Sunday, August 27, 2017

Bull Bear Major Indicators

(Farah Ann Abdul Hadi)

There are tons of financial newsletters but the only one I read religiously is Maudlin Economics. His views are fair, mostly objective, minimal emotional attachment and logical. One of his recent articles entered on whether the bull run globally is over.

ET To Elliot ...

The Elliott Wave Principle, all the rage in the 1980s, is less influential now but is still watched by the technical analysis team at Goldman Sachs. The Elliott Wave comprises sequential upward and downward market moves – “waves” – that form repeating cycles. A full cycle has eight waves. Waves 1–5 are bullish, with only minor pullbacks between. Waves 6–8 are corrective, or bearish, and you do not want to be long when they happen.

The market is presently in wave 4, according to Goldman market technician Sheba Jafari. That means the next downturn will be limited and followed by another bullish wave. Then we would see a bigger correction.

200 Day Moving Average

The 200 day MA is not a very solid indicator but as a guide to overall trend it gives you a lot of flags to be turn cautious. No point looking at Dow Jones index as the composition consists of too few stocks. Hence in order of importance, look at the S&P 500, the NASDAQ, Dow Jones and the Russell 2000. The first three are all above their 200-day moving average, and the Russell just dipped below its 200-day average.

Russell 2000 are the broadest in coverage and might have more retail attention and a lot less institutional interest. The bulk of the market is "controlled" by big funds' movements and not retail.

Hence when the more important indices start to break 200 day MA on the way down, its a red flag to be cautious.

Corporate Earnings

When you buy a stock, you are really buying its future earnings: Each share’s price is the discounted present value of its expected future earnings. Prices change when expectations change, which happens for many different reasons.

The present bull market is still with us in large part because earnings are pretty good. With most of the second-quarter reports now in, FactSet reported in its August 11th letter a 10.2% blended S&P 500 earnings growth since the same period in 2016. Earnings grew in every sector except Consumer Discretionary.

Factors To Watch

The global bull run will continue to edge ahead as long as the following are intact, according to Maudlin Economics, and I agree:

1. Global growth would have had to decelerate. It is not.
(European growth is actually picking up. Germany blinked on financing Italian bank debt, and the markets now have more confidence that Draghi can do whatever it takes.)

2. Wages and inflation would have had to rise. They are not.

3. The Fed would have planned to tighten monetary policy significantly. It is not.
(They should have been raising rates four years ago. It is too late in the cycle now. They may raise rates once more, but the paltry amount of “quantitative tightening” they are likely to do is not going to amount to much.)

4. The ECB would have to tighten policy substantially. It will likely not.
(Draghi will go through the motions, though he knows he is limited in what he can actually do – unless for some unexpected reason Europe takes off to the upside. And while Eastern Europe is actually doing that, “Old Europe” is not.)

5. Credit growth would have had to be surging. It is not.
(Credit growth is generally picking up but not surging. And most of the credit growth is in government debt.)

6. Equities would have had to be expensive relative to bonds. They are not.

7. Investors would have had to be euphoric about equities. They are not.

8. High-yield spreads would have had to be widening. They are not.
(I pay attention to high-yield spreads, a classic warning sign of a turn in market behavior. Are they at dangerous levels? Damn, Skippy, I cannot believe some of the bonds that are being sold out in the marketplace. Not that I can’t believe the sellers are willing to take the money – you’d have to be an idiot not to take free money with no strings attached. I just don’t understand why major institutions are buying this nonsense.)

9. The classic signs of excess would have had to be evident. They are not.

10. China’s credit binge would have had to threaten the global financial system. It does not.
(Xi has somehow managed to push off the credit crisis, at least for the rest of this year, until after the five-year Congress. Rather amazing.)

11. Global trade would have had to be weakening. It is not.

12. The US dollar would have had to be strengthening. It is not.


The longevity of the current global bull run has a lot more to do with the massive quant easing taken after the 2008 financial crisis. It has plugged many holes, but almost every central bank has NOT done anything to rein in the excess liquidity. While growth is evident over the last couple of years, the recovery is still very ginger in the most affected countries. No central bank is willing to tempt fate by pulling back the liquidity.

As long as that persists, interest rates environment will still be very low in the affected countries. That will play itself out into the various financial assets and instruments, making for a very "low risk" environment favouring equities.


bruno said...

Before the US subprime crash,US household debts were at an all time high.After the subprime crash,many household debts were written off.Late last year,US household debts were half trillion higher than before the crash.There may not be high inflation,according to the government officials.That is if we can take them at their words.

Real income have not improved much,at least for the working and middle class.It is only the rich getting richer.A country needs the working class to be able to spend.To be able to go shopping and be a food glutton.Shops in shopping malls in the US are having their doors shuttered for good,many times faster than new ones opening.Restaurants are not doing that well.Especially those that can seat hundreds of patrons,and many have gone out of business.Thousands of stores,many of them chains have closed this year.It is anticipated that 20k stores will close this year in the US alone.

The rich and super rich spendings cannot effect the whole economy.They go to shops and restaurants that people like the ordinary working class and me do not frequent.So 99 % or even higher of the business community do not benefit from the rich spending.Afterall,they are a minority of the less than .1% of the population.

In the US,the high risk can loans are in trouble.There are many more cars reprocessed than available spaces to store them.It could be the next subprime,only this time it is about cars and not houses.So at least the effect will not be that great.

Minimum wages in the big towns and cities in the US have gone up.This have effected the retail and fast food businesses more that the rest.In retail the stores cannot keep on raising prices as the online giants are already putting price pressures on them.Fast food restaurants have raised their prices,and as usual,it is the working class that frequent these joints.Not that business have only gone down,their staff have been cut too.Long queues at working hours have customers flocking to the roadside stalls.The worse is yet to come.

bruno said...

Dali,it has been a long time since I last visited your blog.Hope everything is well on your side.It is nice looking at the pictures of beautiful girls again.I feel like good trades are on the way.

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