Stock Markets Bracing For Recession?

Bull Vs. Bear Debate Continues.

As the major stock market indexes plunged during most of October, fear began to grip Wall Street.  On October 29th, the intraday trading range for the stodgy Dow Jones Industrial Average was nearly 1000 points.  The lows lasted a fraction of a second, however.

Within the next 24 hours, the Dow regained the 1000 points.  In the next ten days, the Dow rallied 2200 points to reach 26,200.  This rally, following the midterm elections, brought the Dow to within a few hundred points of all-time highs.

The market debate shifted to whether the “Correction” had ended.  Was the October swoon just another opportunity to buy cheap?

The two-week rally from 24,000 to 26,200 fit the profile of a “Bear Market Rally” to a tee.  Rallies are short, sharp and designed to scare traders off who might look for opportunities in a declining market.

The “signature” and other characteristics of Bear Market Rallies is described in more detail here: “Characteristics of Bear Market Rallies” (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).  The importance of understanding how Bull Markets and Bear Market rallies differ cannot be understated.

The function of Bear Market Rallies is to keep individuals hopeful, buying, and holding.  Mr. Market HATES anyone who takes money off the table and realizes profits.

Stock Markets Approach the “Waterfall Zone”.

Since touching 26,200 and removing much of the tension and fear from market players, the Dow has since given back virtually the entire 2200-point gain.  In fact, each of the major equity indexes are dangling just above their 2018 lows, from which each has bounced several times.  

The Slide Show below shows just how precariously close the indexes are to making new lows and entering the “Waterfall Zone”.

The “Waterfall Zone” is a wide range of potential downside exposure for each of the indexes.  The Waterfall Zone is the opposite side of the final, frenzied advance that took place in each of the indexes.  Very little trading took place in the Waterfall Zone on the way up and, therefore, there is very little support on the way down.

Making the situation worse is the breathtaking intraday volatility in the indexes.  Through yesterday, there have been 37 trading days since October 1.  Out of those, the Dow has had either a 100-point gain or loss on 29 of them.  On more than half of those days, 20, the Dow has gained or lost AT LEAST 200 points.  On NINE of those 37 trading days, the Dow has lost or gained 400 points!

Yet, despite the stunningly high intra-day volatility, the Dow, Standard & Poor’s 500, Nasdaq 100, and Russell 2000 have gone almost nowhere for 2018 as a whole.  Each of the major indexes is within 5% of where they stood as 2018 began.  Traders and strategies requiring trading are no doubt having sub-par years.

Interest Rates Reverse Course Amid Apparent Economic Weakening.

Interest rates have been kept at or near zero for most of the last decade while economic growth remained anemic.  Recently, the Federal Reserve has signaled that it would gradually raise rates to “neutral”.  In other words, to a level that would be neither restrictive nor accommodative.  Fed plans call for an additional hike in December of this year and 3 more next year.

Until very recently, Treasury rates have been below 3% across all maturities longer than 5 years.  In the last couple of weeks, rates have climbed above 3% for 5 Year Treasuries, 10 Year Treasuries, and 30 Year Treasuries.  In so doing, interest rates established a new, but apparently strong, trend of rising.  With the economy reportedly stronger than it has been in at least a decade, interest rates would normally be expected to “rise”, especially with the announced intentions of the Federal Reserve.

From the Slideshow on rates below, the Five-Year Treasury has, however, made NEW recent Yield “Lows”!  The Ten-Year Treasury which broke the 3.1% barrier, has now traded back to 3.05% and established a series of lower lows.  Only the Thirty-Year Treasury remains above its breakout point of 3.25%, but it has lacked any follow through corroborating the myth of a strong economy.

Normally, lower interest rates are a positive for the stock markets and the economy.  NOT SO, however, when they reflect economic weakness.

For additional reading on interest rates, inflation, and how they affect the economy, feel free to review: “Asset Bubbles Start Popping as Interest Rates Surge” (https://markonomics101.com/2018/10/07/asset-bubbles-start-popping-as-interest-rates-surge/).   More valuable information can also be accessed here: “Inflection Point (Part 5): Interest Rates, Inflation, and Inflection” (https://markonomics101.com/2018/09/03/inflection-point-part-5-interest-rates-inflation-and-inflection/).

Four Horsemen (of the Nasdaq Collapse) Lead the Bear Market Lower.

“The Four Horsemen” are comprised of the 4 Mega-Capitalization Companies which exert a disproportional influence on the indexes.  Apple (AAPL), Amazon (AMZN), Google (GOOGL), and Microsoft (MSFT), which are in a valuation league of their own, account for nearly 25% of the Nasdaq 100.

For most of 2018, the Four Horsemen singlehandedly pulled up the large capitalization indexes.  At one point, both AAPL and AMZN sported market capitalizations in excess of $1 Trillion.  The Four Horsemen combined, peaked at just less than $4 Trillion, an amount which exceeded the ENTIRE 4000 issue Nasdaq value as recently as January 2013.

Some more detailed background and amazing statistics on the Four Horsemen can be accessed here: “The Four Horsemen of the Nasdaq Collapse” (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/).

The Four Horsemen are now in full reverse as the Slideshow below illustrates.  With so much “Horse” power pulling the market indexes lower, how long will the major indexes be able to stay above the “Waterfall Zone”?

AAPL looks to be in Freefall and has sliced right through its “Waterfall Zone”.  Both AAPL and MSFT are Dow components AND major Nasdaq components.

GOOGL is within a whisker of making NEW 52 WEEKS LOWS!  Is this consistent with a BULL Market?

Amazon has lost nearly 30% from its highs of 2050 reached just weeks ago.  Proponents of AMZN point to the prospect of the strongest holiday season in years if not decades.  What if projections are too optimistic because the economy is weakening?

The Debt Mountain is Becoming Insurmountable.

Debt is reaching unmanageable proportions for the Federal Government, Corporate American, and plain old folks like you and me.

The Federal Budget deficit is running at close to $1 Trillion per year, even as tax revenues are being sucked out of the economy at record levels (http://www.usdebtclock.org/).

As the graphic shows, Corporate Debt is at very high levels compared to GDP.  It is at levels which historically have preceded severe financial crises and recessions (https://www.zerohedge.com/news/2018-11-18/how-bubbles-stocks-and-corporate-bonds-will-burst).

Consumers too, are choking on debt.  Household debt, has just reached a record $13.5 Trillion.  This record EXCEEDS the prior peak last seen in early 2008, just before the financial system imploded (https://www.nbcnews.com/business/consumer/household-debt-hit-record-high-13-5-trillion-last-quarter-n937216).

Economic Bombs Continue to Explode.

Bull Markets have a tendency to mask problems in either individual companies or the economy.  BEAR Markets, on the other hand, create the environment for “explosions” to occur.

The stock markets are currently absorbing an Explosion Trifecta of General Electric, Junk Bond Spreads, and Plunging Oil prices.  See the Slideshow below:

General Electric, not so long ago, WAS the Market Leader of the last decade.  It has annual revenues of $120 Billion with operations in 7700 different business including appliances, nuclear facilities, and heavy machinery.  Its GE Capital subsidiary had nearly $500 Billion in assets with operations in 40 countries as recently as 2014.

Crude Oil prices, as measured by West Texas Intermediate Crude (WTIC) have fallen further to $53/barrel, a 30% decline in just 4 weeks.  While lower oil prices, like lower interest rates are normally a benefit to the economy, they are NOT if they indicate that demand is plummeting.

The plunge in prices not only reflects a sharply slower increase in world demand but imperils the credit quality of a number of bond issuers for whom the crude reserves act as collateral.

If the economy continues to weaken, the explosions in GE, junk bonds, and Crude Oil prices are just the beginning.  They are but the leading indicators.  Before the BEAR has completed its job, it will carve out a wide swath of financial destruction.

 

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