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Technically Speaking: Too Many Bears Looking For A Correction?

Are there too many "bears" looking for a correction?

When it comes to financial markets, there is one truism as noted in Bob Farrell’s famous investment…

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This article was originally published by Real Investment Advice

Are there too many “bears” looking for a correction?

When it comes to financial markets, there is one truism as noted in Bob Farrell’s famous investment rules:

“When all experts agree, something else tends to happen.”

Such makes perfect sense given that the “market” is a reflection of the psychology of “buyers” and “sellers.” Such is why sentiment plays such an important role in market expectations.

As an example, a recent Deutsche Bank survey found that 58% of the 550 global market professionals surveyed expect a 5-10% correction by year-end.

Of those managers, only 14% saw the index higher than it is currently, in the next 3-months.

There are many good reasons for concern beyond just a very extended period without a meaningful correction. Currently, the market has gone 319-days without a correction to the 200-dma.

A Wall Of Worry

As the Deutsche Bank strategists also noted:

“Are too many expecting it [a correction] will happen?”

Historically speaking, markets tend to climb a “wall of worry.” But, as noted above, when many Wall Street analysts expect something to happen, it is often profitable to bet in the opposite direction.

Over the last year, in particular, the market ignored concerns over valuations, the impact of the “Delta” variant, inflationary pressures, slowing economic growth, and numerous geopolitical events. Instead, as noted in “Investors Hold Record Allocations,” individuals have ramped up exposure to risk betting on the continuation of the Fed’s ongoing monetary interventions.

It is not surprising that equity ownership is at record highs and highly correlated to valuations. Such is the representation of rising prices on investor psychology. As a result, investors continue to chase overvalued equities until the eventual mean-reverting event occurs.

Such is also the very essence of the meaning of “climbing a wall of worry.” Despite the fact investors “know” they are overpaying for stocks, the “Fear Of Missing Out” leads to the dismal of concerns as “greed’ overtakes “logic.”

Currently, this is the phase of the cycle we are in now, and the desire to “buy the dip” outweighs concerns of a more significant correction.

As noted this past weekend, it is certainly possible the market can continue its low volatility advance for a while longer. However, historically speaking, low volatility has always led to higher volatility. The table below (courtesy of TheMarketEar,) shows the maximum drawdown in any given year. Note that years of minimal drawdowns always get followed by years of larger ones.

In other words, while there may be “too many bears” currently, it doesn’t mean they will be wrong.

The question is, when will the markets start paying attention to the risk?

Heed Thy Warnings

As noted this past weekend, there are numerous warnings from weakening breadth, lower participation, and negative divergences. Sentiment Trader provided additional commentary.

“To differentiate temporary slowdowns from real problems, we look for significant macro deterioration. The Macro Index Model combines 11-diverse indicators to determine the state of the U.S. economy. Investors should be bullish when the index is above 0.7 and bearish when below.

Once the final reports were in for August, the model plunged below 46%, the 2nd-lowest reading of the past decade.

Investors Allocation Warnings 09-10-21, Investors Hold Record Allocations Despite Rising Warnings 09-10-21

At the same time, Sentiment Trader noted their Bear Market Probability Indicator also jumped. This model has 5-inputs, namely the unemployment rate, ISM Manufacturing index, yield curve, inflation, and valuations.

“The higher the score, the higher the probability of a bear market in the months ahead. Last May, the model was in the bottom 10% of all months since 1950. This month, it jumped into the top 10% of all months.

Investors Allocation Warnings 09-10-21, Investors Hold Record Allocations Despite Rising Warnings 09-10-21

The combination of these two measures should not be overlooked. To wit:

“The chart below shows the spread between the Bear Market Probability and Macro Index models. The higher the spread, the higher the probability of a bear market. The chart shows that the S&P 500’s annualized return is a horrid -17.6% when the spread is above 20% like it is now.”

Investors Allocation Warnings 09-10-21, Investors Hold Record Allocations Despite Rising Warnings 09-10-21

Morgan Stanley Wealth Management’s Lisa Shalett is also predicting a 15% pullback for a market she sees as “priced for perfection.”

She, like us, has suggested raising cash levels, adding non-correlated assets, and reducing overall risk, stating:

“The strength of major U.S. equity indexes during August and the first few days of September, pushing to yet more daily and consecutive new highs in the face of concerning developments, is no longer constructive in the spirit of ‘climbing a wall of worry.’”

Being A Contrarian

There is a not so insignificant risk this market will shake off short-term concerns for the time being. Thus, a “buy the dip” opportunity could well be in the offing in the next few days. Such has repeatedly been the case since last November.

However, at some point, the markets will violate this upward trend and complete a retest of the 200-dma.

It is one of the few things of market dynamics that is virtually a guarantee. What will cause it, or when it will happen, is always unknown.

It is times like these I find it helpful to remind myself of something Howard Marks once wrote:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.

Moving against the “herd” is where investors generate the most profits in the long term. But, unfortunately, the difficulty for most individuals is knowing when to “bet” against those who are being “stupid.”

Portfolio Actions To Take Just In Case

As noted above, there is a reasonable possibility the market could bounce as “Pavlovian investors” once again “buy the dip.” However, there is also a possible risk of a correction between 5% and 10%.

Unfortunately, I don’t know which it will be until we start seeing definite signs of the market breaking down. At that point, it will be too late to make adjustments. Such is why, as we have stated previously, this is an opportune time to get in front of risk by taking some simplistic actions.

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against major market declines. (Cash, Non-correlated Assets, Direct Hedges)
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

These actions will not protect you entirely from a decline. They will, however, lessen the blow and allow you to rebalance risk accordingly where the time comes.

Or, you can do nothing and hope for the best.

The post Technically Speaking: Too Many Bears Looking For A Correction? appeared first on RIA.

Economics

Foreigners Sold The Most US Stocks In July Since 2007 ‘Quant Crash’, China Bought Treasuries

Foreigners Sold The Most US Stocks In July Since 2007 ‘Quant Crash’, China Bought Treasuries

In the latest TIC data – from July – Treasuries…

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Foreigners Sold The Most US Stocks In July Since 2007 'Quant Crash', China Bought Treasuries

In the latest TIC data - from July - Treasuries (and agency debt) were bid by foreigners as a wave of fear crossed the globe over the Delta variant, and stocks (and corporate bonds) were dumped en masse.

  • Foreign net buying of Treasuries at $10.2b

  • Foreign net selling of equities at $34.3b

  • Foreign net selling of corporate debt at $11b

  • Foreign net buying of agency debt at $20.7b

In fact, July saw the second biggest selling of US stocks by foreigners since the August 2007 Quant Crash (as the re-emergence of COVID - in its Delta variant - sparked fear across markets mid-month before bank buybacks rescued them)...

On the bond side, China broke a 4 month streak of selling and bought $6.35bn of US Treasuries in July...

Source: Bloomberg

Japan’s holdings climbed in July by $30.5b to a record $1.31t

Source: Bloomberg

Luxembourg, Belgium, and Switzerland all saw notable selling of US Treasuries in July.

Finally, we note that the trend of 'rotation' from bonds to gold has continued in recent months...

Source: Bloomberg

Will that trend change or accelerate next week if The Fed hints at tapering?

Tyler Durden Thu, 09/16/2021 - 16:16
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Precious Metals

The United States reported a 0.7% rise in retail sales. Should I sell Gold?

The gold price has weakened more than 2% this Thursday and reached the lowest level in a month after the U.S. dollar climbed following a better than expected…

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The gold price has weakened more than 2% this Thursday and reached the lowest level in a month after the U.S. dollar climbed following a better than expected rise in U.S. retail sales for August. The United States reported a 0.7% rise in retail sales, raising investors’ expectations that the Federal Reserve will soon begin tapering down monthly bond purchases.

Fundamental analysis: U.S. retail sales figures put pressure on Gold

Gold price remains under pressure this Thursday after the U.S. dollar climbed following a better than expected rise in U.S. retail sales for August. The better than expected results positively influenced the U.S. dollar, and the most significant force behind the Gold price slide is the appreciation of the U.S. dollar.

Investors have started to behave nervously amid concerns that the Federal Reserve will have to tighten its ultra-loose monetary policy sooner than anticipated. Investors will continue to pay attention to the Federal Reserve commentaries looking for any clues, but surging COVID-19 cases could boost demand for Gold because this precious metal is considered a safe-haven asset.

“Risk appetite among market participants continues to be high, as reflected in steep rises in energy and base metals prices. Stock markets remain stable, and what is more, there has been an unexpected and considerable brightening of sentiment among industrial companies in the New York Fed district in September. Gold was not in demand in this market environment,” Commerzbank analyst Daniel Briesemann said in a note.

On the other side, Wall Street’s three main indexes continue to trade in a bull market while U.S. Federal Reserve Chairman Jerome Powell said that inflationary pressures are likely to be temporary. The coronavirus Delta variant is fueling concerns about the recovery path, but the U.S. economy continues to perform well.

The U.S. Initial Jobless Claims fell to the lowest level in almost eighteen months, and the renewed U.S. dollar strength on the back of robust U.S. data continues to negatively influence the price of Gold.

Technical analysis: $1700 represents a strong support level

Those whose interest is to invest in commodities like Gold should consider that the risk of further decline is still not over.

Data source: tradingview.com

The gold price has weakened more than 2% this Thursday, and if the price falls below $1700 support, the next target could be around $1650. The strong resistance level stands around $1850, and if the price jumps above this level, it would be a signal to trade Gold, and we have the open way to $1900. 

Summary

Gold price remains under pressure this Thursday after the U.S. dollar climbed following a better than expected rise in U.S. retail sales for August. The U.S. Initial Jobless Claims fell to the lowest level in almost eighteen months, and investors have started to behave nervously amid concerns that the Federal Reserve will have to tighten its ultra-loose monetary policy.

The post The United States reported a 0.7% rise in retail sales. Should I sell Gold? appeared first on Invezz.

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Economics

Canada’s Inflation Rate Highest Since 2003 Chipping Away at Liberals’ Re-Election Agenda

Canadians paid significantly higher prices for goods and services in August as inflation skyrocketed by the most since 2003, creating
The post Canada’s…

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Canadians paid significantly higher prices for goods and services in August as inflation skyrocketed by the most since 2003, creating a headwind for the Liberal party just days ahead of the federal election.

The CPI jumped from 3.7% in July to an annualized 4.1% last month, marking the sharpest increase since 2003, and the fifth straight month of exceeding the Bank of Canada’s target rate of 3%. Economists polled by Bloomberg forecast an annual gain of 3.9%. Core inflation, which excludes gasoline, rose 3.2% from August 2020. On a monthly basis, the CPI rose 0.2%, against a forecast of a 0.1% gain.

Prices were up across 7 of the 8 major CPI components, with transportation and shelter contributing the most to last month’s gain. Consumers paid 32.5% more for gasoline compared to August 2020, as lower output levels from major oil-producing nations persisted throughout the summer.

The homeowners’ replacement cost index— which is related to the price of new housing, jumped 14.3% from year-ago levels, marking the fourth consecutive month of double-digit increases and the largest gain since September 1987.

Bank of Canada’s Governor Tiff Macklem expects inflation to hit 3.9% in the third quarter, but warns policy makers from reacting to what the bank refers to as “temporary” inflationary effects, such as supply chain bottlenecks and pent-up demand. Still, the latest CPI print will likely create a headache for the Liberal party, which has called a snap election in an effort to gain a majority in parliament.

Affordability has become a central campaign issue in what is appearing to be a tight election. The Conservative party— the Liberals’ main opposition, has blamed Prime Minister Justin Trudeau’s generous spending initiatives for stoking inflation across the country.

Following the CPI report, the Canadian dollar remained little changed, trading at around $1.26 against the US dollar.

Information for this briefing was found via Statistics Canada and Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Canada’s Inflation Rate Soars by Most Since 2003, Shaking Liberals’ Re-Election Bid appeared first on the deep dive.

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