The sellers are clearly in control, as stocks, currencies and a slew of commodities plunged across the globe last week. The selling finally spilled over to the major US indices, sending them below very important support levels that we have highlighted repeatedly over the past few months (2,040 in the S&P 500). In a "normal" (non-13:Easy Money) world, we would say without a shadow of a doubt that the market formed a major top over the past six months and we are now headed into a steep correction, if not worse. The major wild card remains the Fed and other central banks. The Fed still has rates at zero and we believe they stand ready to embark on another round of QE (printing money) if conditions worsen. Remember, the Fed has put on the perfect hedge by saying they are data dependent: If the data improves it gives them the option to raise rates, and if the data deteriorates (present situation), they can easily justify another round of QE. The problem is that even with rates at zero and other central banks printing money, global economic demand remains lackluster at best. So the Fed's conundrum is that Main Street is barely growing, even with rates at zero. At this point, markets around the world are clearly forecasting another global recession and notwithinstanding more Fed easing, the path of least resistance is lower for stocks. Defense is king until the S&P 500 trades above 2040.
Monday-Wednesday's Action: Sellers Are In Control
Stocks opened lower on Monday, but quickly turned higher as investors digested the latest round of economic data. Before the open, the empire state manufacturing index plunged to negative -14.92, missing consensus for a positive 4.75. The housing market index rose to 61, matching estimates for 61 and signaling optimism from the National Association of Home Builders about the general economy and housing market conditions. Japan's GDP shrank by a -1.6% annualized rate in Q2 2015 which bodes poorly for the global economy.
Stocks slid on Tuesday after China's Shanghai Composite plunged by 6.2% (over 1,000 Dow Points). In the US, housing starts inched higher to 1.206M, beating estimates for 1.180M. This sent a slew of housing stocks sharply higher on the news. Separately, building permits fell by 16% to 1.119M in July. Permits missed estimates for 1.230M. On Wednesday stocks were clobbered after Crude Oil plunged to a fresh six-year low. The consumer price index rose to 0.1%, missing estimates for 0.2% and continued to signal deflation remains more of a threat than inflation. In the afternoon, the Fed released the minutes of their latest meeting which continued to show they remain "data dependent."
Thursday-Friday’s Action: Stocks Plunge Below Important Support
Stocks plunged on Thursday, sending the major US indices below very important support. For the past six months, the S&P 500 has been trading in a long trading range between 2,040 (support) and 2,134 (resistance). The S&P 500 sliced, and closed, below support on Thursday and turned negative for the year as sellers remained in control. China devalued their currency in the middle of August and then last week we saw Vietnam and Kazakhstan devalue their currencies. Kazakhstan allowed its currency to float freely and it plunged nearly 30% against he USD. That's a MAJOR move for a currency. The selling continued on Friday as investors dumped stocks ahead of the weekend. To be clear, defense is king right now.
Market Outlook: A Major Top?
Every bull market in history has a definitive beginning and an end. It is important to note that with each day that passes, we are getting closer to the end and further away from the beginning. This bull market is aging by any normal definition and celebrated its sixth anniversary in March 2015. The last two major bull markets ended shortly after their fifth anniversary; 1994-2000 & 2002-Oct 2007. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market. Join FindLeadingStocks.com.
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