Battle Over Trendline Support Continues

Here is a brief update of our recent series of observations on the stock market. First of all, the SPX has just tested its major trendline for the third time after making yet another lower high – it is back below the 38% retracement level after a failed attempt to break through the 50% level. The same applies to NDX, DJIA and NYA as well, but the RUT (Russell 2000) continues to outperform all the big cap and broad-based indexes noticeably.


SPX, daily: another downturn from a lower high, but the major trendline – and incidentally the 200-dma, which is situated very close to it – continues to hold so far. This chart, as well as those of the other major indexes, continues to look dangerous. The danger is mitigated by the outperformance of the RUT, as funds slosh around from one corner of the market to another (there doesn’t seem to be enough liquidity to keep all the plates in the air concurrently).


It is fair to say that the market hasn’t tipped its hand yet, but as we noted previously, a number of things differentiate this correction from previous ones. All the problems we discussed in our last update (see: “Happy Days Are Here Again? Not so Fast…” for details) continue to persist – except for the fact that the charts look even worse now. Since nothing has materially changed with respect to our signals, there is no need to update them at this time.


Narrative Failure?

There is however one thing worth commenting on. As we inter alia pointed out in our last update, we felt that there was a danger that the market reaction to earnings may not be “business as usual” this quarter. We argued that both valuations and expectations are by now so extremely stretched, that good news may no longer suffice to boost stock prices.

Although we did not say so  explicitly, we did not want to indicate that companies would necessarily fail to “beat expectations” for the quarter as such. Rather, we thought that this might simply not be enough to trigger another round of valuation expansion. The market has in the meantime given some initial indications that may indeed be the case.


“Expectations” are still getting it good and hard this quarter – but it hasn’t helped stock prices much.


As usual, the big banks were the first major companies to report – and as far as we could see, their reports were good, but their stocks sold off after the perfunctory gap up open prints, a first hint that things may not go as smoothly in this earnings season as they normally do. This week things got even more interesting though.


GOOGL, CAT and MMM are three rather important stocks – the former two reported solid beats, the latter was merely “in line” (woe!) – and all of them sold off. Apparently a luxury miracle is urgently required at this stage.


Obviously, it is not a good sign when stocks start plunging on what superficially appear to be excellent news. We would note though that a recent analysis by Bernstein Research shows that the gap between “adjusted” operating earnings and GAAP earnings has begun to widen rather noticeably, which they mentions is a typical late cycle phenomenon. Interestingly, GAAP earnings remain solid, but “earnings without any of the bad stuff” are rising much more strongly. Here is a chart from their report illustrating the situation:


“Operating” vs. GAAP EPS – a widening gap.


Do “investors” (we use the term loosely at this stage of the cycle) care about any of this? We would argue they don’t. We think the reasons why stocks are selling off are: 1. the slowdown in money supply growth over the past 18 months, 2. the fact that everybody got long up to their eyebrows into the late January peak (the mutual fund cash-to-assets ratio has plunged to a new all time low of just 2.9%, while NYSE margin debt is currently off by just $20 billion from a recent all time high in nosebleed territory of $640 billion) and 3. interest rates are rising almost every day lately.


Short term interest rates continue to streak higher, day in, day out. We would note that treasuries have recently failed to catch a safe haven bid, which is bad news for “risk parity” funds and could become a problem for the market as a whole if it forces them to deleverage.



As we write this, stock market futures are trading up after FB’s report beat expectations as well – since it was the subject of lots of concern ahead of its earnings, the effect is likely to be more positive. Will it be enough to turn the tide? We doubt it.

As an aside, note that several AAPL suppliers have disappointed rather noticeably of late. Given that this stock (which is actually not overvalued based on trailing earnings, contrary to practically every other market darling) is also very important to the market, this is something worth keeping in mind.

One thing has been confirmed by the recent action: this correction is indeed different.


PS: 3M Details

We thought this press report on 3M’s earnings contained a few interesting tidbits, which we highlight below:


The company, which brands include Post-it, Scotch and Thinsulate, reported before Tuesday’s open first-quarter results that were in line with expectations. But the company trimmed its full-year guidance ranges for profit and revenue, citing softness in its automotive aftermarket, oral care and consumer electronics businesses.

That sent 3M’s stock MMM, -0.12%  tumbling 6.8%, enough to pace the Dow Jones Industrial Average’s DJIA, +0.28%  losers, as it heads for the lowest close since Sept. 5, 2017. The price decline of $14.75 was subtracted about 102 points off the Dow’s price, which dropped 423 points. The selloff was the biggest one-day post-earnings percentage decline since Oct. 19, 2007, when it tumbled 8.6% following 3M’s third-quarter 2007 results.


Obviously, “softness in the  automotive aftermarket, oral care and consumer electronics” seems to be at odds with the “strong economy” meme. And it may be an omen that MMM last time suffered a similar one-day tumble right after the  2007 high in the SPX (an all time high at the time) – when everybody insisted that the economy was going gangbusters and the budding sub-prime crisis was still widely deemed “well-contained”.


Charts by: StockCharts, Bernstein Research




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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK ""web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...
  • Wall Street - Island of the Blessed
    Which Disturbance in the Farce can be Profitably Ignored Today? There has been some talk about submerging market turmoil recently and the term "contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.   Misbehaving EM currencies – the Turkish lira...
  • Fundamental Price of Gold Decouples Slightly - Precious Metals Supply and Demand
    The Fundamental Price has Deteriorated, but... Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017. We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.   Gold and...
  • The Fake Promise of Adult Day Care
      Cold Dark Clouds The sun always shines brightest in the northern hemisphere during summer’s dog days.  Here in America, from sea to shining sea, the nation burns hot.  But, all the while, cold dark clouds have descended over the land of the free.   In case you ever wondered - yes, they really did say it... [PT]   For example, Senator Mark Warner – an absolute goober – is currently running interference for the Democrats on a proposal to silence political...

Support Acting Man

Item Guides


The Review Insider

Dog Blow

Austrian Theory and Investment



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

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!