Sunday, July 29, 2007

Market Internals Go Negative / Hussman

Last week could have been the turning point for the broader markets. I have to admit that i have thought this at least twice in the 6 month. And you know how much fear is in the market when there is a call for the Fed to step in when the markets are just a few percentage points away from a new high. Click on the headline to read the entire piece from Hussman

Habe das Gefühl das die letzte Woche einen Wendepunkt für die Märkte eingeleitet hat. Ich muß aber auch zugeben das ich dieses Gefühl bereits mindestens zweimal in den vergangenen 6 Monaten hatte. Und ein sicheres Anzeichen wie verzweifelt einige Marktteilnehmer sind ist das bereits bei einem überfälligen Pullback von nahe 5% lauthals nach der Fed gerufen wird. Klickt bitte auf die Überschrift um den kopletten Bericht von Hussman zu lesen.

Though the S&P 500 is only 6% below its recent highs, it has already provoked a surprising amount of denial and lack of civility, with an irritated financial news anchor suggesting on Friday, for example, that Pimco's Bill Gross should “just shut up.” It does no service to investors when the media and the analysts who appear there wholly rule out any possibility of a substantial further market decline, when 10% market losses have typically occurred more than once every 2 years, and bear market losses (generally 25-35%) occur about once every 4-5 years.
Abrupt market weakness is generally the result of low risk premiums being pressed higher. There need not be any collapse in earnings for a deep market decline to occur. The stock market dropped by half in 1973-74 even while S&P 500 earnings grew by over 50%. The 1987 crash was associated with no loss in earnings. Fundamentals don't have to change overnight. There is in fact zero correlation between year-over-year changes in earnings and year-over-year changes in the S&P 500. Rather, low and expanding risk premiums are at the root of nearly every abrupt market loss.

Market internals go negative
One of the best indications of the speculative willingness of investors is the “uniformity” of positive market action across a broad range of internals. Probably the most important aspect of last week's decline was the decisive negative shift in these measures. ....Still, the favorable market internals did tell us that investors were still willing to speculate, however abruptly that willingness might end.

Evidently, it just ended, and the reversal is broad-based. For example:
Credit spreads and credit default swap spreads are surging. While we haven't observed the spike in short-term spreads (e.g. 6 month commercial paper versus 6 month Treasury yields) that would indicate near-term recession risks, we are now seeing a “tiered” widening of credit concerns. For example, note that high yield (junk) securities have experienced upward yield pressure since early June (red line). In recent weeks, we've seen a spillover into credit spreads on investment grade securities (blue line). Again, we're not observing this in short-dated spreads, which would be a signal of imminent recession risks, but it's already clear that low risk premiums are being pressed decisively higher.....

As Jim Stack of Investech Research noted near the recent highs, “The DJIA has closed higher in 5 of the past 8 trading days, but declining stocks outnumbered advancing stocks in 7 of 8 of those sessions. That type of negative breadth divergence has occurred only 15 times in 75 years – the majority of which were in bear markets.” He also noted “On Monday of last week, the DJIA hit a record high while declining stocks overwhelmed advancing stocks by a 2:1 margin.” That divergence has never before occurred in market history, though again, lesser divergences have typically been characteristic of weakening markets. ....

Other interesting measures of “overbought” conditions are also worth noting. Last week, Jim Stack reviewed an observation that a technician named Don Hahn made in the 1960's about the Coppock Guide (a measure of price momentum based on the 10-month smoothing of the averaged 14-month and 11-month rate of change in the S&P 500). He observed that when a double-top or “wave” occurs in this measure, without falling to zero between those peaks, “it identifies a bull market that hasn't experienced any normal, healthy washouts or corrections. That's a runaway market usually headed for disaster. This double-top has occurred only 6 times in 80 years.” Those instances, and the subsequent market losses were:

  • October 1929 (-86.2%),
  • May 1946 (-28.8%),
  • February 1969 (-36.1%),
  • January 1973 (-48.2%),
  • September 1987 (-33.5%),
  • and April 1998 (though followed by an 18% market correction by October 1998, the subsequent recovery produced a third “shelf” in the Coppock Guide by 2000, and the market lost nearly half its value between 2000 and 2002).

I don't want to create any confidence that the market is headed for steep losses, but I do want to encourage shareholders not to rule out that sort of outcome. .... AddThis Feed Button

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