Friday's Odd Action

The stock market has spent much of this year trying to exceed its year end 2013 high, and finally succeeded in terms of several indexes in late February/early March. However, it has also dispensed a number of warning shots along the way. On Friday, another such warning shot arrived. A number of momentum stocks were whacked quite badly on Friday, but interestingly, many have actually begun to decline about two weeks ago already.

Friday left the market with a not very pretty daily candle, but what is probably most noteworthy about the action is that it happened on tremendous trading volume. Partly this can probably be ascribed to the expiration, but it is still a bit of an exclamation point considering the many divergences we have been able to observe recently.

Below are a few charts that illustrate the situation. First a look at the Nasdaq and various momentum issues that have been favorites of speculators for some time and have begun to founder a bit.

 

Nasdaq, 5 minute

Nasdaq, 5 minute chart. It gapped up at the open on Friday and immediately started selling off – click to enlarge.

 

Next a look at a few daily charts of several momentum stocks that show that the weakness actually started already in early March. Underneath continued strength in the overall market, many leading stocks have begun to deteriorate. Mind, this is not a comment on whether these particular stocks are overvalued (they most probably are) or on their business (which is probably good). We are merely interested in technical conditions here, and have picked the individual stocks almost at random. We could have made this a much longer list.

 

PCLN dailyPCLN, daily – one of the strongest momentum stocks until early March, but it has been declining since then, even though the NDX almost recaptured its early March high last week – click to enlarge.

 

NFLX dailyNFLX daily, another momentum favorite. Its price action was quite similar, also peaking in early March. Friday's accelerated sell-off looks a bit worrisome to our eye – click to enlarge.

 

BBH, dailyBBH, the biotech ETF. Up until recently, the Rydex biotech sector fund held the by far biggest share of bullish Rydex assets (more than 35% at the peak). BBH mainly represents biotech big caps such as Gilead, Biogen, Amgen, Celgene, etc. – it peaked in late February already and had a very bad hair day on Friday – click to enlarge.

 

AMZN, dailyAMZN daily – this stock peaked shortly before its late January earnings report and has diverged from the NDX as well as other momentum stocks since then – click to enlarge.

 

Russian Sanctions Are Bad for Business

Although the Nasdaq was weakening right from the gap-up opening tick, the broader market attempted an intraday recovery on Friday, which appeared to be cut short when news came over the wires that president Obama had imposed sanctions on Bank Rossiya, a small Russian bank thought to be used by people 'close to Putin'. This is bad for business, no matter what one thinks of Mr. Putin and his policies. It is also a legally quite dubious move, as Mish correctly points out. It is as though a court were punishing Bob for what John has done, since obviously, Bank Rossiya neither 'invaded' the Crimea, nor did it organize the referendum there (we are putting 'invaded' into quote marks, because Russia didn't really invade either. Its soldiers were already stationed on the Crimea, quite officially. They did of course spread out from their base, so it's obviously not a clear-cut case).

In the Western media there is a tendency to report on the sanctions hitting various Russian oligarchs as if they were solely bad news for said oligarchs. Apparently no-one has really thought through yet that if they withdraw their capital, it will also be bad news for all those places where that capital is now invested.

This is one reason why we are saying this move is bad for business, no matter what one's views on the political backdrop are. To the extent that sanctions are hitting average Russians (and reports indicate that quite a number of average Russians found that their credit cards would suddenly no longer work in the West), they only help to strengthen Mr. Putin politically at home, while punishing even more people who had nothing to do with the events.  Alas, 'we' must not 'lose face', so we are eagerly shooting ourselves in the foot.

Moreover, anyone au fait with history should be aware that these tensions vastly increase long term political risk. Most Russians see things in a completely different light from the picture presented in the Western media. Don't be misled by the fact that our media like to quote Putin's political opponents a lot – they enjoy no broad political support, in fact they are a small minority. The media in Russia also report on events in a lopsided manner of course, and partly the views of the average Russian are influenced by that fact (don't forget though that the Russians are people who were for many decades quite cynical about their press).

We are pretty sure that Mr. Putin isn't itching for a fight with NATO (actually, Russia remains in the 'NATO partnership for peace'), but who knows how a future leader might think about this possibility in 20 years time? There is also a tendency to underestimate the country's military prowess, but it no longer has an army relying on shoddy Soviet equipment (funny enough, that rag-tag army was consistently overestimated by the West way back when), not to mention that it continues to be the world's second-largest nuclear power. Why did the West think it necessary to blunder into Kiev and take a hand in events there? Russians see it as the West dabbling in things that are none of its business. Sanctions only confirm to many the picture of the West as an enemy rather than a partner, and we can be pretty sure that the average Russian also believes that Russia has the right to pursue an independent foreign policy.

Let us get back though to the business aspect. Let's assume that it is true that Russia will fall into recession, as is argued here. How is that going to be good for the global economy? It seems more likely it will affect all of Russia's major trading partners as well (hello EU!). The US economy is one of the least directly affected economic regions, but it will be affected indirectly. Global economic interdependence is after all higher than ever, and aside from Russia we also have a marked weakening of China's economy to consider. The times when it didn't matter what happened in these economies are long past.

Here is a look at the SPX:

SPX-5 minuteSPX, 5 minute candles. On Friday it attempted to regain its opening high, but then deteriorated rather quickly. Perhaps it was only a coincidence that the sanctions-related news broke around that time, but it may not be – click to enlarge.

 

SPX, daily

The daily chart shows a reversal candle on extremely high volume. Volume often surges on expiration, but this is still quite an outlier – click to enlarge.

 

It is also remarkable that the DJIA has not confirmed the other indexes this year. Per experience, this is actually more important than one would think. The DJIA is not cap weighted (instead it is price weighted) and only harbors 30 stocks. Why should it matter what it does? We don't know, we only know that it has mattered on a number of previous occasions. Especially memorable in this context were the divergences between DJIA and SPX/Nasdaq that occurred  in the year 2000. We also remember that the signal was widely dismissed as 'meaningless' at the time. A memorable positive divergence occurred at the 2002/2003 lows.

 

DJIA dailyThe DJIA has not confirmed the other indexes this year – click to enlarge.

 

And lastly, a chart that was recently published by sentimentrader.  It shows the Citi 'Economic Surprise' index compared to the SPX. Interestingly, the economic surprise index seems to lead the stock market instead of the other way around. Readers may recall that we have frequently mentioned on previous occasions that the stock market has essentially lost its 'discounting function' since around 1998. Since then, it has more often been a coincident or lagging rather than a leading economic indicator.

A further note on this: in a 'normal' interest rate environment, the yield curve tends to invert prior to market peaks and economic downturns. This phenomenon can however no longer be observed in a structurally sufficiently damaged economy in which the central bank is holding short term rates close to zero. Japan has experienced several cyclical downturns since 1989 that were not preceded by yield curve inversions.

 

Citi surprise indexThe Citi economic surprise index and stocks – a lead-lag function different from what one would normally expect – click to enlarge.

 

Conclusion:

More smoke signals are emerging that suggest all is perhaps not as well as it appears on the surface. At some point they will matter, and one should be mentally prepared for that eventuality.

 

Charts by: Stockcharts, Sentimentrader

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

4 Responses to “Stock Market Dispenses Another Warning Shot”

  • No 6, I don’t think so. I watch a lot of the overnight market. There are trades going on in the market that are large players that are expending a lot of money, not to buy or sell, but to push the futures price upward. I think it was the night the Russians supposedly backed down, maybe 2 weeks ago, there was 12 point move on a 10 minute bar on the SPX. Friday morning I saw maybe 3000 contracts thrown at the market as a market order. You can sell 3000 contracts in an hour or so and not move the market much. This ripped up about 3 points. The idea is to force the shorts to buy when morning comes.

    What I see is the players are out of money. I mean the ones that don’t want to leverage themselves. Day to day, for the last few months, I have noticed the Dow and the Nasdaq can’t move up together. On Friday the Dow opened way up, while the NAS was down. Dow up 100 plus and the NAS negative. The Dow was down less today as well. It is like they know they need a new high in the Dow, so they are pushing it.

    Pater mentions the market hasn’t led the economy since 1998. This is because the market is now a game, where the insiders push as much overvalued stock as they can on the public. We have reached a point where the market is likely to roll over on itself. The Russian mess merely appears to be the trigger. The biggest buyers have been the traded companies themselves, quite often with borrowed funds. The next bear is quite likely to be worse than the last one, if for no other reasons than the central banks have only money printing to effect policy going forward, having left their interest rate ammo on the table too long and the entire world economy has plunged itself even further into debt. The junkie has become used to this much heroin and it will take even more to keep him going. If the market becomes risk off, I suspect the pyramid is too big for its base.

    • No6:

      Good info, you are probably correct. I am just trying to work out why they are unanimous in their tapering quest even though their stated objectives have not been fulfilled.

  • No6:

    I have come to the conclusion that a sharp correction in the market has been planned by the elite in order to allow a new round of QE without losing demand for the USD.

  • Mark Humphrey:

    Thanks for this informative article. I have been assuming that a broad market turndown would be preceeded by weakness in momentum stocks like amzn et al. So I’ve wondered about this in recent days, which makes your comments especially interesting.

    The market behavior and political-economic events abroad makes me wonder if we’re approaching some fireworks in the next 3 months or so.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com