Weekend Market Commentary: Special Edition

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Weekend Market Commentary: O.K., So When Is This 'Big Correction' Coming?

UPDATED: 0900 EST 2014-07-26

Last week we spoke of slow methodical march downward and not a waterfall when the market finally 'reset', but we discussed a loose time frame between 2014 and 2016 when we will see a meaningful correction. Let's see if we can tie the start of this bear market somewhat as the most hated bull market in history marches on.

Follow up:

Although none of this will actually happen in any time frame described here or elsewhere by eager prognosticators, it is always a good idea to be aware of your surroundings in case a big bear jumps out of the bushes with the intent to eat you alive.

We all are aware that it usually takes a 'misstep', Black Swan or 'catalyst' to send the markets wayward as it has in the past. Sometimes it takes several 'events' to get things moving and that is the basis of this weekends commentary as we look at past history, what is happening now and how the accumulation of current events will eventually send this market place in a tizzy.

The Catalysts For A Correction

As the market has moved higher there has been an endless parade of characters on TV and in print saying how much more constructive they would be on the market if it went down 10%. Typically we don't see aggressive moves lower when we are on the lookout for them.

There have been some consistent catalysts for pullbacks in the past. The two most consistent drivers of weak markets have been inflation and policy. Spikes in energy prices and Fed tightening have been the culprits behind just about every major pullback we have experienced since the 1970s. In 1998 there were a string of global financial crises with currencies and the collapse of LTCM driving the market lower.

Frankly, I see nothing alarming in the long-term trend of the LEIs right now.

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We agree that we have seen nothing in the current stock market arena that gives a clear signal what what Mr. Market plans to do next week, much less in the next several years, but that isn't going to stop us from guessing the next time of market correction.

Dr. Bart DiLiddo and Angel Clark write, "The Efficient Market Theory states that it is impossible to "beat the market" because share prices always incorporate and reflect all relevant information as soon as it becomes available". This is true, but common sense says this market has all kinds of problems that are eventually going to come home to roost, sooner rather than later.

Let's face it, says David Moenning in his article Daily State Of The Markets: The Bears Can't Be Too Happy Right About Now frustration may be setting in. The markets could be set to fall at any time as many analysts are predicting, but that is not likely unless a significant Black Swan flies by and poops in the Bull's picnic basket. Investors are getting frustrated, worried and down right scared in some cases with good reasons, but it isn't enough good reasons just yet.

Frustration May Be Setting In

Let's face it; the bears have had ample opportunities to get something going to the downside this year - especially lately. Lest we forget, here are a few of the "issues" the bears have tried to take advantage of recently:

  • Fed appears to be saying rates could rise sooner than expected

  • Renewed bank problems in Europe [Portugal's Banco Espirito Santo (OTC:ESFHF)]

  • Europe's economy is clearly slowing

  • There is a hint of inflation in the air

  • Russia's refusal to play nice in Ukraine

  • Malaysia Airline MH17 flight shot down by pro-Russian rebels in Ukraine

  • Iraq is back in the news

  • Russian sanctions could hurt Europe's economy further

  • Israel has invaded Gaza again

  • The "momentum meltdown" continues to weigh on smallcaps

  • Yellen's "Irrational Exuberance" moment regarding biotechs, internet, and social media names

Added to the above list could be the negative and uninspiring GDPs of late, the absence of plentiful well-paying full-time jobs and four trillion other reasons the Fed's debt should be considered worthy. Then there is the U.S. bridges and crumbling infrastructure to worry about while the stock market is soaring.

Shouldn't this soaring bull market prove we are in an economic recovery? Not on your life, because this growth has only come from the Fed's programs of printing money (buying bonds) and holding interest rates close to zero.

When the time comes for the 'Big Correction', there will be ominous signs of trouble in the market place as the small caps an junk bonds are going to be among the first to fall. The following article has some really good charts to study.

The First Victims Of The End Of QE - Small Cap Stocks And Junk Bonds

This fall could be setting up to produce the first market correction (10%+ decline) seen since the middle of 2012 as investors contend with a less accommodative Fed. Not only will the market have to grapple with the end of QE but also the likelihood of the first eventual Fed rate hike in early 2015.

Given the end of QE and the likelihood of the first Fed rate hike coming closer into view, investors may want to start placing a greater emphasis on risk management in the back half of this year.

The "asset purchase program ends" in October which is well into the 'back half' and that is when the decline begins as my best guess. Slowly at first, gaining momentum into May of 2015 as the liquidity sitting in the Fed's balance sheets starts to dissipate says John M. Mason.

"I believe that the statistics indicate that the stock market is over-valued but will continue to remain at relatively high levels as long as the financial markets continue to have sufficient liquidity to amply supply the market's demand for funds."

As a closing thought, we all know the markets fluctuate and occasionally reset, the question is when is the next reset going to happen? My guess is that it will not come with a flair, shooting star candle and people suddenly jumping out of windows. But something more benign like being unusually tired and later being diagnosed with phenomena - then it is too late.

Your opinions are welcome and would love to hear from you.

(Follow Closing Market Averages at end of this article)

WTI oil closed Friday at 101.97 (down -0.12 -0.11% )

Brent oil closed Friday at 108.23 (up +1.16 +1.08% )

The Demon The Gold Bears Are Mistakenly Overlooking

Gold closed Friday at 1307.90 (up -+17.10 (+1.32% )

Copper closed Friday at 3.247 (down --0.019 (-0.58% )

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.

Friday's Closing Market Numbers

Leading Stock Quotes powered by Investing.com

To contact me with questions, comments or constructive criticism is always encouraged and appreciated:

gary@econintersect.com

Written by Gary









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