1. Moving the markets

A nice early morning bounce seemed to have a soothing effect on the bulls, with the Dow up almost 400 points. Unfortunately, that did not last, as a mid-day fade took the major indexes back to the unchanged line when, suddenly, downward momentum accelerated pushing the Dow momentarily to -500 points, before a last-minute rally limited the day’s damage.

Nevertheless, the trading range for the Dow was over 900 points leaving all indexes in the red for the session. As I mentioned before, when we are in bear market territory, as determined by our Trend Tracking Indexes (section 3), not only can anything happen but also with a speed and magnitude that can be simply breathtaking, as we saw this afternoon. The adage that “stocks take the escalator up and the elevator down” certainly rang true today.

Things started to collapse after US-China trade headlines suggested that Trump might put tariffs on ‘all’ Chinese goods, if his next scheduled meeting with the Chinese Premier Xi does not bring the desired results. Other news about an UK digital service tax did not encourage buyers to put their chips down.

The VIX spiked above 25, and the widely held FANG stocks continued their swan dive and are now down -24% from their highs in late September. All 4 of them are now in bear market territory and have come off their highs as follows: FB (-35.5%), AMZN (-25.9%), NFLX (-33.3%), GOOGL (-20.3%).

The bulls have now set their sights on hopes of good news from the ongoing earnings season, expecting bullish momentum to be restored. The other possible game changer could be the expiration of the blackout period, which is the time frame just prior and shortly after earnings season during which corporations suspend stock buybacks. As these stocks exit this period, it is assumed that their historical buying spree will continue and lift overall market sentiment.

Right now, however, the bears maintain the upper hand, and we will watch this debacle unfold from the sidelines.

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1. Moving the markets

Having been involved in the investment methodology of trend tracking for the past 30 years, I have seen my share of violent market swings in both directions. I was reminded of that when, after yesterday’s 600-point drubbing of the Dow, today’s rebound, or was it a dead-cat-bounce, recovered about 400 points.

These kinds of jaw dropping sell-offs followed by impressive comebacks are typical of the swings you see when we drop into bearish territory, as defined by my Trend Tracking Indexes (TTIs), which have been hovering below their respective trend lines since last week.

Once we are “below” the line, it does not mean that this correction will turn into a full-fledged bear market, it could simply be an overreaction to negative news. However, at that point the odds are increased that more downside activity could be in the cards as conflicting factors and uncertainty favor the bearish crowd.

On the other hand, bull markets have found new life when things looked bad and sellers had run out of ammunition. Today’s rebound is totally inconclusive as to which directional path the markets will take. Using our trend tracking methodology, we will let the markets tell us when it’s time to act.

Should this rebound have legs and generate more upward momentum, we will see an eventual crossing of our TTIs (section 3) back into bullish territory, which will then generate a new “Buy” signal for the affected asset classes. Right now, however, the bears have the upper hand, and we will wait and observe this tug-of-war, which is sure to continue until a directional breakout will clarify the current murky picture.

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1. Moving the markets

By the chart above, you would not know that we had a positive opening thanks to Boeing’s encouraging earnings report which, at the end of this session, turned into a tiny unimportant speck in the rear-view mirror. After a mid-day bounce, bearish momentum gathered strength and south we went, at first slowly and then via a swan dive into close with all major indexes suffering heavy losses.

The Dow and S&P 500 are now negative for the year, while the Nasdaq slipped into correction territory, which is defined as a pullback of at least 10% below its August high; it’s down -12.6% from that level. In fact, 70% of S&P 500 stocks are already in a correction.

So, it’s not surprising to hear that selling on the NYSE reached panic-like proportions with the path to the exit doors getting increasingly crowed. That supports my long-held belief that an investor should only be dealing with high-volume ETFs, such as the ones I feature in Thursday’s StatSheet.

In my advisor practice, we remain in cash on the sidelines and will look for opportunities once our TTIs (section 3) move back into bullish territory.

Not helping matters, and putting another nail in the housing market coffin, were reports showing that New Home Sales crashed in September with supply soaring. New Home Sales plunged to their lowest since December 2016 and tumbled 5.5% MoM. You can read more details here.

Some interesting commentary always appears when markets hit the skids. Here are two that are worthy of mentioning:

1. I want to reiterate that there is unlimited downside risk in the market right now, and I don’t think it’s being respected. It’s not until afterwards that they ask, “what happened??”
2. We have maintained…and still maintain… the same philosophy that we’d adopted for these past several weeks and months: that this is a bear market and that periods of strength can be and indeed must be used to sell into… to lighten up existing long positions if one is still reasonably long and to sell short if one is of that mind. We stand by that thesis. But for a day or two or three, a bounce is in order.

I must agree with these comments, since it appears that the bears are clearly in charge when not just looking at the domestic area but at the global markets as well. The aging and failing banking systems seem to be the front runners, with Deutsche Bank following the path of Lehman as this chart shows. With over $50 trillion in derivatives exposure, it looks to be the proverbial bug looking for a windshield.

ZH summed up the ugliness of the day like this:

1. Small Caps down 15% from highs
2. Dow Transports down 14.5% from highs
3. Nasdaq is now down 12.25% from the highs – enters correction
4. S&P down 9% from highs
5. Dow down 8.5% from highs

Back to the banks. Global systemically Important Banks have now crashed 30% since Trump’s election. Does that mean there will be another 2008 style bailout forthcoming?

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