In my opinion yes. Based on what I’ve seen in the past couple of weeks, stock investors may need to beware. While markets rarely go straight up or straight down, I believe the evidence suggests that over the next few months, the trend will be down. Here are some of the reasons:
One: Since the April highs in the US equity markets, the market has been making lower lows and lower highs for the most part.
Two: A “head-and-shoulders top” has formed in many US Equity markets. Technical analysts use this term to describe a pattern of stock and/or index prices. The pattern has three peaks. The first and third peaks are shoulders, and the second peak forms the head. The “head and shoulders” formation is believed to be one of the most reliable trend-reversal patterns. The top formation is a bearish signal and indicates the possible beginning of a downward trend.
Three: At the beginning of July, the 50 day moving average of market values on major US indices passed below the 200 day moving average. Moving averages data is used by technical analysts to create charts that show whether a stock or indices’ average price over a defined period of time is trending up or down. This crossover is an infrequent occurrence and often precedes declines.
Four: The fundamentals are ‘catching up’ with equity market technicals. A Bloomberg report on August 21 reported that US jobless claims are up and US manufacturing activity is slumping.
Five: Deflation talk is resurfacing. While I’ve been saying for months that debt is by its very nature deflationary, mainstream media is now beginning to discuss the dreaded “D” word. This from an article in The Daily Caller on August 21, 2010 (highlighting added):
Rising job losses and “unusual uncertainty” within the economy have prompted the Federal Reserve and other major financial institutions to slash growth projections for the rest of 2010, leaving Americans worried about the possibility of a dreaded “double-dip” recession. But it’s another “D” word that currently has investors spooked—deflation.
With mortgage rates at record lows and Treasury rates are at their lowest since March 2009—when the S&P dropped all the way to its ominous 666 bottom—the markets aren’t just hedging against the possibility of deflation; they’re expecting it. Todd Harrison, founder and CEO of the financial news and commentary site Minyanville.com, isn’t surprised.
“All roads ultimately lead to deflation,” explained Harrison in an interview with The Daily Caller. “We should have been allowed to take our medicine after the tech crash, but instead, the government gave us fiscal and monetary painkillers to reflate the market. It was about masking the symptoms rather than addressing the disease. Now we have a ‘last gasp’ to reflate one more time. ”
That “last gasp” is already stalling. According to the Bureau of Labor Statistics, after massive economic intervention by the government and Federal Reserve generated moderate inflation in the second half of 2009, total inflation in 2010 has been 0.0%. July’s slight uptick in prices generated positive headlines, but the news was tempered by the fact that, after accounting for volatile food and energy swings, monthly inflation had actually slowed.
Deflation concerns at the Fed have risen as the recovery has stumbled. James Bullard, president of the St. Louis Fed, warned that the economy is at risk of “a Japanese-style deflationary outcome” before last week’s Federal Reserve meeting, which concluded with the decision to effectively “re-print” money originally created to fight the deflation of 2008.
The problem, said Harrison, is the extreme level of debt weighing down on the economy. “The debt virus has infected all three levels—consumer, corporate, and government. We’re at the beginning of a debt unwind that’s going to take years, and the destruction of debt is a bitter pill to swallow.”
Upside-down households across the country are trying to pay down their debts, with outstanding consumer credit contracting in 19 of the past 21 months. But as Americans retreat, their reduced spending on goods and services causes prices to fall. “It certainly looks like households are tapped out,” said Rolfe Winkler of the Wall Street Journal via email. “Debt to disposable income is finally starting to come down after at least 60 years of expansion. That’s as far back as the Federal Reserve’s data goes.”
Recent Fed bank surveys also suggest that, overall, credit is contracting because of a lack of demand for loans, not because of a lack of willing lenders. Harm Bandholz, UniCredit Global Research’s chief U.S. economist, told Bloomberg that “it’s mainly a [credit] demand problem, and not so much about credit supply. The private sector is not responding to low interest rates and easing credit conditions.”
While no one indicator is accurate all the time, nor is it necessarily wise to make investment decisions based on a small number of indicators, I believe a combination of these 5 factors will lead to lower equity markets over the next several months.
How are you positioned?
No matter which investment philosophy you have, there are two questions every individual should answer before making an investment:
Under what circumstances will I exit my investment?
Are there protections in place that may help me maintain my investment principal during a market downturn?
Some investment portfolios employ exit strategies. Exit strategies are designed to lock in a profit or prevent a significant loss by determining at what predetermined point an investment will be sold. Although having a particular investment strategy does not ensure a profit and/or guarantee against loss, the volatility inherent in today’s markets may demand such type of management.
Securities offered through USA Advanced Planners (Member FINRA/SIPC). Advisory services offered through USA Wealth Management. USA Advanced Planners and USA Wealth Management are affiliated companies. The opinions expressed herein are those of the writer and not necessarily that of the above noted affiliated companies. The information and views contained in this entry are not necessarily that of the above noted companies. Any information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.
This entry may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be considered a guarantee. Prior to making any investment decision, the services of an appropriate professionals should be obtained in order to understand the risks, costs, and benefits associated with a particular investment.
