Bulls Vs Bears...Markets Crashing But There Is Hope!

What's real and what's hyperbole 
The chase by Frances Horodelski:

The bears playbook will be much in evidence today and I can hear their growling everywhere. The Dow futures are down more than 400 points at 7:30 a.m. ET. Here is the tally from last week: The Dow down 5.82%. The S&P 500 down 5.77%. The Nasdaq down 6.78%. The S&P/TSX down 5.63%. All ten sectors in the U.S. were lower last week led by Energy (-8.65%) while in Canada it was similar carnage but healthcare led the way (-9.43%) and there was one bright light – telecom +1% on the week. Golds too outperformed with a positive week, with 20 out of 21 members higher led by Alamos Gold (+21.5%) and the sector higher by 6%. Canadian banks which will be much in focus this week with third quarter reports, also had a dismal week with group down 4.7% led lower by Canadian Western Bank (-9%). Year to date the group is down 11.89% with Home Capital and Canadian Western Bank shareholders feeling the most pain (-44% and -32%, respectively). But no bank was spared – all ten components are down on the year. The yield on the Canadian Bank index is 4.33%.

As I said last week, this is one of the most anticipated corrections in years. Most expected theChinese stocks to fall after a speculative feeding frenzy that took the market to ridiculous levels of valuation. Most thought a correction of some magnitude would be “healthy” and many portfolio managers were waiting for the opportunity to buy. Most didn’t expect it to happen in one or two days. Orderly declines are much more healthy than disorderly ones – this one is turning disorderly. Remember that the margin clerks rule when markets collapse like this (now down almost 600 points on the Dow).

So there will be bears. But let’s highlight the bulls’ playbook for fun. Corrections happen and we’re in one. They aren’t great but let’s look at some of the things that could point to something decent ahead. Earnings in the second quarter (excluding energy) showed a decent 10+ gains for S&P 500 companies. The American economy continues to grow (and the Atlanta Fed GDPNow gauge has been showing an acceleration of expectations albeit still modest). Jobs are plentiful and the jobless rate has fallen. The number of millennials has surpassed the number of bombers in the American population have the potential for more homes, more cars and more consumption generally. The Fed remains accommodative (remember the balance sheet isn’t shrinking, they remain committed to re-investing maturing bonds and rates – with or without a hike – are exceptionally low. The CNN fear/greed index is at FIVE (paralytic fear). The amount of damage underneath the averages is severe including more than 80% of NYSE and TSX listed stocks down trading below their respective 50 day moving averages. Stocks are relatively expensive (compared to their own history) but still not outrageous (the bears love the charts that show stocks are the third most expensive compared to 1929 and 2000). The S&P is trading at 16.65x forecasted earnings while the TSX is at 16.8x. The ECB remains committed to “whatever it takes” and continues to buy some $65 billion worth of bonds per month. There is no credit crunch here folks – the leading cause of recessions historically (I know it is always different this time but still important to watch what matters). While all fingers are pointing to China, their ability to soften any blow is mighty (the PBOC’s reserve ratios are at 18.5% compared to the Fed’s 0.25%). According to the latest insider reports, insiders are decidedly bullish with sellers:buyers at 7:1 versus 25:1 in June (insiders on average tend to be sellers rather than buyers given options and significant components of compensation related to stock).

Now if you want to get bearish, there are no shortage of reasons (including the technical picture which always can be convincing when trend lines are broken). Unfortunately, they seem to me to be the same reasons on a loop – Fed, Europe and China. This week it is China. Remember to step back and focus on what is real and what is hyperbole. There will be a lot of the latter today. It used to be when the world was a mess, the world flocked to the U.S. dollar and U.S. treasuries. That isn’t happening as traders are buying the Euro, the yen and the Swiss Franc,

There will be news. Like the Iranians who are intent on shipping oil at any price. There are earnings this week (Best Buy tomorrow and Gamestop and Tiffanys on Thursday). There will be economic data releases including U.S. housing tomorrow, durable goods on Wednesdayand a second look at U.S. Q2 GDP on Thursday.

This not a time to be a hero but it is also not a time to panic. Take a hard look at each and every company in your portfolio and put your bear hat on. Do the numbers under the most uncompromising of scenarios – and see what will remain standing. Hold fast. And hold onto your hat. For months strategists have been forecasting heightened volatility. We’re there now. September is the worst month of the year seasonally – but maybe September came a month early. At BNN we’ll try to cut through the noise and provide clear-headed analysis. Stay with us.

Much to do and much to learn

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).