Stock Market Moves – When The Facts Change by MarketCycle Wealth Management, LLC
This post was written on January 8, 2016 and updated periodically with new charts , but it was published on January 26, 2016 (and it does not reflect conditions after that date). MarketCycle has already acted on the information in this month’s blog in our client accounts and in our member’s website.
John Maynard Keynes lived in England from 1883 to 1946. He was such an influential economist that an entire branch of economics was eventually built up around his theories: Keynesian Economics. Unlike most economists, he was a very successful investor and he is considered to have been the very first Global-macro investor. MarketCycle relies heavily on Global-macro and combines it with a proprietary and sophisticated form of trend following of both asset prices and economic data. The Keynes’ quote above was in response to a reporter that had just challenged him about changing his views; the reporter seemed to feel that changing one’s view as the facts changed was somehow a bad thing. Throughout his life, Keynes approach was geared toward accepting whatever was presenting in the present moment.
Which leads to: MarketCycle’s indicators have been saying that we have been in a bull market ever since our April 2, 2009 signal. Our last blog reflected our continued bullish stance (but with decreased expectations). However, even at the time of writing that early January blog, our near-term RISK Indicators were a hairs-breadth away from triggering… meaning that the risk of a bigger downward move was not certain, but it was highly likely. The members of our REPORT website (link below) had been notified and our client accounts were changed to reflect the new higher risk changes in the market. We have a good idea about where the stock market is headed and our plan is to go long again at the appropriate time.
MarketCycle’s proprietary trend signals are much more sophisticated than either trend-lines or moving averages… however, we found it interesting that so many leading assets were crossing their trend-lines at the same time that our risk indicators triggered (please Google the words “trend-line” and “support” and “resistance” if you do not know what they are). This high number of trend-line and support crosses coming on the same day was almost freakish.
Usually, when an asset crosses its trend-line it keeps moving in the same direction as the breakout; this only occurs because enough traders watch them to create a self-fulfilling prophecy as they all act in unison… like a school of fish. And similar to a school of fish, assets do not swim (trend) in a straight line, but rather zig-zag along in one general direction, so there will be up days along the way even if the market is ultimately determined to swim south for the winter.
Just below is a generic example of a trend-line and a breakout of that trend-line. The market tends to trend in the same direction as the breakout in the vast majority of cases:
Below are actual examples of breaking trend-lines shown from just before the lines were broken. I personally review several hundred investing charts every day of my life (in addition to calculating our system’s indicators) and I’ll be presenting nine charts here. So, all of these following trend-lines were broken on the next trading day of January 11, 2016. The high number of simultaneous breaks helped to back up our changed perception of the market: It is likely heading into a bear market, although not a deep and severe depressionary bear market as in 2008.
The U.S. economy is based on 30% of GDP growth coming from manufacturing and 70% of GDP growth coming from the consumer (as in retail spending). Manufacturing broke down some months back and now even the consumer discretionary sector is breaking down rapidly. Also of importance is the fact that current corporate earnings are not great. Eventually they will all strengthen again and the markets will finally move higher.
Please note the posting date before each chart shown below since the dates show the progression in thought. If you do not realize that I am talking to you from various points in time over a two week period, and jumping back and forth, then this posting will not make sense.
01/08/016… The S&P-500 stock index shown off of the 2011 cyclical bottom just prior to breaking below this shorter-term 4 year trend-channel:
01/08/16… The S&P-500 shown off of the 2009 bottom with longer-term 7 year trend-line support at around 1775-ish (this chart does not show a potential break in a trend-line):
01/08/16… Global developed-market stocks have already broken down:
Global emerging-market stocks have already broken down below support (and have been exceptionally weak since 2011):
01/08/16… Transport stocks and small-cap stocks (both lead the S&P-500 down during downturns) shown just prior to breaking down through their 2009 trend-lines:
01/08/16… Oil (with the inverse of the U.S. Dollar shown behind it in green)… oil broke down into the $20s shortly after posting this chart:
01/08/16… Copper (a strong leading indicator of market conditions) has already broken below its trend-channel, properly retested the line from below, and then dropped again:
01/08/16… Treasury-Bonds shown about to break to the upside out of a year long consolidation pattern. Bonds and stocks usually move in opposite directions during high risk periods, so if stocks drop, then extended-duration fixed-rate Treasury-Bonds should move up strongly:
CHART UPDATE on January 25, 2016 (same chart as above but shown 17 days later and revealing the breakout). Similar breakouts have now occurred on every single chart shown above… all showing potential stock market weakness and bond market strength!
Also posted here in this blog on 01/08/16: Below is a snippet of a small portion of the RISK ASSESSMENT section on our membership website:
01/22/16 UPDATE… This chart was sent to clients and REPORT-members (link below) on JANUARY 22, 2016. If the market eventually continues on down, as we expect it might, then it will naturally seek a strong support area as shown here:
01/25/2016… What could cause a further breakdown in the global stock markets? As I keep saying: “China.”
01/26/2016… The morning after posting the above chart into this blog, I awoke to this financial headline about the Chinese Shanghai stock market:
In the future, MarketCycle will not be showing its hand so openly to readers of this free blog. But currently, if I were a bookmaker, I’d position myself for the following bets:
- IF China falls further, then there is a 75% chance (but not a certainty) that the S&P-500 drops to 1775-ish
- IF the S&P falls below 1750, then there is a 75% chance (but not a certainty) that it drops toward 1600-ish
- IF it falls to 1600-ish, then there is a 75% chance (but not a certainty) that it will find its bottom
- AFTER it finds its bottom, there is a (fairly certain) 75% chance that the S&P-500 moves to new historic highs within 12 months
BUT, we will act like John Maynard Keynes and be willing to change our minds as the facts change.
SUMMARY: We have likely entered a multi-month stealth bear market brought on by the temporary breakdown in U.S. manufacturing and persistent global deflationary conditions (the only area that shows inflation is in “rents”). In our opinion, this is not a market in which to go short, however, relatively safe extended-duration U.S. Treasury-Bonds may out-perform over the coming months. If this further downturn comes to fruition, then floating-rate bonds and gold would likely (temporarily) gyrate up and down but the U.S. Dollar may continue to gain in strength as global investors seek the safety of the Dollar and the upward bias caused by the continued threat of rising rates in the United States.
January 26, 2016 S&P-500 one-year-long chart:
MarketCycle’s clients are currently positioned so that, in the near term:
- If the stock market moves higher, we will make some money from our (current) small “hedged-currency” stock allocation.
- If the stock market moves sideways, we will make some money in the form of interest.
- If the stock market moves lower, we will make the most money… and with the goal of fully locking in again at a lower level and riding it back up.
Thank you for reading!