You guys know my stance. My bias is to the downside. The drop we have had off the highs is not a pullback within an uptrend, it’s the beginning stages of a bear market. Given this I want to try my best to offer a bullish view…or at least a glimmer of hope.
We know the 2000-2002 bear market resulted from the tech bubble bursting. Companies that had high overhead and even higher valuations had no revenue, and even companies that could potentially become great (AMZN) were treated with sky-high valuations because expectations were they’d become great immediately instead of over time. The bubble bursting was inevitable, and if memory serves me right, it was Abby Joseph Cohen lowered her equity exposure from 65% to 60% in mid March 2000 that got the ball rolling.
The 2007-2009 bear market resulted from a collapse of the financial system. Banks, investment banks, insurance companies and large corporations with huge treasury departments over-leveraged themselves. That works great as long as the music keeps playing, but once the dominoes start to fall, losses mount quickly. Most of the financials had paper losses that exceeded their market caps. Without the banks available to “grease the wheels of capitalism” there was nowhere to go but down.
The 2011-20?? bear market resulted from…what? There was no singular crisis that could be pointed to – at least not yet. Yes earnings have worsened, but that’s not enough to cause the intense selling we’ve had. Yes econ numbers started coming in worse, but again, this alone should cause some weakness, but not a free fall. Yes employment numbers have not improved, but they’ve been this bad for two years. Yes housing sucks, but it has sucked for a long time. Yes Standard & Poors lowered their rating on US debt, but the sell-off began two weeks prior to the downgrade. Finally POMO. Yes QE2 ended in June. But the numbers don’t add up if you think the end of QE was what caused the intense selling. The market cap of all publicly traded stocks increased by several trillion dollars. Did buying $600B in treasuries boost the market by several trillion? Doubtful.
So what caused the sudden selling? Here’s my guess.
The sell-off is due to the lowering of the US’s debt, but word leaked out two weeks prior to its release to enough large players who then sold everything under the sun and then some to position themselves for the official announcement. If you don’t think Goldman Sachs, JP Morgan and the largest hedge funds have friends in high places who feed them information (and get rewarded for the info), well then you keep living in your Mary Poppins world. That’s what I think. So even though there may not appear to be a direct link between the recent selling pressure and the debt downgrade, I think there is. If you disagree, that’s fine. I’m just guessing. I actually don’t know.
If this is true – that the selling can be traced back to the downgrade – the next logical question is whether the downgrade is a big deal, is the selling pressure justified. Psychologically it’s a big deal, but does it actually effect things? The US is still going to make their debt payments, and if the lower rating means the US will have to pay higher interest on its bonds, well the market disagrees. Bonds have taken off and rates have continued to drop.
If indeed the intense selling pressure was caused by the debt downgrade, and the debt downgrade isn’t a bid deal, then shouldn’t the market recover and continue with business as usual?
This is my “optimistic” scenario – that this whole thing is just an overreaction. Earnings have turned down and so have the economic numbers. POMO has ended. It’s the weak time of year (August, September). A pullback made sense – even dropping below the bottom of the 2011 ranges. But a full-blown sell-off that leads to a bear market? Hmmmm. Overreaction?
This is my bullish/optimistic argument which I don’t necessarily believe because in my world, the charts don’t always get it right, but they get it right often enough for me to continue following them. And the charts are COMPLETELY broken. If the market wants to turn up here, fine. I’ll change my bias, but for now, I’m sticking with the downside.
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Europe has to be a part of the equation….
You’re right, but Europe has been an issue for a couple years. Did Europe suddenly cause the selling pressure of the last couple weeks? It certainly didn’t help, that’s for sure.
Chris, I agree that France and Italy (ie: Europe) are part of the equation, add to these events the concerns over Spain, Portugal and Greece and we have a Global event
Even though they have been in the news for some time, “they” again became “headlines” at the same time the US was downgraded. This triple wammy caused some to sell and run for the cash accounts.
The other major factor is a chance of a double dip recession based on current economic data and the inconsistant consumer spending. Bottomline,the US and Europe do not have an inkling of how to revive the economy, and the populace senses worse times ahead.
Right or wrong, this is scary stuff and the memories of the 2008 freefall are still too fresh in the minds of investors. A New Bear market is upon us, keep your powder dry.
it seems like the markets have started to react to European sovereign debt issues (I know its been around for a long time, but the markets decide to react now). There’s fear that European banks will follow the path of US banks in 2009 and push Europe into recession again. just my view, but I trade price actions, not news.
I think this selloff is just the U.S. catching up to the rest of the world. The Chinese, Brazilian, and Indian stock markets have been declining for months. I’ve been amazed at how the U.S. stock market stood its ground as the world economy slowed. The developing countries have been tightening amid higher inflation, and their stock markets have dropped as a result.
Maybe investors thought the U.S. was insulated from the rest of the world, but many U.S. companies are dependent on developing countries for growth — and those countries are trying to slow growth. Add to that the turmoil in Europe, and you have a recipe for a global slowdown. The S&P downgrade only added to the mix, since municipalities, states and the feds may face higher interest costs, which may lead to even more layoffs in local jurisdictions. Ironic, though, that U.S. bonds have rallied, even as S&P said they were now a slightly higher risk.
Well, first of all I want to correct your opening statement. (Yeah, unfortunatley whenever you are running one of these stupid websites your always getting bashed by somebody!) But at least I’m not as Vooooop! (if you remember him).
YOU, Jason, are a perma bull and always have been. It’s only recently that
you have switched camps and have gone bearish on all of us. Oh yeah, that
must be a very bullish sign now according to contrarian thinking. I say
tomorrow we go up 718 points on the Dow if Jason’s a bear. HW
Yes I was a permabull during one of the market’s greatest rallies.
big instos–banks hedgies could see the writing on the wal 6 mths and longer ago
bank regulation–the vodka rule vocher–end of qe2—they also know banks mark to fantasy
ect ect ect
some 3 moths ago i started seeing a very strange thing on my 5 and 1 min futures and cash charts—prices were being pushed to key opts strike prices whilst big boys go set
even 3 mths ago hedgies were massive extreme short–puts,retailer calls so sell off could start
but we need a smoke screan–fundamental event –u know the rest
banks may be broke but they will have their puts and other derivities heged
——great article ,Jason
excuse my spelling –please just woke up and blurry eyed
Oh yeah, you forgot to throw in Elliott Wave theory into the mix as well. HW
mr hindight kept getting blind sided by big boys
so did just about everyone inc ew
the bear market started on the bin ladan may 2nd event
and i shorted the exact top —dji 12900 preopen cash
i must be a hillarius guru
The downgrade was no secret, it was publicly announced on July 14:
“A top official at Standard & Poor’s said Thursday the ratings firm could move to downgrade U.S. government debt later this month if Congress hasn’t raised the $14.29 trillion debt ceiling—even though the Treasury says it doesn’t risk missing payments to creditors until Aug. 2. ”
WSJ July 15
Yes they definitely warned Congress, but it’s still somewhat of a shock when it happens…first time in 70 years. Maybe no one believed S&P.
how did i do that preopen
with cfds the cash price is the futures price with fair value added or minused
–see index arb.com
it was at the open of the oz/japan markets the annoucement was made and usa futures reopen
i shorted the world
Since certain institutions are required to hold AAA securities the downgrade results in a shifting of assets and changes in collateral. The recent increase in US Treasuries offsets this deleveraging to some extent. All IMHO.
Also the downgrade affects bank reserve requirements and results in credit retrictions due to collateral changes which will affect the economy.
This is a good point. So instead of holding US treasuries, pensions will hold bonds in stocks like GE which would have gone belly up if not for them getting a “bank” status during the financial crisis. What a system we have! 🙂
Jason–there are opts charts that u go back to check the insto put bearish extremes
and the tretailer call bullishness
$cpu–retailers
$cpci–instos
investment tools.com—oex put/cals
but u know that
Don’t forget our dysfunctional government and the political gamesmanship over the debt ceiling fiasco that laid a smelly fart around the world. There’s no fixin’ the market until we get money flowing out of corporate lock boxes into the economy and that they start hiring again. Recession #2 is right around the corner if we don’t get some focus on growth rather than just cutbacks.
We have the best government money can buy. It’s sickening.
Agreed Jason. Big Boys always have upper hand and anything else is Mary Poppins. I’ve been following Jason on and off for years and have known him to not take sides with the market but follow what it’s saying in the charts themselves.
Market cracked the 200 day exponential and triple bottom like hot knife through butter and that was tell- tale ans the end.
Charts are broken for sure but naturally BIG BOUNCE is eminent. Short the Rally’s and look out below because Gold is telling the real story….our system is broken….it’s a scam from Wall St to the Goggles and we are doomed like Rome was as an empire.
That is not a joke but probabilty in the next 20 years. Do you really have faith in our Govt… ???
I have zero faith in our government, and I agree we are on the wrong path. We’ve been on the wrong path for a long time, and it looks like we are the ones who will get a front row seat to everything unraveling…although it will take time.
Meant to type from wall street 2 government not goggles. That’s what you get for texting on a smartphone
Jason and Ausssie JS the Speller,
One more step Jason.
After the GFC, debt has been transferred to Governments.
Double whammy in Europe and US.
Now Goverments can’t feed the system with stimulus or TARP’s etc.
Just when leveraging was being started up in the private sector.
Government borrowings now feeding excess Public Services and current account, not Capex.
Only growing Asia borrows to fund Capex.
US and Europe, now mature economies and must learn to pay their current account from current revenue.
Painful process ahead for increased taxes in the US and Europe.
Smart investors will fund Capex in emerging economies as “Economic Colonialists”,
just like the British empire for centuries.
We will all survive if we pay our bills on time from current revenue.
Deleveraging will be difficult.
Cheers from Hong Kong.
Mike OC
Thanks for your comments Mike.
all the lies of european debt problems i call it the “european debt scam” because the european debts are not that big as in the US. And in europe we have a working economy but on the other side the US has no creation of new jobs, no debt lowering, so serious economical problems. We have future industries and the US sticks to the great oil players. Soon we are going to export full electrical cars from germany, we have solar panals, windcraft and so on. Where are these future jobs in the US these are the seeds for gains in the future. Obama made a bad decision to sign the debt bill because he made a bad compromise. So buy gold, silver and platin physically because when the system crashes all the paper is not worth the colour on it.
The US is definitely becoming less diversified and instead more concentrated in financials and internet stuff…neither of which actually produces a physical product.
Jason,
What people are missing is the politicos need for QE3. During the time of QE2, the Fed purchased 110% of the amount of new Treasuries auctioned until the debt ceiling was hit. This kept interest rates low.
Public sentiment is very much against QE3 so a crisis and fear needed to be created to scare the masses into accepting it.
Now that the debt ceiling has been increased and the Treasury is auctioning again, if the Fed isn’t buying, then as soon as the market fear starts subsiding, there’ll be no buyers at these rate levels and lots of formerly panicked investors trying to sell their positions and competing with the Treasury. Without QE3, rates will make a major move up which will put downward pressure on home prices, consumer and business spending.
Yep I’ve heard this. Because the public won’t accept more bailouts or QE3, a crash must be engineered. Sick system we have.
Yes, an extremely sick system.
But maybe a crash is inevitable and better the crash that’s controlled than one which is out of control?
If the Fed doesn’t do some form of QE3 (Operation Twister redux or whatever), with the Treasury demand reduced, interest rates will go up. Mortgage rates go up and without a corresponding increasing in personal incomes or reduction in the cost of living (neither is likely with increasing rates), then home prices move down further. Home prices moving down slows consumer spending and the economy while reducing consumer confidence (not to mention the impact on the MBS originating big banks and the MBS holders).
Interest rates going up also puts added pressure on consumer spending as more of the consumer’s income goes towards debt servicing. Reduced consumer spending, all else being equal, puts pressure on business earnings. Pressures on business earnings plus higher interest rates puts pressure business spending as well.
Net-net, the market moves down due to higher interest rates but in an uncontrolled fashion. Eventually this downward spiral forces the Fed into QE3.
Or, the politicos can tank the market while they’re in control, and get QE3 started more quickly than would happen with natural forces causing the move down. But, if those natural forces get into play, they’re going to have their own momentum and it’ll be much harder to reverse that trend than if the down move is a shorter duration engineered event under control.
The “advantage” to the tactic of a controlled takedown is that it’s not caused by higher interest rates so the true level of where Treasury rates would be without QE is never revealed. Can’t have the world knowing that the Emperor has no clothes.