Interesting Market News and Views from Global Financial Markets-1

1) S&P 500 back in black for 2015, Nasdaq leaps 2.3% – USA TODAY

Tech stocks power the rally on strong earnings from Microsoft, Amazon.com, Alphabet.”

2) Bear Market History: The 10 Biggest S&P 500 Pullbacks – Money Morning

There are multiple signs pointing to a bear market in 2015. That’s why we’ve compiled a list of the 10 worst drops in bear market history.”

3) What’s Really Driving the Stock Market’s Big Rebound Rally? – The Fiscal Times

A combination of solid earnings (especially in tech) — as well as a fresh interest rat”

4) The S&P 500 is up an impressive 0% this year – Business Insider

Stocks, emerging market FX, and oil are well off their lows.”

5) Techs lead Wall St. higher; S&P 500 erases 2015 loss – Reuters

A tech share rally drove U.S. stocks up sharply for a second day on Friday as earnings from companies including Microsoft beat analysts’ expectations, while healthcare shares rebounded from recent losses.”

6) What If The US Is Japan And Deflation Is Fate? – Seeking Alpha

Make no mistake about it – while we can talk about daily market movement and the news du jour, the reality is we live in a very small sample. The biggest macro”

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Clues

A must read as always

S O L A R C Y C L E S

Bulls still have the ball at the moment, but we remain neither confirmed in bear nor bull market so need to keep teasing out the clues.

One that got some coverage this week: two all time record high prints in the Skew (protection against an outsized move). The 8DMA of the Skew shows reasonable odds that turns out to be a top in stocks on a longer term view.

18octo5

Source: @sevensentinels

Next we see the long sagging breadth in the SP500 is similar to 2007-8. From the recent low in breadth a bear market rally is in keeping but ought to fail by the 200MA, shown circled in both instances, if this is indeed a bear.

18octo10

Source: Stockcharts

Credit spreads are a negative divergence. Like breadth they have fallen some way and some time already.

18octo6

Ditto oil. So take your pick: either all these things have washed out and yet stocks have held…

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S and P 500, Fundamental and Technical Snapshot

The #SandP500 has broken down this year down over 10%. It is time to get some fundamental and technical perspective on the market. First the fundamentals from Multpl.com. Looking at the Shiller P/E ratio we see that the market is into overvalued territory sporting a #P/E of over 24.

us stock market
Next looking at the #dividend yield on the S and P 500 below, it is closing in on all time lows also suggestive of an overvalued market.

For a technical picture I turn to Permabear Doomster for some long term perspective. The market appears over stretched long term with no meaning full correction since 2011. It has broken down below 1900 after making a series of lower highs between 2080 and 2135. Market internals have broken down and bearish divergences in market indicators have culminated in a death cross (50 DMA below 200 DMA) that implies downside in the upcoming months. Currently a massive bear flag has formed on the daily chart that is breaking down:


Support – 1867
Resistance – 2040

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Nifty Technical and Fundamental Snapshot

As we are well into 2015 I thought it would make sense to look at the technical and fundamental snapshot of the Indian stock market #Nifty index. First the technicals. For this I turn to San at Nifty charts and latest patterns. As can be seen from the chart below the Nifty is on the verge of a head and shoulders break down with the important 0.618 fibonacci retracement level close to 8650 on the Nifty serving as a major short term top. This along with the #bearish divergences in technical indicators make the market over extended in the short term and ripe for a fall.

Next the fundamentals, for this I turn to Sanjay Jaiswal at Market Pulse for the daily updated trailing #P/E ratio on the Nifty. As you can see below despite the recent fall it stood above 22.0. The market is obviously overvalued.


Support: 7750
Resistance: 7950


Taken together the market appears over extended and ready for a fall both on technical and #fundamental grounds.

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Long and Short Stock Market Cycles Indicating a Major Market Top?


dow jones

Aside from over valuation and technical break downs a major stock market top appears overdue in 2016 from the convergence of long term market cycles. Have a look at the long term 21 year stock market cycle (#stkmktcyl) that is scheduled to conclude in 2016 highlighted in silverdoctors.com:


6
In addition shorter 7 year market cycles are also scheduled to resolve in 2016. The chart below from silverdoctors.com shows a broadening top #megaphone pattern in the S and P 500 with the S and P at the top of the pattern.With short and long market cycles both resolving in 2016, a topping process globally in risk assets is likely in the next few months with the S and P eventually migrating to the lower line of the pattern towards the 650 mark:

7

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weekend update

Source: weekend update

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What Causes Bear Markets And Recessions?

A Must Read

S O L A R C Y C L E S

Firstly, the definitions of a bear market (20% decline) and a recession (two consecutive quarters of negative growth) are arbitrary, but a line has to be drawn somewhere. Secondly, there is a lot of misinformation spread about this question, so let the evidence speak.

This chart shows US bear market and recessions. Mainly they occurred together but we can see a couple of recessions without stocks bears and a handful of stocks bears without recessions.

19sepe5

Source: Ritholz

The deep recessions always correlated with a stocks bear and the deep bear markets always went hand in hand with a recession.

You’ll hear a lot that recessions cause bear markets, but quarterly GDP prints at bull market peaks say otherwise.

US quarterly GDP growth at past major stock market peaks:

Q4 2007 4.4%
Q1 2000 6.18%
Q3 1987 6.08%
Q1 1973 11.91%
Q4 1968 9.84%

Leading indicators can help us identify the onset of…

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Some Bear Market ETF’s to Consider for September and Beyond

The US and global markets appear stretched both on a technical and fundamental basis. A correction is looming and is likely to be significant this time around. Here are some bear Exchange Traded Funds (ETF’s) to look into:
a) The S an P 500 Ultra Short ETF (SDS) – This ETF is an inverse ETF on the S and P 500 that doubles the downside performance of the S and P 500 Index. The S and P has encountered  major resistance near 2135 and is on the verge of a major break down breaking below the 2000 level recently:
ProShares UltraShort S&P500 (SDS)
nyse
S&P 500 (^GSPC)
b)The next ETF is the Ultra short ETF on the Nasdaq 100, QID. This inverse ETF would double the performance of the Nasdaq 100 on the downside. Off late the breadth on the Nasdaq has considerably narrowed with very few stocks holding the Index up and a major break down is underway:
ProShares UltraShort QQQ (QID)NASDAQ-100 (^NDX)
c) The third ETF to consider is the inverse ETF on the Russell 2000 small cap index. In the event of a major correction small caps will definitely under perform the broader market:
Russell 2000 (^RUT)
d) Another Inverse ETF to consider is the SKF which is the ultra short ETF on the US financial sector. Financial stocks are nowhere near their highs set in 2008 and could significantly under perform in the next leg down:
ProShares UltraShort Financials (SKF)

KBW Nasdaq Bank Index (^BKX)
e) Finally Emerging markets have already started to sell off and could significantly under perform in the event of a major sell off in global risk assets. A way to play this is through the ultra short ETF EEV on the MSCI emerging market Index:
ProShares UltraShort MSCI Emerging Mkts (EEV)


iShares MSCI Emerging Markets (EEM)

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The Big Picture

Terrific Analysis

S O L A R C Y C L E S

Financial markets are the function of swells and shrinkages in buyers and leverage, brought about principally by demographics and sunspot cycles, additionally with the latter influencing the former.

The big theme in demographics over the last half century has been that the major nations have largely experienced similar swells and shrinkages in key age groups due to the post WW2 baby boom. As a swell of young adults they produced inflation in the 60s and 70s, which then turned into a middle-aged swell producing stock market and real estate booms post 1980.

This chart shows the ratio of middle-aged to all population in the major nations. This ratio experienced a major peak in each of the countries between 1989 and 2011 producing the according stock market and commodity major peaks.

5sept1

First Japan’s demographics peaked out, producing the Nikkei and Japanese real estate tops. Then the US peaked in 2000 with the resultant…

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Mean Reversion Upcoming? US Stock Market (S and P 500) Major Tops and Bottoms Analysis since 1950

With the recent melt down in global markets, it would be prudent to look back at historical data on the US market to see where we stand. To do this I look at major tops and bottoms in the S & P 500 obtained from weekly historical data from Yahoo Finance since 1950.
The first table below shows major tops and bottoms in the S and P 500 relative to the average and standard deviation:

Table 1: S&P 500 Tops/Bottoms, Average & Standard Deviation over Time

Date
S & P 500 Top / Bottom
Average
Standard Deviation
November 25, 1968
108.37
55.37
24.92
May 18, 1970
72.25
58.26
26.21
January 2, 1973
119.87
62.90
28.12
September 30, 1974
62.34
65.38
28.78
December 22, 1980
136.57
72.26
29.69
August 2, 1982
103.71
74.74
31.00
August 17, 1987
335.9
90.93
53.55
30-Nov-87
223.92
92.37
55.95
13-Jul-98
1186.75
181.77
203.72
31-Aug-98
973.89
184.22
208.73
20-Mar-00
1527.46
218.64
282.52
2-Apr-01
1128.43
242.13
324.34
14-May-01
1291.96
244.38
327.45
10-Sep-01
965.8
250.33
334.93
11-Mar-02
1166.16
258.34
343.62
30-Sep-02
800.58
266.00
349.94
8-Oct-07
1561.8
346.50
427.52
2-Mar-09
683.38
366.81
443.71
19-Apr-10
1217.28
379.11
448.71
28-Jun-10
1022.58
381.39
449.82
2-May-11
1340.2
392.94
457.43
15-Aug-11
1123.53
397.09
460.40
13-Jul-15
2126.64
474.27
543.97

As can be seen in the table above on only one major bottom in 1974, the market tested it’s long term average since 1950. We have not tested the average since 1974 for well over 40 years. The other interesting observation is that the standard deviation of the market has exceeded it’s average since 1998 with the market way above its average. This coincides with the involvement of the FED in the market since 1998 post the Long Term Capital debacle and suggests that the risk in the market has increased significantly. The markets average since 1950 currently stands at about 475.

The next table shows the deviation from the average at major tops and bottoms and the return from highs to lows and lows to highs. The market in its early stages till about 1987 always peaked out at about 2 standard deviations above the average. Since 1987 the market has gotten as high as 5 standard deviations above its long term average. Bottoms tend to occur within 1.5 standard deviations from the average. Every key top at above 2 standard deviations from the mean produced a decline of at least 16%. The current market is the fourth most over extended market in history.

Table 2: No of Standard Deviations from the Average at Major S&P 500
Tops/Bottoms and Subsequent Returns from Tops to Bottoms and Bottoms to Tops

Date
No of Standard Deviations
from Average
% Change
November 25, 1968
2.13
-33%
May 18, 1970
0.53
66%
January 2, 1973
2.03
-48%
September 30, 1974
-0.11
119%
December 22, 1980
2.17
-24%
August 2, 1982
0.93
224%
August 17, 1987
4.57
-33%
30-Nov-87
2.35
430%
13-Jul-98
4.93
-18%
31-Aug-98
3.78
57%
20-Mar-00
4.63
-26%
2-Apr-01
2.73
14%
14-May-01
3.20
-25%
10-Sep-01
2.14
21%
11-Mar-02
2.64
-31%
30-Sep-02
1.53
95%
8-Oct-07
2.84
-56%
2-Mar-09
0.71
78%
19-Apr-10
1.87
-16%
28-Jun-10
1.43
31%
2-May-11
2.07
-16%
15-Aug-11
1.58
89%
13-Jul-15
3.04
?
Finally drilling down to tops and bottoms since 2000, the average top to bottom decline since 2000 is 28% while the average bottom to top return since 2000 is 55%.
So the question begs what does it mean for today’s market? We have already started breaking down from over extended levels. The current market average is about 474 and standard deviation is 544. Here are some scenarios below:

nyse

Table 3: S&P 500 Possible Scenarios

Market
Average (MA)+ Standard Deviation (SD)
S & P
500 Level
MA
474
MA +  1 SD
1018
MA + 2 SD
1562
MA +  3 SD
2106
The bottom line is folks we are historically over extended. We could now correct to at least 2 standard deviations above the long term average which is close to the 2008 highs near 1575 or to a standard deviation above the long term average as was the case at the 2008 lows near 1018 or to the long term average near 474 which we haven’t revisited since 1974. Only time will tell.
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