NYSE short sales and daily volume dipped slightly on Wednesday but remain elevated, warning of selling pressure.
NYSE short sales and daily volume dipped slightly on Wednesday but remain elevated, warning of selling pressure.
NYSE short sales and daily volume are only published 24 hours after the close of trade, but are still a useful indication of where the market is headed. Short sales over 500 million on Monday, remain elevated. Keep an eye out for any increase above 600 million this week — which would warn of rising selling pressure and a likely breach of support.
After Friday’s narrow consolidation between 1970 and 1990, S&P 500 September 2015 E-mini futures broke support at 1970, indicating moderate selling pressure.
Sound domestic economic performance is likely to ensure that the S&P 500 returns to its primary up-trend in the medium- to long-term, but upheaval in international financial markets may have sapped investor confidence in the short- to medium-term. The doji star on the daily chart reflects indecision. A close below 1970 would suggest another test of support at 1870, with respect of resistance at 2000 a bearish sign. A 21-day Twiggs Money Flow peak below zero would also warn of selling pressure. Follow-through above 2000 is less likely, but would indicate light selling and a snappy recovery.
NYSE volumes reflect the increase in activity, starting Friday August 21st, with daily volumes over 2 billion and short sales jumping to 800 million. It will be worth keeping an eye on short sales this week. Recovery above 600 million would warn of rising selling pressure.
Performance of the All Ordinaries during the 1997 Asian financial crisis and ensuing Russian financial crisis in 1998.
The index gained 7.9% in 1997 and 7.5% in 1998 despite the upheaval in Asian markets. Australia is now a lot more reliant on exports to Asia, however, than in 1997/98.
Reversal of 13-week Twiggs Money Flow below zero warns of long-term selling pressure. Follow-through of the All Ords below 5000 would confirm a primary down-trend.
Here is the performance of the S&P 500 during the 1997 Asian financial crisis and the ensuing Russian financial crisis in 1998.
The index gained 31% in 1997, and 26.7% in 1998, despite the upheaval in Asian markets. Global markets are nowadays a lot more interconnected, however, than in 1997/98.
All the same, gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure — a secondary rather than a primary movement.
Dow Jones Shanghai Index broke support at 440. Expect more government efforts, near the close, to shore up support. As futile as attempting to hold back the tide. Target for the breakout is 330*.
* Target calculation: 440 – ( 550 – 440 ) = 330
The 1990s featured two significant upheavals in global financial markets. First, 1990 saw the Nikkei collapse from its high of 39000, reaching an eventual low of 7000 in 2008.
The collapse followed strong appreciation of the Yen after the September 1985 Plaza Accord and the ensuing October 1987 global stock market crash. The Plaza Accord attempted to curtail long-term currency manipulation by Japan who had built up foreign reserves — mainly through purchases of US Treasuries — to suppress appreciation of the Yen against the Dollar and maintain a current account surplus.
Seven years later, collapsing currencies during the 1997 Asian financial crisis destroyed fast-growing economies — with Thailand, South Korea and Indonesia experiencing 40%, 34% and 83% falls in (1998) GNP respectively — and eventually led to the 1998 Russian default and break up of the Soviet Union. Earlier, rapidly growing exports with currencies pegged to the Dollar brought a flood of offshore investment and easy credit into the Asian tigers. Attempts by the IMF to impose discipline and a string of bankruptcies spooked investors into a stampede for the exits. Falling exchange rates caused by the stampede led to a further spate of bankruptcies as domestic values of dollar-denominated debt skyrocketed. Attempts by central banks to shore up their currencies through raising interest rates failed to stem the outflow and further exacerbated the disaster, causing even more bankruptcies, with borrowers unable to meet higher interest charges.
What we are witnessing is a repeat of the nineties. This time it was China that attempted to ride the dragon, pegging its currency against the Dollar and amassing vast foreign reserves in order to suppress appreciation of the Yuan and boost exports. The Chinese economy benefited enormously from the vast trade surplus with the US, but those who live by the dragon die by the dragon. Restrictions on capital inflows into China may dampen the reaction, compared to the 1997 crisis, but are unlikely to negate it. The market will have its way.
Financial markets in the West are cushioned by floating exchange rates which act as an important shock-absorber against fluctuations in financial markets. The S&P 500 fell 13.5% in 1990 but only 3.5% in October 1997. The ensuing collapse of the ruble and failure of LTCM, however, caused another fall of 9.0% a year later. Not exactly a crisis, but unpleasant all the same.
The domestic US economy slowed in the past few months but increased spending on light motor vehicles and housing suggested that robust employment growth would continue. Upheaval in financial markets (and exports) now appears likely to negate this, leading to a global market down-turn.
The S&P 500 breached primary support at 1980, signaling a primary down-trend. The index has fallen 4.5% from its earlier high and presents a medium-term target of 1830*. Decline of 13-week Twiggs Money Flow below zero would confirm the signal but descent has been gradual, suggesting medium-rather than long-term selling pressure.
* Target calculation: 1980 + ( 2130 – 1980 ) = 1830
The CBOE Volatility Index (VIX) spiked upwards indicating rising market risk.
Bellwether transport stock Fedex broke primary support at $164, confirming the primary down-trend signaled by 13-week Twiggs Money Flow reversal below zero. The fall warns of declining economic activity.
Canada’s TSX 60 broke primary support at 800, confirming the earlier bear signal from 13-week Twiggs Momentum reversal below zero. Target for a decline is 700*.
* Target calculation: 800 – ( 900 – 800 ) = 700
Germany’s DAX broke medium-term support at 10700. Expect further medium-term support at 10000 but reversal of 13-week Twiggs Money Flow below zero warns of selling pressure. Breach of 10000 would indicate a test of primary support at 9000.
* Target calculation: 10700 – ( 11800 – 10700 ) = 9600
The Footsie broke 6450, signaling a test of primary support at 6100. Reversal of 13-week Twiggs Money Flow below zero warns of (long-term) selling pressure. Breach of 6100 would offer a target of 5000**.
* Target calculation: 6450 – ( 6800 – 6450 ) = 6100 **Long-term: 6000 – ( 7000 – 6000 ) = 5000
The Shanghai Composite reflects artificial, state-backed support at 3500. Declining 13-week Twiggs Money Flow warns of long-term selling pressure. Withdrawal of government support is unlikely, but breach of 3400/3500 would cause a nineties-style collapse in stock prices.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
Japan’s Nikkei 225 appears headed for a test of 19000. Breach would test primary support at 17000 but, given the scale of BOJ easing, respect is as likely and would indicate further consolidation between 19000 and 21000. Gradual decline of 13-week Twiggs Money Flow suggests medium-term selling pressure.
* Target calculation: 21000 + ( 21000 – 19000 ) = 23000
India’s Sensex is holding up well, with rising 13-week Twiggs Money Flow signaling medium-term buying pressure. Breakout above 28500 is unlikely but would indicate another test of 30000. Decline below 27000 would warn of a primary down-trend; confirmed if there is follow-through below 26500.
Commodity-rich Australian stocks are exposed to China and emerging markets. The only protection is the floating exchange rate which is likely to adjust downward to absorb the shock — as it did during the 1997 Asian crisis. 13-Week Twiggs Money Flow below zero warns of (long-term) selling pressure on the ASX 200. Breach of support at 5150 is likely and would confirm a primary down-trend. Long-term target for the decline is 4400*. Respect of primary support is unlikely, but would indicate consolidation above the support level rather than a rally.
The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.
The Freight Transportation Services Index reinforces this, declining since late 2014.
But the LoDI Index contradicts, continuing its climb.
The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.
Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.
On a positive note, however, light motor vehicle sales are climbing.
New building permits for private housing retreated in July but the trend remains upwards and new housing starts are increasing.
Overall construction spending is also rising.
Solid growth in spending on durables suggests further employment increases. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.
[August 19th – This post was updated for Fedex and today’s release on Housing Permits and New Building Starts]
The Shanghai Composite today found support at 3500 today after plunging more than 8% on Monday. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
The Japanese asset price bubble….. was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices had been closely associated with excessive monetary easing policy at the time.
By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ)…..the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.
“…uncontrolled money supply and credit expansion….overheated stock market and real estate bubble.” Sound familiar? It should. We are witnessing a re-run but this time in China. Wait, there’s more…..
…..At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy, but decided to delay the decision in view of economic uncertainty related to Black Monday (October 19, 1987) in the US.
…..BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the “endaka recession” ….. closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.
…..in order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through expansion of public investment. Simultaneously, the BOJ declared that curbing the yen’s appreciation was a “national priority”……
Global stock market crash leads to prolonged monetary easing…… aggressive expansion of public investment to stimulate the domestic economy…..central bank efforts to curb appreciation of the currency. We all know how this ends. We’ve seen the movie before.
It’s like deja-vu, all over again. ~ Yogi Berra
Australian stocks typically encounter tax loss selling in June (before end of the financial year), followed by a rally in July/August that often carries through into the next calendar year. Sale of poor performing stocks before EOFY withdraws money from the market and effectively lowers all stock prices. After the year end, investors start to accumulate stocks again, lifting the market.
A monthly chart of the ASX 200 Accumulation Index since 2006 shows 2 years where the rally started in August (dark green), 5 years where the rally started in July (light green), and 2 years (red) where the EOFY rally disappointed, continuing a down-trend.
This year is complicated by turmoil in Greece and China. July 2011 also had its Greek drama. Prime Minister George Papandreou survived a confidence vote but was eventually replaced by Lucas Papademos, former governor of the Bank of Greece and vice-president of the European Central Bank. S&P also downgraded US government debt at the start of August 2011.
I don’t have a crystal ball, but breakout above the trend channel on the ASX 200 daily chart would indicate the correction is over, suggesting another advance. Rising 21-day twiggs Money Flow indicates mild buying pressure.
But it would be prudent to wait for confirmation, in case it turns into a bull trap like 2011.
Interesting work by Dan Greenwald, Martin Lettau and Sydney Ludvigson on what moves the market.
There is little mystery that the real value of the stock market drifts upward over long periods in a largely predictable way as productivity (driven by technological progress) improves. This same deterministic trend has also propelled output per capita and the average standard of living upward over the last several centuries. It is instead the random shocks, the boom and busts around this trend, about which we have little knowledge, yet on which a continuous stream of media speculation centres. Such random shocks can persistently displace the market from its long-term trend for periods as long as several decades. What drives these movements in the market?
They identify 3 types of shocks that account for market fluctuations around the long-term trend:
For example a company may experience a surge in output through improved technology. The share of increased earnings paid to workers will determine the level of profits remaining for distribution to shareholders. I illustrated this recently in a graph of the inverse relationship between employee compensation and corporate profits as a percentage of value added.
The current “Grexit” turmoil is an example of the third factor, investor risk tolerance, where output and factor shares are unaffected but investor willingness to hold stocks decreases. The increased risk premium demanded causes market valuations to fall while earnings are unaffected.
….We find that these shocks explain the vast majority (87%) of fluctuations in quarterly stock wealth growth, implying that we can decompose almost all of the variation in the US stock market into components corresponding to these three sources of economic variation. We find that:
When we measure variation in the stock market over short to intermediate horizons (i.e. over months, quarters and business cycle frequencies), fluctuations in stock market growth are dominated by shocks to risk tolerance that have no discernible effect on the real economy.
Over longer horizons (i.e., over years and decades), 40-50% of the variation in stock wealth growth can be attributed to factors share shocks–those that move the stock market in one direction and labour income in the other.
Shocks to productive technology have a very small effect on fluctuations in stock prices at all horizons.
This does not mean that we should ignore market valuation. High earnings multiples are more prone to shocks than low ones. But we can ignore secondary influences on risk premiums — I call them “media corrections” — caused by market noise. The study also confirms that fluctuations in factor shares (or profits as a percentage of value added) can last for more than a decade; so reversion of US profit margins to the mean may take some time.
Let us start with Warren Buffet’s favorite market valuation ratio: stock market capitalization to GDP. I have modified this slightly, replacing GDP with GNP, because the former excludes offshore earnings — a significant factor for multinationals.
The ratio of stock market capitalization to GNP now exceeds the highs of 2005/2006, suggesting that stocks are over-valued — approaching the heady days of the Dotcom era.
If we dig a bit deeper, however, while the ratio of market cap to sales is also high, market cap to corporate profits remains low.
Clearly profit margins have widened, with corporate profits increasing at a faster rate than sales. The critical question: is this sustainable?
At some point profit margins must narrow in response to rising costs. Increases in aggregate demand may lift employment and sales, but also drive up labor costs.
The brown line above depicts labor costs as a percentage of net value added, compared to corporate profits (blue) as a percentage of net value added. There is a clear inverse relationship: when labor costs rise, profit margins fall (and vice versa). At first the effect of narrower margins is masked by rising sales, but eventually aggregate profits contract when sales growth slows (gray stripes indicate past recessions).
Other contributing factors to high corporate profits are interest rates and taxes. Corporate profits (% of GNP) have soared over the last 30 years as bond yields have fallen. The benefit is two-fold, with lower interest rates reducing the cost of corporate debt and lower finance costs boosting sales of consumer durables.
Lower effective corporate tax rates (gray) have also contributed to the surge in profits as a percentage of GNP.
The most enduring of these three factors (labor costs, interest rates, and tax rates) is likely to be taxes. Corporate tax rates have fallen in most jurisdictions and US rates are high by comparison. Even if a long-overdue overhaul of corporate taxation is achieved in the next decade (don’t hold your breath), the overall tax rate is likely to remain low.
The other two factors (labor costs and interest rates) may not be sustainable in the long-term but it will take time for them to normalize.
Treasury yields are rising, with the 10-year at 2.37 percent. Breakout above 3.0 percent still appears some way off, but would confirm the end of the 35-year secular down-trend.
Interest rates are likely to remain low until rising labor costs force the Fed to adopt a restrictive stance.
Labor markets have tightened to some extent, as indicated by the higher trough on the right of the above graph. But this is likely to be slowed by the low participation rate, with potential employees returning to the workforce, and a strong dollar enhancing the attraction of cheap labor in emerging markets.
Hourly earnings growth in the manufacturing sector remains comfortably below the Fed’s 2.0 percent inflation target. Any breakout above this level, however, would be cause for concern. Not only would the Fed be likely to raise interest rates, but profit margins are likely to shrink.
None of the macroeconomic and volatility filters that we monitor indicate elevated market risk. I expect them to rise over the next two to three years as the labor market tightens and interest rates increase, but for the present we maintain full exposure to equities.
India’s Sensex is testing primary support at 26500. Breach would signal a primary down-trend, confirming the signals from 13-week Twiggs Momentum & Money Flow, both of which have crossed below zero. Twiggs Momentum has been warning of a reversal with a bearish divergence since late 2014, while Twiggs Money Flow chimed in from March 2015. Breach of support would offer a target of 23000. Recovery above the descending trendline is unlikely, but would suggest another rally.
* Target calculation: 26500 – ( 30000 – 26500 ) = 23000
The S&P/NSE Nifty index tells a similar story, testing primary support at 8000. Breach would offer a target of 7000*.
* Target calculation: 8000 – ( 9000 – 8000 ) = 7000
ASX 200 support at 5750, 5650 or 5550: which is most relevant? Judging by some of the questions received, I succeeded in confusing a number of readers. Here is a brief summary:
Mild decline of 13-week Twiggs Money Flow suggests medium-term selling pressure — not a reversal. Recovery above 5750 remains more likely than breach of 5550.
* Target calculation: 6000 + ( 6000 – 5750 ) = 6250
The Shanghai Composite is consolidating between 4000 and 4500. Breach of either of these levels would signal future direction. Declining 13-week Twiggs Money Flow warns of medium-term selling pressure, favoring the downside.
* Target calculation: 3500 + ( 3500 – 2500 ) = 4500
Short retracement on Japan’s Nikkei 225 Index is a bullish sign. Breakout above 20000 would offer a target of 22000*. Declining 13-week Twiggs Money Flow reflects medium-term selling pressure; recovery above the descending trendline would be a bullish sign.
* Target calculation: 20000 + ( 20000 – 18000 ) = 22000
India’s Sensex found support between 26500 and 27000. Long tails suggest medium-term buying pressure. Recovery above 28000 and the descending trendline would suggest another attempt at 30000. But 13-week Twiggs Money Flow remains below zero, warning of (long-term) selling pressure. Another peak below zero would warn of breach of primary support and a reversal.
Germany’s DAX encountered support above 11000. Penetration of the descending trendline would indicate the correction is over and follow-through above 12000 would suggest a primary advance. Declining 13-week Twiggs Money Flow warns of continued selling pressure and a further test of 11000, but respect of support remains likely and would provide a solid base for further advances.
The Footsie also displays long tails, suggesting medium-term buying support, but declining 13-week Twiggs Money Flow indicates continued selling pressure. Breach of 6900 would warn of a correction to 6700, but further losses are unlikely at present. Recovery above 7100 would confirm the long-term breakout, offering a target of 8000*.
* Target calculation: 7000 + ( 7000 – 6000 ) = 8000
Stocks are recovering from their recent soft patch and breakout above resistance is likely, signaling further gains.
The S&P 500 is testing medium-term resistance at 2120. Breakout would signal an advance to 2200*. Three weekly candles with long tails reflect medium-term buying pressure, while a 13-week Twiggs Money Flow trough high above zero indicates long-term pressure. Retracement that respects the new support level at 2100 would further strengthen the bull signal.
* Target calculation: 2120 + ( 2120 – 2040 ) = 2200
CBOE Volatility Index (VIX) at 12 indicates low risk typical of a bull market.
Dow Jones Industrial Average is testing resistance at 18300. Buying pressure appears similar to the S&P 500 and breakout would offer a target of 19000*.
* Target calculation: 18300 + ( 18300 – 17600 ) = 19000
Canada’s TSX 60 found support at 870. 13-Week Twiggs Momentum holding above zero continues to indicate a primary up-trend. Breakout above 900 would offer a long-term target of 1000*.
* Target calculation: 900 + ( 900 – 800 ) = 1000