The Stock Market

 

Stripped Gears

DELRAY BEACH, Florida – “The Donald” breathed a sigh of relief yesterday. He and other rich people got a break from the beating they’ve been taking: Stocks bounced, with the Dow ending yesterday’s session up more than 600 points.

 

rusty gearsThe gears have been stripped, and they look rusty…

Photo credit: Jonathon Cianfrani

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A Post Mortem – the Influence of Black Box Systems

Here is a brief update on the recent market action and what we think one should watch out for now. First of all, we already noted in our last market update that something about the recent “mini crash” was quite unusual. For one thing, it started to get serious in an options expiration week, which happens only rarely. One rather scary precedent is actually the 1987 crash: on that occasion the market declined sharply during expiration week and crashed the following Monday.

 

post-mortem

Photo credit: Oocoskun – dreamstime.com

 

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A “Large and Dramatic Downturn”

TIVOLI, New York – We hadn’t even had our morning coffee on Friday when we got an alarming message from Stephen Jones, who does stock market research for us.

Stephen – a former equity analyst at Value Line – has been working on a proprietary indicator. The aim is to give us a better understanding of the expected returns on stocks, given today’s rich valuations.

 

SPXOne from the “it hasn’t gotten any better since Friday” department – stocks continue to drop in a crash-like wave on Monday – click to enlarge.

 

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The Odds Favor a “Warning Shot” Scenario – but there is a “But”

As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market’s increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather complacent majority of market participants, by essentially wiping out 9 months worth of gains in more or less just four trading days.

 

panic-button

 

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Asian Markets Plunge

 

“Alright boys, you may stride forth and massacre them with gay abandon.”

“But Sire!”

“What is it?”

“How shall we be able to tell the heretics from the true believers?”

“Just kill them all. The Lord will recognize his own”

 

  • Papal legate Arnaud-Amaury, Cistercian abbot-commander of the crusader army explaining to his officer Ceasar of Heisterbach how to deal with the inhabitants of Bézier, AD 1209

 
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Sometimes it Works

When we recently discussed the sudden drop in the demand for luxury consumer goods in China (see “Sign of the Bear” for details), we offered inter alia a chart of the Shanghai Composite (this one) with the words:

 

“The Shanghai Composite Index – a triangle has now formed in the index in the wake of unprecedented government intervention. Unfortunately, triangles are usually trend continuation formations”

 

It seems that unfortunately, they really are:

 

1-SSECThe Shanghai Composite breaks below the lower boundary of the triangle we discussed. Often this tends to be double-plus-ungood – click to enlarge.

 

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The Original Anecdote

There is a well-known – though likely apocryphal – anecdote from the end of the roaring 20s. It involves Joseph P. Kennedy, US ambassador to the UK from the late 1930s to mid 1940s. Before he entered the civil service and politics, he had made a name (and a fortune) for himself as a businessman and investor. On Wall Street he inter alia ran the Libby-Owens-Ford stock pool with a number of Irishmen, a loose association of investors pooling their resources and dedicated to manipulating the hell out of Libby-Owens-Ford stock by deftly using insider information to their advantage.

Today he would be deemed a criminal, but at the time his activities on the stock exchange were perfectly legal and he was widely admired for being a wily operator. Rightly so, we should add.

 

Joseph_P._Kennedy,_Sr._1938Meet Joseph P. Kennedy, wily Wall Street operator.

Photo credit: Wide World Photos

 

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A Look at the Broader Market’s Internals

We have previously discussed the stock market’s deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively.

When more than 60% of stocks in the broader market trade below their 200 dma with the SPX not too far off an all time high, it is clear that cap-weighted indexes are helped up by an ever smaller number of big cap stocks. This typically happens near important trend changes, but it is not always certain that the market will decline significantly when such a divergence occurs.

 

Beer-StierIs he about to make his entrance?

Cartoon via wallstreetsurvivor.com

 

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Junk Rolling Over

TIVOLI, New York – Chinese stocks fell hard on Tuesday. The Shanghai Composite plunged more than 6% – the biggest fall in three weeks. Our research team in Beijing is downcast.

“Nobody here wants to hear about stocks,” they tell us.

 

roulettewheelImage credit: AP

 

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Counterfeit Information

TIVOLI, New York – It’s hot here in the Hudson River valley. People are taking it easy, sitting on benches in the shade. We had to put in a window air-conditioner to take some of the heat out. Still, we sweat… and we wait for the cool of the evening.

The markets are lackluster too. A little up. A little down. Languid. Summertime slow. We have been focusing on technology – sometimes directly, often obliquely. It is the subject of our next monthly issue of The Bill Bonner Letter, requiring us to do some homework with the help of our resident tech expert, Jeff Brown.

 

542153-man-1367259821-837-640x480ABC News Photo Illustration

 

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