I See A Bear, And It Is Coming To A Market near You

July 16th, 2012
in Gary's blogging

I See A Bear, And It Is Coming To A Market near You

The first bit of news in the following article sets you up for what I have been preaching in that sell in May and go away. Unfortunately the market has been reacting in slow motion for the past year and makes daily predictions difficult, but the overall trend is still bearish as I will point out.

For now the markets are in a 'dead zone' because lack of direction, but I suspect that will become bearish as the month of July peters out. The crystal ball is still on the cloudy side but if you have kept up with the depressing world financial news from analysts on the forefront, the picture should become much clearer. Here I have included just a few articles that do not point a rosy picture of improving World finances anytime soon. I see a bear down the road, a really big one, and it is coming to a market near you.

Follow up:

Chart: The S&P And 'Should I Still Stay Away If I Sold In May?' by Kevin Wilbur

As it turns out . . . proved to be very timely at the beginning of May this particular presidential and congressional election year. . . the question becomes "Should I sell now, going into the second half of the summer and the fall election cycle?

"The S&P: Is More Correction Coming?" I stated then that my data indicated that, "the average correction within the present presidential cycle has been about 225 points on the SPX, with the exception of year 2009, likely from the extreme price downdraft and regime change correction the prior year in 2008."

225 points comes to between 15% and 18%, depending on whether you are measuring from 1425 as you would be this year, or measuring from 1200 as you would have in 2010.”

After Friday's 200 point rise on the DOW and on light volume, I would remind those who read my last article, that I saw a bear trap in the making where absolutely no fundamentals have changed, and equities are once again showing serious complacency. As we wait on Germany’s Constitution Count to give its opinion on the European Stability Mechanism (ESM) bailout fund on Sept 12, we lose any hope of a continuing improvement of the EU for the next several months. This will have the effect of a channeling sideways market and that isn't good. Typically, in a negative situation like we are experiencing now, a sideways markets breaks down and the longer the channel the harder the break – stay tuned.

The first glance is that we are currently in a range that could melt up a bit with decent news, but the down pressure of nonperforming world economies is the one real threat to continued market decline. I haven't seen the traditional spike in volume to signal the downfall, but the cash crowd isn't in the market either to panic one way or the other. I suspect the decline will be slow and methodical as I have pointed out in previous articles of recent.

The Bear Market Is Only Beginning

Long before it became headline news, we were talking about the corrosive effect of excessive debt, the softening U.S. and global economy, the "fiscal cliff", the implausibility of a European solution, the probability of a hard landing in China and the prospect that corporate earnings estimates were far too high.  Now these negative stories are carried in the Wall Street Journal every day.

In the face of the now-obvious negative outlook, the question we get most often is why the market has declined so little, and why it seems so resistant to bad news. In our view, the reluctance of the market to give up much ground is typical of many past market declines and reflects a state of denial by investors as they grasp at reasons to remain bullish.  Currently, the reasons cited most often are that the market is cheap, corporate earnings are strong and the Fed, as well as other central banks, will provide all the liquidity that's needed to avert a serious economic downturn.  We believe that each of those evaluations is flawed.

In the last four major bear markets the decline started very slowly from the peak, and was interrupted by numerous rallies, but continued to gather steam, ending only after a scary waterfall decline toward the end.  We suspect that the same pattern may happen this time around.”  (Read the entire article here.)

From July 9th. we have the following article that expounds on the European crisis and the improbabilities of it getting fixed any time soon. This article also states that inflation is the key policy driver in China's sinking economy.

That Sinking Feeling Continues

Posted: 09 Jul 2012 03:50 AM PDT

Though the US jobs data was pretty soft, it was clearly not bad enough to prevent the single currency from sliding to a fresh two-year low on Friday. Indeed, the euro’s price action in the second half of last week was quite dreadful, falling from around 1.26 on Wednesday to under 1.23.

At the same time, Spanish bond yields soared over the final three days of last week to 7.0% from 6.2% on Wednesday. Europe’s policy-making cognoscenti will no doubt be alarmed that the honeymoon generated by the successful late-June EU Summit evaporated so incredibly quickly. Finance ministers meet again in Brussels today to discuss the implementation of the various initiatives agreed ten days ago, including how to funnel much-needed capital into Spain’s troubled banks.” Read the rest of the article That sinking feeling continues

For French President Hollande and his continuing whining.

And just in from global outplacement firm Challenger, Gray & Christmas, Inc. is some VERY disturbing news that continues to erode investor confidence that we will see a quick recovering economy soon. This news is not at all enlightening for any thoughts of a solid employment recovery anytime soon. Only employed folks can make a recovery happen.
U.S. retail sales fall for third straight month


Technology Sector Job Cuts Surge 260%

CHICAGO, July 16, 2012 – Planned layoffs that will impact 30,000 workers at computer giant Hewlett-Packard helped push job cuts announced by technology-sector firms to their highest level in three years, according to a report on tech-sector downsizing released Monday by global outplacement firm Challenger, Gray & Christmas, Inc.

Technology firms, including those in computer, electronics, and telecommunications, combined to announce 51,529 job cuts in the first half of 2012, a 260 percent increase from the 14,308 cuts announced during the same period a year ago.  The midyear total is, in fact, 39 percent higher than the 2011 yearend total of 37,038.  It is the largest midyear total since 2009, when the sector announced 118,108 job cuts in the first six months of the year.

We may see more job cuts from the computer sector in the months ahead.  While consumers and businesses are spending more on technology, the spending appears to favor a handful of companies.  Those that are struggling to keep up with the rapidly changing trends and consumer tastes are shuffling workers to new projects or laying them off, altogether.”

Download the PDF report here: Press Box

This article written by a Chinese economist Dee Woo, gives the concept of China's serious stepping into the deleveraging pit a lot of credence. It is long and full of data and you may want to read it in its entirety later. (Please note none of his data or graphics originated in china.) Hat tip to S.Y.

China's Catastrophic Deleveraging Has Begun

If one wants to know how bad the health of China's economy has gone, look no further than the PBOC's composure, which seems rather frustrated and aggressive as of late . . The central bank's aggressive pro-liquidity maneuvers at best serve to sustain the over-leveraged economy and avoid the systematic short-circuit of debt financing. . . under a new set of rules, the country’s biggest banks will need to increase their capital levels to 11.5 percent of assets by the end of 2013.

According to the great Ray Dalio's principles, the credit-fueled China's economy is so over-leveraged that a great de-leveraging is going to be the only way out. The pyramid of debt/credit is cracking and will collapse since the conditions of underlying economic agents are deteriorating. There's no mount of monetary band aids that can alter that destiny.

I will analysis China's construction industry to illustrate the severeness of China's economic bubbles.

  • China spent more than $1,000bn on construction (including residential/non residential real estate and infrastructure), representing around 20% of its nominal GDP,or almost twice the world average.

  • In 2010, China’s cement consumption surpassed 1,800mt, which is around 55% of global consumption and about 25 times more than US consumption.

  • In 2010, China has built around 1.8bn square meters of new residential floor space, which is the equivalent of Spain’s housing floor space stock.

As to the foreign demand, China's export growth clearly is decelerating recently as the major customers--EU and the US--are both fighting on the edge of double-dip. It is immoral to accelerate the export growth while trade partners are drowning in their debt crisis.

The biggest problem for China is the state, central enterprises and crony capitalists wield too much power over national economy, have too much monopoly power over wealth creation and income distribution, and much of the GDP growth and vested interest groups' economic progress are made on the expanse of average consumers stuck in deteriorating relative poverty.”

I like Mr. Hui as his writings are very close to my heart. Read and consider his objective advice over the next few weeks. My inner investor is bearish but I see the long term buys coming around in the September / November time frame, certainly not this month. My buys lately have been ETF shorts held by a very short leash, several have been simple scalps as I did this morning collecting a 0.89 point gain.

Waiting For Market Direction by Cam Hui

For a market analyst, the bear case is easy to make. Cyclical leadership is weakening and defensive leadership continues to be dominant.

  • The relative performance of the Morgan Stanley Cyclical Index tells an uglier story.

  • The Technology sector continues to look sick.


On the other hand, I wouldn't be too eager to get overly bearish here. Long-term sentiment measures are screaming "buy".

With long-term sentiment models showing this much bearishness, traders who go short run the risk of getting their faces ripped off in a market melt-up on any hint of positive news, as they did Friday.

Long-term investors may be tempted to get long here, but I would also caution against going all-in because we have not seen signs of investor capitulation yet. In the most recent bout of market weakness, a broker contact I had told me that clients were calling up to ask, "Is it time to buy yet?"

These are not signs of a durable intermediate term bottom.

In short, this has been a market of maximum frustration. My inner investor is accumulating positions, but he is afraid that we could see a downdraft on some dramatic news that could take the market down 20%.

My inner trader doesn't know what to do. His instincts tell him to get short, but the risks of a rebound are too great. He is mostly stepping aside and waiting for market developments to give him an indication of direction.


The U.S. is already in recession, says Ambrose Evans-Pritchard, citing the Economic Cycle Research Institute, adding that the Fed has "drifted into fatalism." The risk is that the Fed is repeating the errors of early to mid 2008 "when failure to respond turned a common garden recession into a disaster." Bernanke's at fault for that. What's needed now is "nuclear force" to drive GDP up to 5%.


Stock Market Blithely Ignores ‘Perfect Storm’

With last week’s powerful finishing stroke, the U.S. stock market continued to thumb its nose at reality, rampaging higher on economic news that seems to be getting worse by the day.

Around mid-week, readers of the Wall Street Journal could have glimpsed a perfect storm gathering on the horizon.

Numerous articles spread across two inside pages summed up a darkening global economic picture. We learned that China’s economy is decelerating at a rapid pace, Europe’s is dead on arrival despite blather about further stimulus, and even a lean and muscular Brazil has cut interest rates to get in step with increasingly desperate central banks around the world.

In the U.S., a carefully spun recovery story was starting to unravel just in time for the election with warnings that Q2 earnings are going to stink. It would appear that the jobless “recovery” is finally starting to take its toll on consumer spending.

Henry Ford was right after all: business prospers only when companies are hiring workers and paying them well.

It is a gaseous cloud, as far as we’re concerned, and therefore vulnerable to instantaneous collapse. Traders eager to ride the Dow to our target 300 points above current levels should take note of this, with an eye toward the fire escape.”

To contact me with suggestions or deserved praise:


Written by Gary

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