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The Risk of a Correction in the Equity Bull Market

January 25, 2018

THE RISK OF A CORRECTION IN THE EQUITY BULL MARKET

  • Rising commodity prices, including oil, are feeding through to PPI
  • Unemployment data suggests wages may begin to rise faster
  • Federal Reserve tightening will continue, other Central Banks may follow
  • The bull market will be nine years old in March, the second longest in history

Since March 2009, the US stock market has been trending broadly higher. If we can continue to make new highs, or at least, not correct to the downside by more than 20%, until August of this year it will be the longest equity bull-market in US history.

The optimists continue to extrapolate from the unexpected strength of 2017 and predict another year of asset increases, but by many metrics the market is expensive and the risks of a significant correction are become more pronounced.

Equity volatility has been consistently low for the longest period in 60 years. Technical traders are, of course, long the market, but, due to the low level of the VIX, their stop-loss orders are unusually close the current market price. A small correction may trigger a violent flight to the safety of cash.

Meanwhile in Japan, after more than two decades of under-performance, the stock market has begun to play catch-up with its developed nation counterparts. Japanese stock valuation is not cheap, however, as the table below, which is sorted by the CAPE ratio, reveals:-

Star_Capital_-_Equity_Valuations_31-12-2017

Source: Star Capital

Global economic growth surprised on the upside last year. For the first time since the great financial crisis, it appears that the Central Bankers experiment in balance sheet expansion has spilt over into the real-economy.

An alternative explanation is provided in this article – Is Stimulus Responsible for the Recent Improved Trends in the U.S. and Japan? – by Dent Research – here are some selected highlights:-

…click on the above link to read the rest of the article…

Markets Are Correcting Hard

January 8, 2016

Markets Are Correcting Hard

An assessment of the risks of things getting worse from here

The long-awaited global financial market correction has arrived. We are seeing collapses in all major markets and across all major categories.

As usual, the pain has started at the edges, in the weaker elements (emerging markets, junk bonds, weak companies, etc.) and is rapidly spreading towards the center.

How far this goes before the central banks overtly step in (you can be sure they are covertly doing whatever they can to stem the damage) is anybody’s guess. Our assessment is “not too long” because the central banks are deathly afraid of the Frankenmarkets they have created.

They are worried that these grotesquely-inflated “”markets”” will begin to implode, gather steam, get further away from their control, and end up causing real damage to one or more major banks (the only entities that central banks actually care about). Or even possibly one or more small countries.

That is, they are afraid of a deflationary impulse destabilizing the $200 trillion edifice of debt they have carefully erected. Or perhaps we should say carelessly erected.

As we’ve always said: bubbles expand in search of a pin. As we look around for the pin to this one, it helps to ask: What was the trigger for this latest bout of global financial deflation?

It Begins With China

2015 ended weak but essentially where it started, with the US equity indexes just barely green for the year.There was no big Santa Claus rally, which was a bit of a bummer for the Wall Street year-end bonus crowd. But neither was there any big decline.

China’s market appeared more or less stabilized by the year end, however it began 2016 with a circuit-breaking wave of panic selling, losing -7% on the new year’s first day of trading before the markets were simply closed by authorities.

…click on the above link to read the rest of the article…

Has The Market Trend Shifted From Bull To Bear?

October 23, 2015

Has The Market Trend Shifted From Bull To Bear?

Why the recent volatility may mark a secular shift

Emotions are running high for the investment community in the wake of recent market volatility. Up until August, we had been in the third longest period in market history without a 10% correction. Since then, stock indices sold off hard, only to bounce once again over the past two weeks of trading.

As you’d guess, the generic punditry has been out in full force.  A good number of very well respected technicians are not mincing words: We’ve entered a bear market.  No equivocation.

On the other side of the equation are plenty proclaiming a successful retest of the lows has been made, and now away we go.  Earnings will be better next year. No recession in sight. Just another dip to be bought, right?

And certainly the truth is….No one knows. Especially in today’s world where global central banks can concoct further QE/monetary schemes at the drop of a hat.  Let’s face it, at this point the global central banks are all in. In fact, beyond all in. Without question, the US Fed knows that if equities fall, they lose the high end consumer. (Wal-Mart shoppers have already long been lost)

I thought in this discussion I’d run through a number of indicators I’ve been watching that will hopefully help answer the key question – was the recent market turbulence a sign of a short-term correction, or something larger?  We know there’s no single Holy Grail metric in this wonderful world, but I tend to think of indicators as mosaic pieces.  If we can get enough pieces in the right place, we have a good shot at actually deciphering the “picture” of what is to come.  And for that, we can only really rely on historical experience.

…click on the above link to read the rest of the article…

Weekend Reading: Just A Correction, Or Something Else

August 28, 2015

Weekend Reading: Just A Correction, Or Something Else

AAA-Weekend-Reading-List

Earlier this week I posted two pieces of analysis with respect to the recent dive in the markets. The first discussed the possibility that this is just a correction within an ongoing bull market. The second delved into the possibility that a new cyclical bear market has begun. Only time will tell which is truly the case.

However, in ALL cases, the initial decline led to a subsequent bounce and ultimately retested previous lows. As shown in the chart below, this was the case in 2010 and 2011 which were ultimately followed by Federal Reserve interventions that helped the bull market regain its footing.

SP500-2010-2011-Crash-082515

The question is whether, with economic growth rates slowing and deflationary pressures building, will the Fed again intervene by postponing rate hikes and injecting liquidity? Or, is this recent correction just the beginning of something larger? Only time will tell for certain. However, there is mounting evidence that we are indeed closer to the end of this bull market cycle than the beginning.

This weekend’s reading list is a smattering of views from bulls, to bears and everything in between as to the recent correction. Is it just a correction to be followed by a resumption of the bull market? Or something else?

THE LIST

1) Panic Attack Or Start Of A Bear Market by Ed Yardeni via Dr. Ed’s Blog

There have been lots of panic attacks since the start of the bull market in early 2009. The first four of them occurred from the second through the fourth years of the current bull market, and they were full-fledged corrections. They were all triggered by worries that a recession was imminent, with anxiety focused on three major and varying concerns: a double-dip in the US, a disintegration of the Eurozone, and a hard landing in China–all having the potential to cause a global recession either individually or in combination. When those fears dissipated, relief rallies ensued.”

Yardeni-SPX-082715

Read Also: Was Monday’s Plunge Capitulation, Nah! by Simon Constable via Forbes

 

 

…click on the above link to read the rest of the article…

First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

August 26, 2015

First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

A housing market set for the mother of all corrections.

“I think it’s important that people don’t hyperventilate about these type of things.” With these words, Australian Prime Minister Tony Abbott tried to soothe the world’s rattled nerves today about the ongoing crash in China. Australia is heavily exposed to China, the biggest consumer of its commodity exports.

“It is not unusual to see stock market corrections,” he said about the relentlessly brutal three-month crash that has taken the Shanghai Composite down 43% so far.

“It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound,” he said, speaking of the Chinese fundamentals, and by extension, of the Australian fundamentals that depend so much on Chinese fundamentals.

And he said this though factory activity in China shrank at the fastest rate since the Financial Crisis, other indicators are heading south, cars sales are suddenly plunging, and the People’s Bank of China started devaluating the yuan to mitigate the problem, thus further hurting Australian exports to China.

So here’s Lindsay David, founder of LF Economics in Australia, weighing in on the “sound” fundamentals in Australia.

 

…click on the above link to read the rest of the article…

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