Weekend Market Commentary: Special Edition

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Weekend Market Commentary 'The Straw That Will Break The Camels Back'

UPDATED: 0900 EST 2014-07-12

The talk this week is about an overdue correction that could happen at anytime - only it hasn't - YET! According to some we haven't had a 'meaningful correction in several years and we are really due for one now. Is this correction talk different this time? Yes and here is why.

Follow up:

True, the escalating crisis in Iraq, the Ukraine, Portugal and Israel are keeping some awake at night, but none of them singularly are likely to cause the US markets to 'correct' significantly. If we see a 'major' correction it is going to be a combination of many factors coming together making a perfect storm.

We all know the foundation that hold the European Union together is again starting see the cracks that were papered over several years ago to 'hide' systemic problems. These issues have never been fixed, but it is unlikely there is enough tension here to cause a meaningful correction.

Issues like the turmoil in the European Debt Markets two years ago which never brought economic growth in spite of lowering debt yields to under 3%. The towering welfare systems and out of control unemployment are once again starting to appear on investors radar screens as potential financial bogymen.

Portugal's bank insolvencies is only the latest scary EU monster to take center stage and the markets had a minor knee-jerk experience.

Concerns that Espirito Santo International (ESI), the international arm of Portugal's second largest bank, Banco Espirito Santo (BES), was likely to file for insolvency after it failed to partially repay some of its outstanding commercial paper Wednesday, July 9. As scary as all of the above sounds, this too is not enough to end the markets bull run. These European worries didn't cause the market to collapse then, why should it now?

Then there is the latest fear, not necessarily fact, that the markets have climbed up too steeply for too long and need to correct. This is also true, but in itself not enough to cause the markets to correct downwards, not significantly anyway.

Market Outlook - This Rally Is Getting A Bit Steep


  • Employment data last week was good, not great. This week doesn't hold much other than the Fed minutes release and the beginning of earnings reports.

  • This current twelve-week, 9.3% runup in the S&P 500 is an unusually large and unusually long advance.

  • The SPX is now 8.4% above the 200-day moving average line, and the CBOE Volatility Index closed at a multi-year low of 10.30 on Thursday.

Conclusions? The assessment of the current situation is simple enough - the momentum is compelling, but the broad market indices (IWM) are overbought. The question is, which outcome are you willing to trust at this point? More bullishness built on momentum, or the overdue correction?

The charts say stocks are a 50/50 proposition at this point, but being realistic, there's unlikely to be much - if any - upside left, with a ton of downside risk just waiting to pull the rug out from underneath the market. The onset of earnings season may well be the catalyst to get the bearish ball rolling. Even if it's not earnings that starts the tumble, however, there's still lots of other ways for bad news to exploit the market's vulnerability here.

I read Jeff's missives, below, every week for a solid foundation on market fundamentals. This week he timely discusses the 'possibilities' for a possible correction.

The Week Ahead: Is It Time for a Correction?

After an event-filled 3 ½ day trading week, it is time to pause and reconsider. There is little fresh news in store this week, and therefore plenty of time for calendar-driven introspection.

Is it time for a mid-course correction? I expect the punditry to assemble the evidence, with each concluding that (s)he has been right all along!

  • The end is near. It will all turn out badly. (These sources are pretty easily found. If you are having trouble, just use The Google to find Schiff, Durden, or Faber).

  • A correction is coming. The main argument is often called "statistical" but is not really based upon statistics. It is merely an observation that the market historically has shorter cycles than we are currently experiencing. (Sources too numerous to mention).

  • QE is ending. Since the market has depended on this liquidity, stocks will now falter. You can easily find a two-variable chart to prove this point. (Check here for a Silver Bullet candidate in waiting).

  • Things are better - the economy, earnings, and future prospects. Take a few minutes and watch this discussion from Rebecca Patterson, Bessemer Trust Managing Director. She has been right on the market and has clients overweight in stocks. She also has advice for those just thinking about stocks. This is a good example of mainstream buy-side thinking.

  • Things can get even better. Jeremy Siegel sees Dow 18K and maybe even 20K by the end of the year.

Read more »

The straw that broke the camels back.

In my opinion the the start of any meaningful correction and end of the bull run will begin in November, 2014 AFTER the QE has officially ended. Notice I did not say crash, I wrote 'start' as not much may happen until we are well into 2015. That is because the QE ending will be the accumulation of the many factions that will be needed to instigate the end of this current bull run.

James A. Kostohryz writes, "This process (liquidity preference ) could take one to two full years to fully run its course". In his article below he explains how the markets are posed to shoot the markets higher after QE ends which could be the 'last straw'.

QE To Propel Market Treacherously Higher After Taper Ends


  • After the taper: Abnormally high supply of accumulated liquidity + normalization of liquidity preference = surging asset prices.

  • Almost by definition, the taper will end just as risk aversion and liquidity preference have barely begun to normalize.

  • In this context, stock prices will probably rise sharply for 1-2 more years, but with valuations already stretched, this will be an unprecedented and treacherous time in US history.

Does all this mean I should allocate cash funds to the sidelines just in case? Your opinions are welcome and would love to hear from you.

If you would like to get advanced buy/sell tweets, sign-up in the column to the right of this post by clicking on the 'Follow' button. Write me with suggestions and I promise not to bite.

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Written by Gary

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