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Technical Market Indicators
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October 11, 2015
The Fed Can't Stop The Next Financial Crisis
Preview from my weekly report*
Last week, Federal Reserve Bank of New York President William Dudley said U.S. policy makers are “a long way” from being able to identify developing risks to financial stability and act in time to prevent future crises. “We may not be able to anticipate the next area of excess.”
Adam Posen, president of the Peterson Institute for International Economics in Washington, contends that the U.S. institutional framework for preventing crises is “likely to fail.” He said discretion within individual financial institutions was “huge,” forming a “recipe for creating uncertainty.” Posen is skeptical of the council of financial regulators created by the Dodd-Frank Act of 2010, known as the Financial Stability Oversight Council, which he calls “a mess”, due to Washington’s difficulties in coordinating between multiple agencies.
The shaky global economic recovery and the threat of extreme market volatility leave the world's central banks with little or no margin for error, Bank of England Governor Mark Carney said at a joint meeting of the International Monetary Fund and the World Bank in Lima, Peru. "This is a pretty unforgiving environment" and "not a type of economy in which one can make mistakes," he said.
IMF Managing Director Christine Lagarde said the world is faced with "massive" challenges.
We couldn't agree more with these warnings. Nevertheless, the U.S. stock market ignored them and rose 8 of the past 9 trading days, snapping back like a rubber band from an oversold stretch-out to the downside.
Fundamentally, however, stock prices are relatively expensive historically, the global economy is weakening, and Federal Reserve officials appear to be caught off balance with their relatively optimistic economic expectations.
Economic "growth has been slowing all year, and inflation remains stuck well below the Fed’s target, " in the words of ERCI, The Economic Cycle Research Institute, www.businesscycle.com.
As we predicted, all this implies a further delay in raising interest rates. In fact, the global economy and financial system appears so weak and vulnerable that a few observers are beginning to speculate about the possibility of another round of Fed Quantitative Easing ahead. So bad news for the global economy might be good for more money printing, and anticipation of more QE might be lifting stock prices.
The latest AAII survey as of 10/8/2015 shows a complete reversal in sentiment from bearish to bullish: with 38% bulls, 28% bears, and 34% neutral. Individual investors are nearly as bullish as they were at the stock market tops in June and July. That is bearish, according to The Art of Contrary Thinking. The stock market is technically overbought, and the short-covering rally by bearish traders over the past 2 weeks already may have run its course.
Technically, the stock market clearly has spoken: long-term major trends have been confirmed bearish. Short-term, the stock market appears to have staged an oversold bounce after its decisive August bearish breakdown, but how much more upside might be left to squeeze out is highly uncertain. As usual in the short term, much of what happens from here depends on the latest news headlines, which have aggravated volatility in recent months: the VIX volatility index reached its highest level in 6 years in August. I suspect that the short-term action ahead will be volatile and very tricky, and the recent upside bounce very well might reverse literally overnight. Caution is warranted. Traders and investors both should continue to use price rallies to further reduce risk exposure.
• The Defensive stock sectors rose in price over the past 2 weeks but lagged relative to the Cyclical sectors, as trend-following, short-term traders covered short sales in the weaker Cyclical stocks. In the longer-term perspective, it is still clear that the main trend is for Defensive stock sectors outperforming, as they have most of this year. Defensive outperformance indicates a move away from risk and toward relative safety. Consumer Discretionary, Consumer Staples, and Utilities should continue to show relative resilience for months ahead.
• The bearish exception to longer-term Defensive strength is the Health Care sector, which has continued to perform poorly, falling below relative performance ratio lows of the previous 8 months last week on 10/6/2015. Continue to sell and avoid.
• The Cyclical sectors showed typical oversold bounces over the past 2 weeks but remain bearish longer term. They should continue to be sold and avoided. For Energy, Materials, and Industrials sectors, the 50-day SMAs remain below the 200-day SMAs.
• The Technology sector has outperformed the broader market since 8/21/2015, as well as most of the time over the past two years. Nevertheless, on an absolute price basis, Technology is systematically questionable, with the 50-day SMA still below the 200-day SMA since 9/3/2015. Technology has been outperforming during periods of market strength and underperforming during periods of market weakness. So, Technology has been mirroring the broader stock market, only more volatile in both directions.
• Financials underperformed again last week, have weakened substantially relative to the market since 8/7/15, and remain systematically bearish. Continue to sell and avoid.
• Emerging market stocks and BRICs, commodities, and commodity-related stocks have rallied as the U.S. dollar weakened, as they often do, but they appear to have limited upside potential from current levels. Long-term trends remain bearish.
• U.S. Treasury bond prices underperformed last week, as they often do when stock prices rise. Over the medium term just ahead, however, U.S. Treasury bonds still may benefit from the continuing move away from risk and toward safety that we have been expecting.
Now is the time to take action. Preserve your capital by placing your assets under our careful management--before the next major bear market of -20% to -50% devastates most portfolios.
Make no mistake, the ongoing global economic and financial crisis has not been fixed by any sound or lasting solution. History shows that the authorities will not protect you or give you any advance warning--but we will.
If you agree that making money while staying safe is better than taking big risks in the stock market and exposing your nest egg to potentially ruinous losses, we would be very happy to implement our time-tested strategies for all of your assets. It makes good sense to choose protection--especially at this time when the financial world is stretched out of proportion.
We are always happy to discuss your goals and concerns and answer all your questions.
Call us now for a free consultation.
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