Many market periodicals and news programs reported that there was no real catalyst for yesterday’s decline, but that is not how we see it. On Monday we predicted weakness in early August. Things have been building up for the last few weeks and it started on Tuesday when the S&P (SPU14.CME) reversed and never looked back.
What a difference a week makes
While the talking heads are saying there was no main reason for the selloff, we thought we would name a few potential “hot spots,” starting with the speculation about the Fed raising rates in 2015. While there was no flight to quality between the S&P and the bonds yesterday, there has been an obvious shift. The public is scared and all the talk about the a stock market bubble and all the debt piling up is shaking the foundation of the stock market. But there’s plenty more for worriers to worry about…
- The S&P is up nearly 190% since making its March 2009 lows
- The Fed just completed its 6th taper
- The stock market broke a five-month winning streak
- Earnings disappointed after optimistic expectations
- Portugal’s Banco Espirito Santo failed
- Argentina defaulted on its debt, which affects the eurozone at a critical time
- The DAX fell 4.3% in July, its largest loss since May 2012
- The U.S. ramped up its sanctions on Russia
- Gold, crude and Treasury notes are all falling
- Wars in the Ukraine, Gaza, Libya, Syria, Somalia, Pakistan, Afghanistan, Nigeria, Central African Republic, and Iraq—and that’s just the ones that have claimed 1000 or more lives in 2014.
The markets have been looking for a good reason (or excuse) to pull back. The government cannot support the markets forever and all the money it has printed is going to have to be paid back. Rates can’t stay at zero forever. The after-effect of the 2007 credit crisis and the end of the government’s quantitative easing programs and associated drop in liquidity is now and will remain a problem for U.S. and global markets. It’s like we are just finishing the part of Star Wars where we escape from Darth Vader. We haven’t blown up the Death Star yet and we still don’t know when and how hard the Empire will strike back. Yes, some things are best explained with movie analogies. On the positive side, Israel and Hamas begin a three-day truce today. Let’s hope this injects some Friday optimism into the markets and, more importantly, into all of us who pray for peace. In Asia 11 out of 11 markets closed lower and in Europe 12 out of 12 markets are down. Today’s economic and earnings schedule includes the motor vehicle sales number, jobs number, personal income and outlays, PMI Manufacturing Index, consumer sentiment, ISM Mfg Index, construction spending and earnings from Chevron (NYSE: CVX), Procter & Gamble (NYSE: PG), Enbridge (NYSE: ENB), and PBF Energy (PBF).
S&P down three in a row, 5 of the last 6
Our view: The S&P had its worst day since April 10 and had its first monthly loss since January. It’s been a long time coming. The question is how long can this selloff last? As of yesterday’s close the Emini S&P (ESU14.CME) has been down 3 in a row (July 29 -9.9, July 30 -21.0, July 31 -40.3) It’s already been a long week, but today is packed with economic reports, not just the jobs number. That said, we have to go with the flow, and right now that’s on the sell side. The S&P is loaded with downside sell stops and if the news is bad this morning we could be facing another big down day. We had it partially right yesterday: buy the early weakness and sell the rallies. But it turned out there was no early rally— it was all down. With the futures going from 6 higher to 14 lower in Globex this morning and the jobs report out at 7:30 we think it best to wait on the data before making any day trading calls. This has been a long time coming and while we hope that markets don’t crash we can’t rule it out… Video: A VIX Rip, and a BIG S&P Dip As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 of 11 markets closed lower: Shanghai Comp. -0.74%, Hang Seng -0.91%, Nikkei -0.63%.
- In Europe 12 of 12 markets are trading lower: DAX -1.98%, FTSE -1.37%, MICEX -0.86%
- Fair value: S&P -5.59, NASDAQ -7.18, Dow -66.13
- Total volume: 2.76M ESU and 11K SPU traded
- Economic and earnings valendar: Motor vehicle sales number, jobs number, personal income and outlays, PMI Manufacturing Index, consumer sentiment, ISM Mfg Index, construction spending and earnings from Chevron (CVX), Procter & Gamble (PG), Enbridge (ENB), and PBF Energy (PBF).
- E-mini S&P 5001913.00-19.00 - -0.98%
- Crude104.30-0.12 - -0.11%
- Shanghai Composite0.00N/A - N/A
- Hang Seng24648.26+48.18 - +0.20%
- Nikkei 22515320.31-154.19 - -1.00%
- DAX9189.74+35.601 - +0.39%
- FTSE 1006682.48+4.96 - +0.07%