The major averages fell hard last week as the sellers remain in control of this market. Stocks fell in September and are down hard again in October. Volatility is spiking which is another bearish sign. The action is outright bearish and we would not be surprised to see the market crash or experience a very large sell off in the very near future. The bigger concern from where we sit is something virtually no-one is talking about- What will happen when QE 3 Ends? So far, the action is bearish. Remember the S&P 500 (SPX) soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. It will be very interesting to see how the market reacts when QE 3 officially ends later this month. Since September 15, a slew of leading stocks, and the major averages, have been acting somewhat sloppy (erratic price swings). The small cap Russell 2000 (RUT) remains the weakest index and continues to woefully under-perform its peers which remains a concern. The last time all this happened was in March/April and that preceded the deepest pullback of the year (-6% decline in the S&P 500). So far this pullback is -5.60% under two weeks which is just about the normal depth of all the pullbacks this year.
Monday-Wed’s Action: Volatility Spikes
The market opened higher on Monday but quickly rolled over and closed modestly lower. One of the big headlines of the day came from a surprise announcement from Hewlett-Packard (HPQ) that it is going to split into two companies in an effort to bolster shareholder value. Another “surprise” came from GT Advanced Technologies (GTAT), which supplies sapphire glass to Apple (AAPL). Separately, the World Bank cut its 2014 and 2015 GDP views for China and industrial production slid 5.7% in Germany.
Stocks opened sharply lower on Tuesday after more weakness spread regarding the health of the global economy. The International Monetary Fund lowered its global growth forecast for this year and 2015. The IMF represents 188 countries and now believes that the global economy will grow at 3.3% in 2014, down 0.1% from its July forecast. They also lowered their 2015 forecast to 3.8%. Elsewhere, German industrial output fell by -4% in August, with the worse-than-expected and bodes well for Europe, since Germany is Europe’s largest and strongest economy.
Stocks rallied hard on Wednesday after the Fed released dovish (a.k.a. easy money) minutes from their last meeting. The market is focusing on when the Fed will raise rates. The minutes showed the internal discussion within the Fed shows they want to err on the side of caution and wait for further progress towards the committee’s inflation and employment goals. The global economy remains lackluster at best which is not ideal for the Fed’s outlook. Overseas, Australia lost a lot of jobs last month, missing estimates which bodes poorly for their economy. Also energy prices are virtually in free-fall as global demand continues to wane.
Thurs & Fri’s Action: Sellers Smack Stocks
Stocks plunged in heavy volume on Thursday, completely erasing Wednesday’s 274 point rally in the DJIA, as fear returned concerning the health of the global economy. The Dow fell over 330 points on Thursday which was the third straight triple digit move this week. This huge spike in volatility is bearish, not bullish action and is another signal that the market is forming a large topping pattern. Stocks furthered their losses after European Central Bank President Mario Draghi said there are indications that the euro zone’s economic growth is slowing and that central bankers should strive to boost inflation. Stocks were smacked again on Friday which bodes poorly for the market. The market looks very similar (not exactly the same, but the close) to how it did in 1987 and other huge declines.
Market Outlook: Bears Getting Stronger
We have been writing for weeks that the market is getting weaker, not stronger. That is exactly what is happening. We have also noted that the bull market is aging and is now in the process of forming a large topping pattern. Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). Furthermore, the S&P 500 has not experienced a 10% correction since 2012 which means that each day we get closer to that correction, not farther away from it. Remember a 10% decline from the recent high of 2019 would bring the S&P 500 down to 1817. As always, keep your losses small and never argue with the tape.