​Market Correction That Began on October 10th Is Not Over

Michael Markowski  |


The market correction which began on October 10 is far from over. The lifting of the restrictions for share buybacks by corporations who are reporting earnings for their fiscal periods ended September 30 will not matter. Two things happened during the week ended October 19th, which will cause the markets to have a peak to trough correction of at least 10% before the uptrend for the 2009 secular bull could potentially be re-established. They are the price action for Netflix  (NFLX) shares and the news about September’s real estate statistics.

Netflix

What happened to Netflix’s shares last week indicates that the S&P 500 can-not stabilize at its current level. Throughout 2018, Netflix shares have ranked at the very top or near the top of the market’s best top performers. It’s one of the members of FANGAM, an index which is comprised of six tech companies, that I created to conduct research on the S&P 500 for my October 9th “Day of Reckoning Approaching for Market” article. After Netflix reported record earnings and handily beat their new subscriber estimates its share price reached $380.00, the high for the week on October 17th. When the market sold off on Thursday Netflix shares fell back to the price that they were trading for prior to their day earlier earnings announcement. On Friday October 19th Netflix’s share price fell by four percent and closed down for the week.

The inability for Netflix shares to hold their gains after reporting record earnings, which were above Wall Street estimates, and instead closing down for the week speaks volumes for Netflix and the market. Based on Netflix’s price action its shares are not attracting new investors and that its current shareholders are not adding to their positions. Most importantly, traders and not investors are in control of the market for Netflix shares as indicated by there being a lack of firm bids at the closing price the day before earnings were released closing price. The lack of conviction that investors have for Netflix, a company for which 25 Wall Street analysts have “buy” or “strong buy” recommendations on the shares underscores the market’s house-of-cards foundation.

Real Estate

The daily email report that I got from Bloomberg after the close of the market on Friday caught my eye. The lead subject “Housing doldrums leave analysts out in the cold” for the email was about the downturn of real estate gaining momentum.Below are the excerpts from the Bloomberg article:

  • The U.S. housing market is slowing down, and that's giving a chill to economists who see it as sign of bad things to come. Sluggish sales and falling rents indicate developers may have added too much inventory. And while banks are pulling back from real estate lending, non-banks are rushing in to fill the void.
  • Sales of previously owned U.S. homes eased in September to the weakest pace in almost three years, a sign that rising prices and mortgage costs are keeping potential buyers on the sidelines. The sixth-straight monthly drop in sales is the longest streak since 2014.
  • Rents are on the decline too, a bad omen for builders who may have already filled cities with too many amenity-rich apartments that were built for gains that won't exist, according to Zillow. Developers are selling into overpriced markets with higher construction costs and are finding it harder to pass those expenses on to customers. With a slowdown expected to last through the coming year, shares are suffering.
  • Banks held back by post-crisis limits are curtailing their lending to builders, but that's not stopping the flow of money. Funding by more lightly regulated sources of capital, including debt funds and mortgage REITs, was up more than 40 percent in 2017 to almost $60 billion. The result: a decline in lending standards and even more inventory added.
  • Policy makers are only starting to recognize the "possibility" of a significant weakening in the housing sector. Research suggests the housing market has already entered a cyclical downturn that's likely to intensify, says Bloomberg Opinion's Lakshman Achuthan.

The surfacing of the real estate data on Friday was likely the cause of the S&P 500 selling off by 30 points from its high and to close even on the day. When this new data becomes digested by professional investors the bullish sentiment will decrease and the bearish sentiment will increase. Therefore, the probability has increased that the S&P 500’s September 20, 2018, all-time high will be the high for the secular bull market which began in 2009. The reason why the market and the S&P 500 has to correct by at least 10% is because the percentage is the rule of thumb that most professional investors and traders use to buy market dips.

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To better understand my math as well as to learn about the secular bear market and the recession-investing strategies that I am recommending from now through 2030, watch my recently taped two-part interview. A private pre-screening of my two-part interview, which will be broadcast on the Fox Business channel at the end of October is available NOW exclusively to BullsNBears.com’s alert subscribers. Click here to subscribe to BullsNBears.com free alerts.

Below are my most recent must-read articles pertaining to why I believe that the market will be substantially lower in the coming weeks and months:

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Disclaimer. Mr. Markowski’s crash predictions are frequently ahead of the curve. The September 2007 predictions that appeared in his EquitiesMagazine.com column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While warnings were accurate, they proved to be premature. For this reason he had to advise readers to get out a second time in his January 2008 column entitled “Brokerages and the Sub-Prime Crash”. His third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. In that article “The Carnage for Financials Isn’t Over” he reiterated that share prices for Goldman and Morgan Stanley were too high. By the end of November 2008, the share prices of both had fallen by an additional 60% and 70%, respectively — new all-time lows.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
NFLX Netflix Inc. 270.60 -15.61 -5.45 13,194,211 Trade
SPXS Direxion Daily S&P 500 Bear 3X 26.03 1.06 4.25 7,422,474
SPXL Direxion Daily S&P 500 Bull 3X Shares 42.08 -2.04 -4.62 5,432,829

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