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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1. Moving the markets

Worldwide markets rode a wild roller-coaster this morning with global systemically important banking stocks crashing hard bringing back distant memories of what we saw in 2008. It appears that banks don’t have “fortress like balance sheets,” which increases the odds of more fallout to come.

Global stock markets retreated in sync with the Dow getting hammered at the tune of 500 points with the Nasdaq and S&P 500 experiencing not only their own sharp declines, but also dipping below their respective 200-day M/As. However, as if by magic, most of the losses were made up during an afternoon levitation, which made the session look not as bad as it was. Makes me wonder how much of the sudden support came from the Plunge Protection Team (PPT) as opposed to dip buyers on the prowl.

Assisting in the early sell-off were earnings disappointments by 3M and Caterpillar (CAT) with the former not only missing Q3 earnings but also slashing guidance, while the latter warned about rising costs. Especially Cat’s chart is a picture of ugliness, even to the most casual observer and may very well set the tone for this earnings season.

Today’s session seems to confirm a change in sentiment and mindset, which some analysts referred to as “fade bounces,” “sell the rips” and “take down net exposure to new lows.” Others see the mantra changing from “growing faster than we are tightening” to “tightening ourselves in a slowdown.”

Even the much-hyped hope bounce of a one-day 4.1% in the Chinese Markets came to an end, and stocks resumed their wild ride to the downside. Asian shares in general dropped -2.1% to a 1.5 year low and are in danger of slipping into a bear market. Europe is facing a similar situation, as their tech sector just generated a “Death Cross” bearish signal.

I took the opportunity to liquidate our final position in “broadly diversified domestic equity ETFs,” as our Domestic TTI slipped deeper into bearish territory (see section 3). In my view, and judging by the above goings on, the odds of further downside moves have increased, especially if we start to catch down to the rest of the world. That’s why we will stand aside for the time being and establish new positions once our Domestic TTI crosses back above its trend line.

This is not the time to be a hero but to be more concerned with preservation of capital. If you were in the market during the 2008 disaster, then this reminder should ring a bell that history may not rhyme but has a funny way of repeating itself.

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1. Moving the markets

We saw another see-saw ride on Wall Street with bulls and bears engaging in a continuous battle for domination. There were no clear winners and some of the intra-day rally attempts fell short of pushing the major indexes above their respective unchanged lines. The exception was the Nasdaq, which managed to eke out a small gain, while the S&P 500 scored its 4^th straight loss.

So, the tug-of-war continued, but I took the opportunity to lighten up some more on our few remaining positions, as both of our Trend Tracking Indexes (TTIs) headed deeper into bearish territory with the Domestic one now closing in on a level that requires an all-cash position regarding “broadly diversified domestic ETFs.”

We are at an inflection point where the markets can still break out either way. The only bullish component I currently see is the upcoming earnings season, which could provide a boost to the markets leaving open the question as to whether this would only be of a short-term nature or have enough strength to get our Domestic TTI back on the bullish side of the trend line.

In the meantime, this current choppiness may stay with us until a breakout occurs, either to the downside or to the upside. Right now, downside momentum seems to have the upper hand as my indicators show, along with the US Financial Conditions Index.

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