Market Analysis: Correction in the Cards

The Dow has enjoyed new highs since I last posted my view on the current market actions. The S&P has hit 5 1/2 year highs. So everything is back to a happy, normal bullish market?

Well, I disagree. The Dow only consist of 30 companies that are weighted based on selling. It alone is not a good indicator. But it tells us something: that investors are moving away from growth to value. A clear sign of the last phase in a cyclical bull market. What confuses the picture is the current sector rotation, from commodities, energy and housing to value, tech (including bio) and financials.

Sure, BKX is doing great but Nasdaq is not roaring out of the gates and SOX is breaking down. The current tech leaders are tired and just recovering from the May – July wipeout.

If you believe in cycles you’ll probably know that we are currently in a secular bear market, not seen since before 1982. We are also in the end of the cyclical 4-year bull market that started in October 2002 by hitting new lows and rallied in March 2003. This current rally is a short-term relief rally, a classic bull run in a bear market.

But, but… isn’t oil coming down, growth in the economy slowing and the interest rate stable? Well, yes but are any of those factors positive in the intermediate to long-term? Nope. Lower oil prices means slowing global demand. A economy that contracts is not growing. And a lowered Fed rate would mean declining dollar.

Therefore I’m putting my money on a 10-15% correction of this irrational exhuberance over the promise of a “soft landing”. My time horizon is 2-6 weeks and the only thing we need now is the catalyst. Could tonight’s 8% KOSDAQ crash be it? It only takes a butterfly to create chaos even if it’s on the other side of this flat world.

Market Analysis: Slowdown in Growth Worries

The Philly Index rattled the markets yesterday and that has continued today. Many of the key indecies – such as BKX, SOX and COMP – are challenging the upwards short-term trendlines. Technically all of them are in engulfing bearish rising wedges.

Oil has dropped 20% since July and is now due for a rebound. That will again put pressure on the equity markets. I think people are starting to realize that there might be a small possibility for stagflation. The Fed is not going to lower the interest rates until the inflation is truly under control. A unchanged rate for the rest of the year is not positive. That scenario supports my overall midterm bearish market outlook.

The next two weeks will be interesting. September so far has been unusually good to the markets, especially the financial and tech sectors who has been the clear leaders. It’s time for a strong correction but it could be dampened by the earnings season that is just 2-3 weeks away. One things is clear: VIX is heading up, possibly breaking out of the bullish falling wedge.

Market Analysis: All About The Fed

Tomorrow the FOMC policy statement is being released at 2.15pm EST. The market expectation is that the Fed won’t raise the interest rate since the inflation seems to be under control – for now. The focus will therefore be on the wording; changes, additions and formulations.

The housing is showing further weakness as the construction of new homes dropped with 6% in August. That’s the fifth decline during the past six months and clearly indicates that the past five years bull run is over. This is the sector I believe will lead the US economy into a recession as previously argued.

The financial markets are still in a short-term confirmed rally, lead by NASDAQ. But there are still no clear leadership and the indices’s are now very close to previous tops or resistance levels. The past few days have showed a tug of war between bulls and bears.

My sentiment is that the market has chosen to look at the positive aspects of the recent decline in energy prices and the unchanged Fed rate. But what does this data really mean? Well, after a five year long housing boom and a three plus year market rally the times are changing. The lower energy prices most likely mean a decline in global demand. And even if the Fed keeps the interest rate at 5.25% we haven’t seen this extra cost of capital being carried through to companies and consumers.

The US is also much more depend on the rest of the world than previous years. The federal debt is being financed by foreign governments who wants the greenback in their portfolio, i.e. holding up the dollar value. The increase in global supply of labor has held down the cost of wages and allowed many business to charge ahead. The savings rate is negative and when housing cannot longer be used as an ATM machine the consumption will keep declining and people have to focus on paying off expensive debt.

That said, I still think we are going to see strong company earnings over the next 4-8 weeks within certain sectors and specific companies. A bull market doesn’t turn into a bear market overnight. That would be to easy. Topped out earnings is usually a sign of decline in the current context. The important for investors is the potential for future earnings growth, not past or present.

Market Analysis: The Rally is Churning

My bearish mid-term sentiment for the markets stays unchanged as per my blog entry a week ago. Short-term we are in a confirmed rally since the August 15 follow-trough with 2 distribution days. But I cannot see any leaders or any convincing volume. To me, the current rally looks like a bull trap.

A market’s bull and bear cycles are usually driven by a few sectors, both on the way up and on the way down. Housing and energy has been the strong drivers since March 2003 and it now looks like they will take charge in introducing the bear market. Just look at what Tech did in the end of the 90s.

The base for my bearish hypothesis is that consumption will slow down the economy thanks to higher interests and a weaker housing market. About 2/3 of the US market is driven by consumption. But shouldn’t inflation come down thanks to lower energy prices and higher rates? Well, it will take time for the rate hikes to take effect. And lower energy prices indicates lower production, not necessarily more disposable money.

Technically, all the key indecies are breaking out from bearish rising wedges and that is bad. There are few market leaders that shows any strength. Apple (AAPL) is the only one within tech that has a bullish momentum (big announcmenet 9/12). Even Google (GOOG) who has charged ahead like there is no tomorrow is now showing weakness, breaking down from a symmetrical triangle with low volume. Everyone and their aunt now owns Google and when there are no buyers left at a certain price point, sellers needs to lower their ask.

In the long-run a bear market or recession if you will is positive; it’s the natural rythm of the economy to expand and contract to build long-term wealth. Speculative behaviour in the late stage of a market creates froth that needs to be shaved off. Housing was undervalued in 2001 but is today overvalued, driven up by everyones desire to make money with low risk. Once everyone is in, who are you going to sell to?

PS. My bet is that the Fed will hike the rate another 50-75 basis points within the next 3-4 meetings.

The Market Rallies But Not For Long?

The financial markets have come back strong since the bottom in July. The catalyst being a combination of markets being oversold and a positive response on the PPI and CPI numbers in mid-August. Obviously the halt in interest rate hikes gave comfort that inflation is under control. Fridays employment data was another positive sign.

That said, there are two things that doesn’t seem right here: the lack of volume and the lack of strong leaders. The current rally lacks conviction going into one of the worst market months of the year. Volume shows level of commitment and leading stocks needs to outperform the key indecies. Neither is happening.

In addition, many stocks are hovering right under resistance levels (selling pressure) and some key indecies are forming bearish rising wedges. That spells trouble ahead.

In summary, I think we are seeing the confirmation of a normal contraction of the economy. The key catalyst this time is the real estate boom which has accounted for 30% of the economic growth over the past few years. The money supply is tightning and homes can no longer be used as cash machines for renovation or consumption.

But all this is painfully normal and happens about every fourth year. It’s a cyclical process that is healthy for the economy. Higher cost of money means that only the best survive in each catagory and that is what capitalism is all about.

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