Sellers Are In Control & Germany's In A Bear Market

The following is an excerpt from a intra week update.

FLS Update: 10.07.14

Defense Is King

Market Forming A Large Topping Pattern & Germany Is In A Bear Market

The market is in the process of forming a large topping pattern that began earlier this summer and not surprisingly overlaps with the end of QE 3 (more on that below), almost perfectly. The small-cap Russell 2000 and Germany’s stock market (The DAX: Symbol EWG) both hit new 2014 highs in June/July then spent most of the summer moving sideways as the S&P 500 and Nasdaq steadily marched higher. Then in Early August (see chart) the DAX violated support of its large top and is now in a bear market (defined by a decline of >20%). The Russell broke below support last Thursday which we covered in that day’s intra-week update. The Russell’s breakdown was a bit “obvious” and the market was oversold, so we bounced for a few days before before the S&P 500 hit resistance near its 50 DMA line yesterday before rolling over and falling hard today. Today is the first day the Russell 2000 actually closed below support of its large multi-month flat base (e.g. top pattern). This action is outright bearish and if the other popular averages (DJIA, SPX & Nasdaq) take out support then we are in for a nice (and long overdue >10%) correction in the S&P 500 and other popular averages. So far, even with all the damage/ugly action, the S&P 500 is “only” down -4.1% from its ALL-TIME high.

Market’s Biggest Problem

We have been writing to you for weeks letting you know our thoughts regarding QE. We wrote, “From where we sit, the biggest problem, that virtually no one is talking about right now, is what will happen when QE 3 ends? Remember, when QE 1 ended, the S&P 500 fell -17%, when QE 2 ended it fell -22%. What will happen when QE 3 ends? The reality is no one, not even the Fed, knows the answer to this question… The “good” news is that Central Banks have said the easy money train is here to stay and if conditions worsen, they have made it clear that they have no problem providing more “liquidity” (e.g. QE 4, anyone?), If needed.” Clearly, this is a bearish signs and it will be interesting to see how it plays out. Furthermore, historically, several major market crashes, including the 1929 crash (here), occurred in October, so clearly defense is KING until further notice. We are not fear mongers, instead we are evidenced based thinkers and always let the facts guide us. It is perfectly normal and healthy to see markets bottom and top. The key is to remain flexible in our approach and “change when the facts change.”

FLS Portfolio:

Thankfully the FLS Portfolio  is acting well considering all the damage on Wall Street recently. We have received quite a few “Thank You” emails and phone calls over the past few weeks, thanking us for our ability to successfully navigate an otherwise difficult tape.  As you can see from our approach, we did the bulk of our buying earlier in the year and have refrained from aggressively buying stocks in recent months. We are just responding to what we “see” unfolding in the market. If this selling continues, we will begin looking at the short side since FLS is a long/short service. As of Tuesday’s close,


Members only

Germany Is In A Bear Market:


Russell 2000 Breaks Support Of Large Topping Pattern:


Inter-market Analysis: