A Rebound in Stocks Begins

Given that a very sharp downturn in so-called “risk assets” is well underway globally, but not yet fully confirmed by US big cap indexes, we are keeping an eye out for confirmation. This is to say, we are looking for events, market moves, positioning data, even newspaper headlines, that will either confirm or refute the notion that a larger scale bear market (as opposed to just a deep correction) has begun.

 

Bank of Japan Governor Haruhiko KurodaHaruhiko Kuroda will stimulate us back to Nirvana! Hurrah!

Photo credit: Yuya Shino / Reuters

 

Readers may recall an article we posted earlier this year, discussing historical examples of the stock market swooning in the seasonally strong month of January (see: “Stock Market Suffers Worst Start to the Year Ever” for details). When the market does something like this, it is more often than not sending a message worth heeding. Chart patterns of course never repeat in precisely the same manner, but such historical patterns are nevertheless often useful as rough guides.

As a reminder, here is a chart of the DJIA from 1961 to 1962. Both the distribution period preceding the sell-off, as well as the timing and pattern of the sell-off itself show many similarities to what has so far occurred in 2015 to 2016:

 

1-DJIA-1961-1962The DJIA from 1961 to 1962. We may be at the beginning of the period equivalent to the one in the green rectangle – click to enlarge.

 

In keeping with this, we would now normally expect the market to rebound from the initial sell-off and retrace a portion of its losses over a period of several weeks before resuming the decline from a lower high. Last week the bond market delivered a technical signal on the daily chart, which based on well-known inter-market correlations suggests that such a rebound has likely begun.

 

2-TNXAssuming that the positive correlation between treasury bond yields and the stock market (resp. the negative correlation between bond and stock prices) persists, the island reversal in bond yields last week is signaling the beginning of a short term relief rally. The bullish consensus in the bond market has recently become extremely stretched, so a rebound in yields would be quite normal – click to enlarge.

 

A certain degree of support for the idea has also emerged on the US economic data front: for instance, growth in retail sales exceeded expectations. More importantly though, initial unemployment claims, which traditionally are strongly negatively correlated with stock prices, fell sharply last week. In the process they have negated a recent short term uptrend that threatened to lead to a breakout to higher highs:

 

3-Initial claimsThe reversal in the short term trend in initial claims lends support to the idea that the stock market is in for a sizable rebound – click to enlarge.

 

Crash Risk Still Remains High

There are of course a number of caveats to all of this: Neither the VIX nor put-call volume ratios have so far shown any signs of an emerging panic in the US stock market. If one looks at gold stocks, in spite of the sector being overbought and more than ripe for a pullback, numerous charts of individual gold stocks actually look as though they may have even more short term upside. Since the sector is currently negatively correlated with the broader stock market, this counts as a mildly negative factor for “risk”.

 

4-VIX and CPCEThe VIX and the equities only put-call volume ratio. Traders have shown no signs of grave concern – yet – click to enlarge.

 

Moreover, as we have pointed out in a recent missive, once a market hovers close to major chart support – as is the case with the S&P 500 index and the DJIA at present – crash risk becomes higher than normal (see: “The Bubble Deflates and Crash Risk Rises” for the details). We would also point readers to John Hussman’s weekly market column, in which he echoes this sentiment:

 

“Given our focus on historically-informed, value-conscious, full-cycle investing, I generally don’t place much attention on short-term technical factors or specific patterns of price action. However, the current setup is one of the few exceptions. In a market return/risk classification that is already the most negative we identify, where a sustained period of speculation has given way increasing risk-aversion, the position of the market relative to very widely identified “support” (about the 1820 level on the S&P 500) is of particular note.

Often, well-recognized support levels become places where dip-buyers and swing-traders line up on the buy side, on the assumption that they’ll be rewarded if the market bounces from that support, and that they can quickly cut their losses immediately if the support level is broken. The problem here is that when too many speculators set their stop-loss points at the same level, and valuations are still elevated, there may be neither speculators nor value-conscious investors willing to bid for stock anywhere near those support levels once they break. The resulting gap between eager sellers at a high level and willing buyers at a much lower level is the essential element of market crashes, because every seller requires a buyer.

I’ve often observed that market crashes have historically emerged only after a familiar profile of market behavior that features a compressed market retreat of about 14% over 10-12 weeks, a rebound between 1/3 and 2/3 of that decline, a fresh retreat that slightly breaks that initial level of support, a one-day barn-burner advance, and then a collapse as the prior support level is broken. In the 1990’s, I called this pattern the lead-up to “five days of Armageddon” because historically, once rich valuations have been joined with poor market internals (what I used to call “trend uniformity”), the break of a widely-identified support level has often been followed by vertical market losses.

The present widely-followed “support” shelf for the S&P 500 is roughly 14% below the 2015 market peak, but most domestic and international indices have already broken corresponding support levels. Given the obscene valuations at the 2015 peak, my impression is that a run-of-the-mill completion of the current market cycle (neither an unusual nor worst-case scenario from a historical perspective) would comprise an additional market decline of roughly 40-50% from present levels. I certainly don’t expect that kind of market loss in one fell swoop. Rather, my immediate concern is that the first leg of this decline could be quite steep.

 

(emphasis added)

In other words, one shouldn’t get carried away by the market’s short term rebound potential. It exists, and it would clearly conform with “standard expectations”. We do assign a large probability to it. But the risk of a sudden and very sharp drop has definitely not gone away just yet.

 

Bear Market Confirmation from Japan?

Now we come to the what has prompted us to refer to “stimulus hopes” in the title of this post. With US markets closed for President’s Day on Monday, the mice came out to play everywhere else. Gold sold off sharply, and the Nikkei rallied by more than 1,000 points in a single trading day.

 

5-Nikkei, dailyThe Nikkei jumps by more than 1,000 points, or 7.16% on Monday – click to enlarge.

 

Normally people will be inclined to think that such a powerful reversal is a bullish sign. Unfortunately this isn’t the case – the opposite is true. Such rip-roaring one-day rallies are typically a hallmark of bear markets. Readers may recall that there have been a number of huge rallies in the DJIA a few years ago that broke records in terms of points recovered in the space of one to two trading days.

These notable moves occurred in September of 2008. After the SEC banned short selling of a large list of financial stocks in mid September, the DJIA rallied by more than 1,000 points in just two days. On the penultimate trading day of September it again rallied very strongly, recovering nearly 600 points in just one day. Then it crashed.

 

6-DJIA 2008Record short term rallies in the DJIA before the October 2008 crash. Record one day rallies could incidentally also be observed in the three weeks preceding the 1987 crash and in April of 2000 – click to enlarge.

 

Note, we are not saying that a big one day rally means a crash is imminent. What we are saying is merely this: when such large short term rallies occur in the course of an initial wave of selling from a multi-year peak, they should be regarded as a bearish sign. This does not mean that a larger rebound cannot take shape over coming weeks. However, it does represent yet another warning.

This is especially so if one considers the headlines and circumstances accompanying the Nikkei’s surge on Monday. The Japanese government published yet another batch of terrible economic statistics. Specifically, the economy once again contracted in Q4 of 2015, for the fourth time in the past seven quarters. Here is how the rally in the Nikkei that started right after the release was explained in the mainstream press:

Nikkei surges on stimulus hopes” wrote the Business Standard. Reuters reported: “Nikkei posts biggest daily gain in more than 4 months on oil bounce, stimulus hopes”. The Guardian noted along similar lines “Asian and European stock markets rally on stimulus hopes”. Countless similar headlines appeared all over the world.

Stimulus hopes? Seriously? Only a little while ago the press finally got around to noticing that the imposition of negative interest rates in Europe and Japan had backfired badly and was seemingly about to annihilate blind faith in central planners. We believe that absolutely nothing has changed on this front. The “stimulus” dog ain’t hunting anymore, even though we still come across declarations of faith such as this recent one by Deutsche Bank equity strategists, who asserted that “Only the Fed can Save Stocks Now”.

Well, no. It actually cannot – and neither can the BoJ or the ECB. It is a serious misconception to believe that central banks have “control” over what the stock market does next. There is a big difference between the ability to exert influence on the extent and duration of bubbles while they are underway and stopping a bear market from playing out.

People often end up losing a lot of money in bear markets because they believe that these things actually matter. Hopes are kept alive and as a result many people stay fully invested in the market at the worst possible time. Of course, in the aggregate these losses cannot be avoided anyway – after all, someone will always end up holding stocks. For every investor who manages to avoid further losses by selling, another investor steps up to the plate to take them instead.

 

Conclusion

We would assign a very high probability to a market rebound lasting several weeks, which would allow for oversold conditions to be relieved and recent positioning extremes in stock index futures to be mitigated. One must keep in mind though that nearby support levels will have to hold – if they are violated in the near term, the extant crash risk would likely materialize.

Regardless of the market’s near term gyrations though, the manner in which overseas markets have turned around on Monday should be seen as another medium term warning sign – not only on technical grounds, but also based on the faulty reasoning forwarded by market observers.

As we always stress, central banks definitely can goose stock prices even under the worst economic conditions, if they proceed to utterly destroy the currency they issue. This has e.g. most recently happened in Venezuela. However, our working assumption at this juncture remains that developed market central banks are highly unlikely to pursue such a course. After all, they all have “inflation targets” – and while they have obviously no control over price inflation either, we assume they will tighten policy should these targets be materially exceeded.

Pinning one’s hopes on “more stimulus” definitely strikes us as a mug’s game at the current juncture though.

 

Charts by: StockCharts, Acting Man

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to ““Stimulus Hopes” – a Dog that Ain’t Hunting no More”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...
  • A Bumper Under that Silver Elevator – Precious Metals Supply and Demand
      The Problem with Mining If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).   As this book attests to, some people have a very cynical view of mining...  We would say there is a time for everything. For instance, when gold went ...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • The Knives Come Out for Trump
      A Minor Derailment GUALFIN, ARGENTINA – Yesterday, stocks fell. And volatility shot up.   When too many people have too many knives out at once, accidental cubism may result   Reports Bloomberg:   The Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe. Major U.S. stock indexes...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com