Much to do and much to learn
The chase by Frances Horodelski:
Maybe because we look at things every day—corrections seem to happen in slow motion. This has been the most anticipated correction in history it seems for the New York markets (we haven’t had a serious one since 2011). The indicators have been there for a while. The Transports peaked in December. The generals (S&P 500 and Dow) peaked in May while the Nasdaq—always late to a party—peaked on July 20. We’ve been watching (and talking) about the internals for some time which also provided the clues that something was coming.
Here’s the tally so far: The TSX is down 11% from its April high (and 12.3% from all time September 2014 highs). The S&P is down just 4.5% while the Dow is down 7.2%. The Nasdaq has dropped 6.5% in a month. The movement has been the most painful but over a longer time frame – down 12.22% since December 29 peak – for the Dow Jones transports.
I’ve been told that what leads in the correction is also what can lead on the way out. Gold? Materials, staples and telecom have been the outperformers in the past week/month in both the U.S. and Canada. We’ll see whether that defensive posturing is the signal of more defensiveness to come. Alternatively, are we seeing the capitulation trade in energy that sets up for the next cycle? The S&P has had seven weeks of alternating performance (down, up, down, up, down, up, down). The CNN fear/greed index is at 10.
Yesterday I highlighted a number of the worries around the world. Add North Korea to the list today as Kim Jong Un traded threats with South Korea and the military has been put on a “war footing”.
For reference, U.S. strategists remain generally bullish on where U.S. equities will end the year. Right now the median target for the S&P 500 is 2225 within a 2100-2350 range. I think I said last week that we could get a pop, a drop and then a rally into the end of the year. I probably should have said pop, drop, pop, drop, pop, drop – and then the rally. The volatility will likely continue. Is there anything new in the mix? Maybe the realization that China’s economy is weaker than we thought (numbers in the 3-4% GDP growth range are becoming more prevalent) and that the country’s leaders are a little less capable at managing the markets and the economy. Today’s WSJ, below the fold, talks about the Tianjin explosion and how it has undermined the people’s confidence in the leadership. Pretty much everything else is the same. The ECB is still in there buying $65 billion worth of bonds per month (until September 2016). The PMI for both manufacturing and services in the Eurozone continue to show expansion (and at a pace slightly better than expectations). The Atlanta Fed’s GDPNow forecast for the U.S. economy has started to tick up again – and while the street remains much more bullish on growth, the gap is narrowing. Growth will be positive in Q3. Interesting that a dovish fed caused a big market hiccup – maybe a rate hike will be a plus. And what about all that “a fall in oil is like a tax-cut for the masses”? Of course, the price of gasoline hasn’t fallen at the same pace as oil – but it still could and it certainly has provided some consumer relief. Jobs are being had. Wages are rising (slowly). I don’t want to be a Pollyanna. The world is thinking that central bankers have lost control. And they’re hunkering down for something worse but when the weak are running, the strong take action.
Having said that, the technicians are nervous and in the short term, the charts might dictate. From Bill Strazzullo at Bell Curve Trading: “Note how the TSX tested the 13,800-13,700 area. This is the CRITICAL level I talked about on the show last week (mid-range of the June 2013 rally). Gut check time for the Canadian equity market. If the TSX fails here it is down to 13,400/300, another attempt at a rally that probably fails around 13,700-13,800 and then down again, possibly as deep as 12,900/700.” Another view from Raymond James Jeff Saut (who thought August 12th was the low and still thinks a bottom will be put in before September comes) lines up a number of indicators that are suggesting capitulation such as the NYSE McClellan Oscillator (about as oversold as it gets), puts are being bought at a pace more than calls that hasn’t been seen since 2012, the above-noted CNN fear/greed index is well into fear. While he notes “never on a Friday” – the bottom is near. For the TSX, the story might also be similar – if only the price of oil could find some level of support. Soon my friends, soon. Next week’s bank results – coming after a miserable year-to-date for the sector (down 10.45% year to date) – could be the supporting trigger.
Where is the most pain this year? The emerging world. In the past 13 months, according to Yardeni Research, almost one trillion ($940.2 billion) has flowed out of the 19 largest emerging market economies. That is double the outflow of $480 billion during three quarters of the financial crisis (2008-2009).