Well, that was a wild ride. I quit watching the exchanges when it looked as if the Dow and S&P were recovering their moxie, and got some editing done instead. But when I checked back to see how the recovering moxie looked — let's just say that was painful. Full disclosure: I am not currently in the market, nor in any market. When I am, I tend more toward the trading side of things, rather than investing.
Fears of a meltdown in China's economy continue to contribute to the overall bearishness; concern over U.S. interest rates, with a first potential hike penciled in for September, is also part of the mix. Until U.S. interest rates are normalized, U.S. stock pricing will remain under tension.
Some technical indicators, including the dreaded moving average death cross, are flashing sell signals. As one portfolio manager said to The Fiscal Times, “People are still nervous about overseas and what might happen tonight” when Asian markets open for Wednesday's trading. (The quote is found in this article and in this one.)
That general consensus echoes the old trading maxim that it's better to be out of the market and wanting in, rather than in and wanting out.
In the last post, I promised a discussion on moving averages. They're a simple indicator based purely upon mathematics, where selected prices P (often the closing price) are averaged over time period X. Such an average price becomes moving when, for each day on the chart, the last price P is removed from the calculation and the new day's price is added in.
For example, a five-day moving average would look like this:
P1 + P2 + P3 + P4 + P5 = MA-5
On day 6, P1 would be discarded and P6 would be substituted, and so on. If P6 is higher than P1, the moving average would rise, showing an uptrend; if it's smaller, than the line will trend down.
Moving averages are very valuable to traders because they illustrate, with their simple lines, the chart's actual trend, which can be amazingly hard to see. A moving average with a long lookback time changes direction more slowly than one with a shorter lookback, so traders who like to close their positions each day rather than leave anything open overnight will be more concerned with five-, ten-, or twenty-day moving averages. Investors who buy and hold generally give more weight to the MA-250, which tends to move very slowly indeed.
Courtesy of the Wall Street Journal, here's the DJIA one-year candlestick chart with the MA-250 (lower line) and the MA-50 (upper line) superimposed.
Notice how the MA-250 is smooth, indicating its slower reaction time, while the MA-50 changes course more easily, because each time period's price has more effect on the line's motion. Also keep in mind that, because moving averages are based upon actual prices, they show where the stock, commodity, or currency pair has already been, not where it's going — it's a lagging indicator, not a leading one.
At the chart's left side (above), it's easy to see how the MA-250 is trending higher. On the right side, the upward trend is vanishing and the MA-250 is leveling off.
Of most interest is the fact that the MA-50 is crossing below the MA-250. Although it's difficult to see on the chart, for the DJIA the crossover actually happened during today's U.S. trading session, and the MA-50 (at 17,618.55) is lower than the MA-250 (at 17,630.23). That crossover of a long-term moving average below a medium- or short-term one is called the death cross, because it illustrates downward pressure on prices — downward pressure that's already happened (remember, lagging indicator).
I would not be surprised if the bulls and optimists decided to contest that crossover tomorrow. A resurgence of buying pressure, with bargains being snapped up, can raise tomorrow's MA-250 back above the MA-50. Especially if the Chinese government takes another stand, or if a spokes-type for the Federal Reserve dials back expectations for a September rate hike, it could happen. Personally I wouldn't put any money on it, but five years ago I realized I did not understand the market on zero percent interest rates (still don't) and I bowed out of it.
The bears, pessimists, and perma-bears will not see them as bargains to be snapped up.
This is a two-day Dow line chart, courtesy of an earlier edition of the WSJ and with two red-line additions of my own.
For two days the Dow traded within a narrowing range. Prices bounced multiple times off the lower support line and the upper resistance. But in the end it fell below support and the sell-off began.
Yes, I know. Yesterday's marked-up chart plus a couple bucks might get me a cup of coffee in a cheap joint. Now, if I'd marked up that chart 24 hours ago, that would be another matter entirely… say, has anyone checked the Fibonacci ratios against that last dogleg down?
Thanks for stopping by. Cheers and happy reading,
So, what happened with the stock markets this week? The indices have defied gravity for so long, it seemed they were packed with hot air rather than data. What caused the correction?
A lot of people right now are discussing China. Good point: currency devaluation and economic turmoil tend to cause issues in one country's stock market which can spill over into other countries' exchanges.
Was that the only problem? No.
Was it the Dow death cross, or Apple's likely upcoming one? The death cross is a technical trader's signal, where a long-term moving average crosses below a medium-term one. Later this coming week I'll post an article describing more fully how the death cross works. For now, understand that the death cross is not necessarily a leading indicator — a signal showing where the market is going. Instead, it's a lagging indicator, showing where the market already is or has been. If the DJIA death cross has already occurred (and it happened on August 11) then the DJIA is already by definition going down.
So in addition to fundamental problems in China and the potential for a September rate hike from the Federal Reserve, with investors and traders withdrawing from high-risk free money trades for the safer shores of long-term government debt — in addition to all that, there are technical signal issues in the U.S. exchanges. Market breadth is poor, meaning there are more stocks in downtrends than in uptrends, in itself meaning the current bull market is based on only a few stocks, not the entire market. Bloomberg.com's Joseph Ciolli holds that five megastocks are currently supporting the market: Amazon, Apple, Google, Facebook, and Netflix. Are those five big enough to keep the entire market upright?
Good question. Because it's not just a mathematical matter of market value; it's the psychological possibilities of market perception.
For the past four years, U.S. markets and especially stocks have traded with low volatility, because zero per cent interest rates supported them. With investors beginning to price a September Fed rate hike into the market, that's changing. On Friday, the VIX volatility indicator closed above 28 for the first time in at least twelve months, and Bloomberg.com's Financial Conditions Index formed a classic head-and-shoulders chart pattern as it fell below zero for the first time since 2012, indicating a potential drop.
In other words, everything's going back to normal after a four-year hiatus with zero per cent interest rates. Remember when stock valuations actually had some relationship with the overall economy? Those days seem to be returning.
It's too early to predict a true bear market. But Thursday and Friday wiped a trillion dollars off S&P500 market values. Most indices are solidly in correction territory, with losses of greater than ten per cent from the most recent highs. If losses reach twenty per cent, you'll hear analysts quit using the term "correction" and start substituting "downtrend." And keep in mind, some overseas markets are already there.
Markets Beating Fed to Tightening Ahead of September Meeting
Reason Returns to U.S. Stocks at Awkward Time for Global Markets
The Fiscal Times:
China’s Currency Devaluation Brings Stocks to a 'Death Cross'
Dow Plunges into Correction Territory: Here’s How Bad Friday’s Market Bloodbath Was
Crushed: Dow Enters Correction After Biggest Selloff in Four Years
In other news…
In December of 2013, Detroit Police Chief James Craig encouraged law-abiding residents to carry guns and assist in policing the city, which faced a shrinking PD and growing criminal class. FoxNews.com's Perry Chiaramonte brings us an update on how that's working out. Short answer: pretty damn well. Note that the armed man fighting off a carjacker event happened before Chief Craig's call to arms. Doesn't make it less newsworthy.
Packing heat in Detroit: Motown residents answer police chief's call to arms
Well, that's a problem
Former Secretary of State Hillary Clinton claimed there was no classified information transmitted through her private server — no, that's not how she phrased it. She said that she sent no classified info, nor did she receive any that was marked as such.
Parsed like the 1990s.
Here's PJMedia.com's Charlie Martin discussing the reason it remains a problem whether information classified as top secret was marked or not. Short answer: computers storing top secret and some other classified info are not connected to the internet. Shorter answer: uh, oh.
Hillary’s Air Gap Problem The very fact that TOP SECRET information made it to Hillary's email shows a crime was committed.
The last few months have mainly been spent editing for my alter ego, Dingbat Publishing. But with the next three releases lined up and ready to go, hopefully I can return to a more steady blogging schedule, and maybe even get some actual, you know, writing done. Miracles do occasionally happen.
Thanks for stopping by, and watch your margin calls out there. This could get ugly.