Written by Gary
Opening Market Commentary For 06-03-2014
Premarkets were mostly down -0.30% mostly being blamed on investors adopting a cautious approach ahead of Eurozone inflation figures later this week and concerns over a slowdown in China were also dampening sentiment.
Markets opened down as expected with the averages gaping negatively in the first few seconds to -0.30% and the recovering somewhat in choppy trading with a slight positive trend. At 10 am the US Factory Orders came in at 0.7% down from 1.1% and that caused the market to continue melting upwards. But then . . .
The small caps were flat and in the green, but the large caps remain in the red while investors scratch their collective heads wonder where this crazy market is going next. By 10:30 the decent began again as investors look towards a volatile session.
The bears obviously haven’t left the wings of the Wall Street Market Place and are looking carefully at the report of Corporate profits falling.
As SocGen’s Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production.
Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below.
In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!
The short term indicators are leaning towards the hold side at the opening. The all important signs of reversal, up or down, have not been observed so we are mostly, at best, neutral and conservatively holding. The important DMA’s, volume and a host of other studies have not turned and that is not enough for me to start shorting. The SP500 MACD has turned up, but remains above zero at 13.12. I would advise caution in taking any position during this volatile transition period although Barchart.com shows a 48 % sell. Investing.com members’ sentiments are 68 % bearish.
The small caps remain above the 50 DMA and the $RUT is approaching the 200 DMA in an obvious down trend. I can not see, as of right now where those large cap MA’s are rolling over to indicate any permanent bear run but the falling small caps are a real worry. (See deviation of large and small caps here.)
Bottom line here is that I have not seen any serious bears jumping out of the woods just yet, although I am VERY concerned that ANY minor correction could turn nasty in a heart beat. One significant signal would be losses in any of the major averages that go over the ‘magic’ 3 % and then you need to pay close attention to risk-off tactics. Any market correction over 6% would be an additional signal and I can’t see having one without the other.
In Lance Roberts article he asks, Is The Market Consolidating Or Topping?
There are two ways to look at stagnation in the markets. It is either a consolidation process that works off an overbought condition which leads to further advances, OR it is a topping process that leads to a market decline. Discerning which process is currently “in play” is critical for investor decision making.
Let me be clear. I am not stating that the current consolidation process will absolutely collapse into a sharp correction in the months ahead. However, I am stating that the current environment is more similar to past markets which did correct, than not.
While it is certainly possible that the markets could ratchet higher from here due to the “psychological momentum” that currently exists, the likelihood of a runaway bull market from here is remote.
The large caps having bounced back and forth between losses and gains for over 11 weeks have once again approached all time highs or have reached them. The last six months of trading in the SP500 has been within a narrow 4.8% range. This sideways movement and falling volume may be foretelling signs of waning energy and the lack of ability to continue higher and investors need to be alert for a possible significant market selloff.
It is still possible that Mr. Market is not through playing with the averages and even newer historical highs are a distinct possibility. Historically, accordingly to Eric Parnell, “major bull markets have almost never reached their final peak in a sideways grinding pattern. Instead, they have almost always peaked with flourish including one final crescendo toward a new all-time high before finally rolling over and succumbing to the forces of the new bear market”.
The longer 6 month outlook is now 35–65 sell and will remain bearish until we can see what the effects are in the Fed’s ‘Tapering’ game plan and Russia’s annexing game playing. Again, I would also take chart and other technical indicators with a lessor degree of reliability for the time being and watch what the Janet Yellen’s Fed does over the next couple of months. Also, the margin debt is very high and has been setting historic highs and as of Monday, 4-7-2014, it stands at $466 billion. (Read More at NYSE Statistics Archive)
It is its ending of QE that worries me the most as many financial institution and emerging markets can not continue to push forward or upwards without the Fed’s ‘Market Viagra’. Even if the Fed reduces its purchases by $10 billion every month for the rest of 2014, the Fed will have acquired $320 billion more for its portfolio. Note, that in 2013, the Fed added more than $1.0 trillion in securities to its portfolio. The debt stands at 4 trillion and will be at 5 trillion by the time the taper is completed and that is one hell of a debt that ‘someone’ has to pay.
At some point during the taper process, this market will crack after one too many tapers. That, among the many other negative issues will most likely come without warning and the major average’s losses will be over 3 percent during a single session.
Several additional notes of negativity where investors are worried about issues directly related to the Fed’s tapering and Putin’s annexing. They are considering these factors along with the Argentine Peso, South African Rand and Japan. And of course, China’s defaulting businesses are dropping like flies. And now the Second Chinese Bond Company Defaults, First High Yield Bond Issuer. And now Another Chinese High Yield Bond Issuer Declares Bankruptcy.
The markets are still susceptible to climbing on ‘Bernankellen’ vapor, use caution!
The real story behind the current weakness is the US weak housing, layoffs and poor employment data, inventory reductions and soft economic outlook including a mediocre sales outlook. I just can not buy the continual optimism of the bullish pundits when it comes to politicians and our economy. They lie and misrepresent the financial status just about every day, but of course, that is the definition of a politician, is it not? We may never know how ‘dark’ our shadow banking is, ‘Dark Pool’ activity and there are too many lurking ‘Black Swans’ on the horizon to be as confident as some bulls are. For now the ‘law of gravity’ does not apply to the stock market.
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.
The DOW at 10:30 is at 16714 down 29 or -0.17%.
The SP500 is at 1923 down 2 or -0.12%.
SPY is at 192.67 down 0.24 or -0.12%.
The $RUT is at 1127 down 2 or -0.21%.
NASDAQ is at 4234 down 3 or -0.07%.
NASDAQ 100 is at 3731 down 2 or -0.05%.
$VIX ‘Fear Index’ is at 11.79 up 0.21 or 1.81%. Neutral Movement
(Follow Real Time Market Averages at end of this article)
The longer trend is up, the past months trend is positive, the past 5 sessions have been positive and the current bias is down and sideways.
WTI oil is trading between 102.66 (resistance) and 102.23 (support) today. The session bias is sideways with a negative slant and is currently trading down at 102.38.
Brent Crude is trading between 108.99 (resistance) and 108.34 (support) today. The session bias is sideways with a negative slant and is currently trading down at 108.44.
Maybe I’m Wrong – Justifying $2,000+ Gold by Jeffrey Dow Jones
Gold fell from 1247.81 earlier to 1241.58 and is currently trading down at 1242.10. The current intra-session trend is negative.
Dr. Copper is at 3.138 falling from 3.168 earlier.
The US dollar is trading between 80.71 and 80.48 and is currently trading up at 80.57, the bias is currently negative, but now climbing.
Real Time Market Numbers
To contact me with questions, comments or constructive criticism is always encouraged and appreciated:
Written by Gary