11 Signs That An Imminent Stock Bear Market Apocalypse Has Become Even More Likely
And things will continue to unravel as we move into 2016 and beyond…
A Double Dip By The ISM Manufacturing Index Into Contraction Territory Preceded The Previous Two Big Bear Markets For Stocks
A key gauge of manufacturing activity has double-dipped into recession territory, but stock market investors don’t seem to care. History suggests, however, that maybe they should.
The Institute of Supply Management’s manufacturing index for November surprisingly fell to the lowest level since June 2009, the last month the U.S. economy was in recession. More importantly, the ISM index fell below the 50% level, to signal contraction, for the first time since it dipped below that level for one month in November 2012.
Meanwhile, the S&P 500 Index SPX, +1.07% climbed 1.1%, with more than 80% of the components gaining ground.
The following chart shows the last two big bear markets, were foreshadowed by a return of the ISM index into contraction territory, in August 2000 and December 2007.
Will the third time be a charm, or a dud?
The continued downtrend in the high-yield bond market is warning that liquidity is drying up, which could bode very badly for the stock market.
When financial markets are flooded with liquidity, investors tend to feel safer about investing in riskier, higher-yielding assets, like noninvestment grade, or “junk,” bonds, and stocks. When the flow of money slows, the appetite for risk tends to decrease as well.
That’s why many stock market watchers keep a close eye on the longer-term trends in the high-yield bond market. If money is flowing steadily into junk bonds, investors are likely to be just as willing, if not more willing, to buy equities. When money is coming out of junk bonds, like the chart below shows, many see that as a warning that investors could start selling stocks.
When Steve Nison says candlestick charts are telling him not to buy stocks, people might want to listen.
Nison is widely known as the person who introduced candlesticks to the West. He has an M.B.A. in finance, but he started focusing on technical analysis — more than 30 years ago while at brokerage E.F. Hutton. In the late 1980s, while at Merrill Lynch, Nison met a Japanese broker who used terms like “doji” and “harami” in conversations with clients. Intrigued, he wrote a short article for Futures magazine on the more than 200-year-old Japanese technique in 1989.
Now candlestick charts — which include information about an investment’s movement during a trading day, rather than just its closing price — are standard on most charting services, and many Western chartists call them their preferred way of mapping the market….
Companies have defaulted on $95bn worth of debt so far this year, with 2015 set to finish with the highest number of worldwide defaults since 2009, according to Standard & Poor’s.
The figures are the latest sign financial stress is beginning to rise for corporate borrowers, led by US oil and gas companies. The rising tide of defaults comes as investors reassess their exposure to companies that borrowed heavily in recent years against the backdrop of central bank policy suppressing interest rates.
Without a rebound in oil and commodity prices, and with the Federal Reserve seen lifting its policy rate for the first time in nine years, strategists predict a further rise in corporate defaults for 2016.
The amount of debt owed by US companies relative to the size of their profits has been increasing, according to Alberto Gallo, macro credit strategist for RBS, with the proportion of the most indebted borrowers rising since mid- 2014.
“This tail of highly levered borrowers is likely to be vulnerable to rising rates,” he said in a note to clients.
The Federal Reserve is cutting its lifeline to big banks in financial trouble.
The Fed officially adopted a new rule Monday that limits its ability to lend emergency money to banks.
In theory, the new rule should quash the notion that Wall Street banks are “too big to fail.” Translation: the government has to save them during a crisis.
The Fed’s new restrictions come from the Dodd-Frank Act of 2010, which brought in a wave of reforms after the financial crisis.
Under the new rule, banks that are going bankrupt — or appear to be going bankrupt — can no longer receive emergency funds from the Fed under any circumstances.
If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG () and Bear Stearns, Fed chair Janet Yellen points out.
We were told that low oil prices were unequivocally good for America, so it’s odd that, after seeing the weakest growth in pending home sales since Nov 2014, NAR blames “softness in sales on oil-related job losses from low oil prices.”Pending home sales grew 2.1% YoY in October, (way below the 4.3% expected growth and 3.2% growth in September).
As Bloomberg reports,
Morgan Stanley, the investment bank that saw bond-trading revenue plunge 42 percent in the third quarter, is planning a significant reduction in its fixed-income staff, according to people with knowledge of the plans.
The cuts, which could total as much as a quarter of fixed-income trading employees, will be across all regions and are set to take place in the next two weeks, said two of the people, who asked not to be identified because the decision hasn’t been publicly announced. Hugh Fraser, a spokesman for the New York-based bank, declined to comment.
“The trick for us is to size our business appropriately to what we think the fee pool is,” he said at the conference. While trying to gauge that, the investment bank needs to keep the unit “credibly sized” to complete globally, and “make sure we have enough flex or leverage that when the markets recover, which we do think they’ll recover, you’ll be able to participate in the upside of that,” he said.
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It’s another ugly day for iron ore, with analysts fretting about a big round number falling by the wayside.
Iron ore futures on Monday dropped below a closely watched level in Singapore trading — $40 a metric ton — for the first time ever.
It’s just the latest commodity to keep crumbling and spur worries about global economic growth.
One American Enterprise Institute fellow isn’t afraid to use the “d-word,” given today’s action:
— Scott Gottlieb, MD (@ScottGottliebMD) November 30, 2015
Last week’s tryptophanic slumber gives way to what should be a turbulent stretch for markets, as the Fed, OPEC and a batch of macro numbers, including Friday’s jobs report, take the spotlight. If the prevailing trend continues, look for the strong to get stronger and the weak to get weaker. Don’t let the proximity to new index highs fool you — pain has trumped pleasure in 2015, for the most part.
And in doesn’t bode well for 2016.
“The turkey looks good on the surface, but where’s the stuffing?,” asks Jon Krinsky’s of MKM Partners (h/t Reformed Broker). “In the last 20 years, the only other times we have seen less than 55% of components above their 200 DMA while the SPX was within 2% of a 52-week high have been ’98-’00, October 2007, and July/August of this year.”
In other words, the narrowness of this market is unlike anything we’ve seen since the period preceding the dot-com bust. Our chart of the day digs a little deeper (see below).
Elsewhere, ‘tis the season for a most objectionable human trait: the blood lust for a deal. We saw it unfold on Friday, although the crowds were perhaps a bit thinner than they’ve been in the past. Shoppers have increasingly gone online for their holiday needs. We’ll get a better sense of how Cyber Monday unfolds as the day rolls on, but regardless of where the sales come, it’s evident retailers need the boost after the latest batch of grim quarterly numbers.
The evidence continues to mount that we are steamrolling toward a deflationary economic slowdown that is worldwide in scope.
Just look at the price of U.S. oil. It just keeps on falling, and as I write this article it is sitting at $40.40.
The price of oil collapsed just before the financial crisis of 2008, and the same pattern is happening again.
And look at what is happening to commodities. The Thomson Reuters/CoreCommodity CRB Commodity Index has plummeted to the lowest level that we have seen since the last recession. It is now down more than 30 percent over the past 12 months, and it continues to fall.
Media pundits are doing their best to paint a rosy picture of the U.S. economy, but the recent crash in retail stocks shows the country could be on the verge of a recession, and even an economic collapse in 2016.
As was expected, the selling frenzy triggered by the world’s biggest retailer, Wal-Mart Stores, Inc. (NYSE:WMT), is trickling down to other retailers now. The tremors are being felt across the board, with grocery stores, drugstores, and specialty retailers all getting hit by anemic consumer spending. It wouldn’t be wrong to say that U.S. retail stocks are already crashing.
The leader in the retail industry, Wal-Mart, guided lower for the next two years. Following in Wal-Mart’s footsteps, Macy’s, Inc. (NYSE:M) andNordstrom, Inc. (NYSE:JWN) have both posted depressing results this week. While J. C. PenneyCompany, Inc. (NYSE:JCP) and Kohl’s Corporation(NYSE:KSS) may have temporarily saved the day for retailers, but both hinted at weakening spending. Prior to the quarterly report, JCPenney went for job cuts at its headquarters to save some bucks, while warning of lower sales going forward. Kohl’s reported much better numbers than were expected, but indicated weaker-than-expected sales for the month of September.