.

Nasdaq 100

China’s Shanghai Composite found support at 2900.

Shanghai Composite Index

Japan’s Nikkei 225 is ranging between 20000 and 24000. Expect another test of primary support at 20000.

Nikkei 225

India’s Nifty is testing support at 11000. Respect would confirm the primary up-trend.

Nifty Index

In Europe, The DJ Euro Stoxx 600 is undergoing a correction that is likely to test support at 365. But Trend Index above zero continues to signal buying support.

DJ Euro Stoxx 600

The Footsie found support at 7200, with Trend Index again signaling buying support.

FTSE 100

10-Year Treasury yields are testing support at 2.40%. One of the few clear signs that markets are growing increasingly risk averse, as demand for bonds drives down yields.

10-Year Treasury Yields

S&P 500: No deal

It looks like there will be no trade deal any time soon.

“Trade talks between China and the United States ended on Friday without a deal as President Trump raised tariffs on $200 billion worth of Chinese imports and signaled he was prepared for a prolonged economic fight….. Trump is now moving ahead with plans to impose 25 percent tariffs on all remaining Chinese imports. Those new tariffs could go into effect in a matter of weeks.” (New York Times)

Signature of a document was always going to be more theater than substance. Earlier in Bloomberg:

“U.S. President Donald Trump has good reason to be skeptical about China’s willingness to live up to its commitments in any trade deal. Seasoned foreign business executives on the mainland know that any agreement there represents the start of a bargaining process, not the end….”

Response of stock markets, to signs that negotiations had reached an impasse, were muted. The pull-back on the S&P 500 is modest.

S&P 500

The Nasdaq 100 retreated below its new support level at 7700 but the Trend Index remains strong.

Nasdaq 100

China’s Shanghai Composite is undergoing a correction but this week’s long tail suggests selling pressure is moderate.

Shanghai Composite Index

The yuan fell sharply, acting as a shock-absorber.

Chinese Yuan/US Dollar

Stocks like Boeing and Apple may be re-rated but the broad view of the market seems largely unchanged.