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Weekend Reading: Serious Indigestion

Submitted by Lance Roberts via STA Wealth Management,

Another week of market volatility with no ground gained. It's enough to give you indigestion. I made an assessment earlier this week in reference to the markets rally attempt stating:

"Any rally that occurs over the next few days from the current oversold condition should be used as a "sellable rally" to rebalance portfolios and related risk. (Chart updated through Thursday's close)

  • "While the market did rally over the last week as expected, it failed to rally above the current downtrend that has confined the market since mid-May.
  • The failure of the market to rise back towards new-highs, given the "oversold" condition discussed last week, continues to confirm the underlying weakness in the market.
  • While overhead resistance has kept the markets from rising in recent months, downside support at the 150 and 200-day moving averages has kept the "bullish trend" alive for now.
  • Lastly, the oversold condition that existed last week has been primarily worked off. However, the market has not returned to an overbought condition that has previously marked the end of bull rallies. The market must close above 2180 by Friday's close to reverse the current weakness.

This short-term analysis suggests, especially when combined with the ongoing deterioration of internal measures, that rallies remain useful opportunities to rebalance portfolio risk as discussed last week."

As suspected, the rally failed at the current downtrend resistance and is currently testing support at the 200-dma. Importantly, the market is NOT oversold currently which could potentially fuel further selling. 

I discussed yesteday's that more warning signs have emerged suggesting there may be more to the recent consolidation than just a pause. This weekend's reading list will delve into a variety of views on the current market action.

Is this just a simple case of indigestion or is it something more viral? 


1) US Stocks Can't Keep Shrugging Off Global Pressures by Anthony Mirhaydari via Fiscal Times

"Yet a better indication of what's happening in world markets comes from the MSCI World (ex USA) Index, which is down more than 7 percent from its high set last summer. Or the iShares MSCI Emerging Markets (EEM), which is down 19 percent from last summer's highs. Or the DB Commodities Tracking Index Fund (DBC), which is down 43 percent.

 

Something is slipping. Factory orders here have expanded on a monthly basis only twice in the last 11 months. Excluding transportation, factory orders collapsed at a 7.5 percent annual rate in July, the worst since the maw of recession in 2009. With America's manufacturing sector looking shaky, the risk is that a global stalling pulls us down, too."

 

Read Also: Too Early To Worry About The Bear by Chris Puplava via Financial Sense

Also Read: 3 Warning Signs For Market Bulls by Lance Roberts via Streettalklive

 

2) The Wizard Of Odds For The USD by Erik Swarts via Market Anthropology

"From our perspective - and represented by the Fed's arduous task of administrating policy from ZIRP and within the trough of the long-term yield cycle, the conditions in the economy that were reflected in the markets of the 70's, 80's and 90's - are not remotely similar with today or have the potential reach and trend capacity that was fundamentally set in motion and sustained by the rise and fall in yields, from their secular icarus heights of the early 1980's.

 

Although anythings possible - and admittedly the bulls continue to hold the fort and battle for now, we feel it would behoove such lofty expectations to approach the dollar with the aforementioned long-term intermarket cycles in mind. Moreover, from a performance point-of-view, the magnitude and pace of gains over the past year is in fact rare and more representative of culminating blowoff extremes - rather than the early headwaters of a longer trend."

Read Also: The Great Tragedy by Joe Calhoun via Alhambra Partners

 

3) Things Are About To Get Bumpy  by Russ Koesterich via BlackRock

"Investors should be aware, however, that the good times may not last for long. Higher volatility should be expected given the recent evidence of slowing global growth and less benign credit conditions. This suggests to us that so-called momentum stocks, which have rallied strongly this year, could falter."

Read Also: The Stock Market Is Weaker Than It Looks by J C Parets via Business Insider

 

4) The "Big Short" Opportunity May Be At Hand by Doug Kass via Kass' Corner 

"Too little attention has been placed on the continued subpar growth that's been the consistent feature of the U.S. economy since "The Generational Low" in March 2009.

 

It's worth noting that recoveries out of severe U.S. recessions like the 2007-2009 one have historically been V-shaped. But this time around, gross domestic product has only expanded at a 2.1% real annual rate from the recession's bottom – well below the historical trend line of slightly more than 3%.

 

This fact, coupled with the more-sluggish corporate-profit growth than has emanated from a weaker economy, has formed my cautious market view over the last two years. I also think this slow-growth condition has generated a dependency on aggressive monetary tactics from the Federal Reserve and the world's other central banks."

Read Also: 2015 Recession Probabilities And Bear Markets by Chris Ciovacco via Ciavocco Capital

 

5) Coming Out As A Bear by Axel Merk via Merk Investments

"Increasingly concerned about the markets, I've taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I'm doing to try to profit from what may lie ahead.

 

I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

 

Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn't give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

 

Of late, I've taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation."

 

Read Also: Short Seller Who Called Financial Crisis See Calamity Ahead  by Michael Newberg via CNBC


Other Interesting Reads

The Revenue Recession by Charlie Bilello via Pension Partners

Fed Policy Keeps Introducing Distortions by Dr. John Hussman via Hussman Funds

The Fed Is Cornered by Guy Hasselmann via ZeroHedge

A Compendium Of Awesome Observations by Meb Faber via Meb Faber Research


"These are the cards we've been dealt. We can't trade the market we want, we have to trade the market we have." - J C Parets

Have a great weekend.