Pullback (Critical Support Levels)

“The market feels uglier now than during those crazy days in August.”  That’s what a subscriber wrote to me in a personal email yesterday.

I replied that he wasn’t alone, as we’ve been getting a lot of similar comments from our subscriber base, which is made up primarily of top FAs and buy-side, portfolio managers.

And, it’s not just our subscribers who are voicing this concern:

“I’m as hedged as I’ve been in years.”  Investor Carl Ichan.

“Flat is the New Up.”  Quote from the Goldman Sachs research note out this morning, where the firm cut their YE S&P 500 target by 5%.

We agree with that sentiment. 

We wrote to subscribers earlier in the week that we are afraid this market decline may be entering a new phase, as the selling that started last Tuesday has been different than what we saw in August.

This most recent drop in the market has been driven by momentum, not macro-economic influences:

1. Biotech stocks, which had been market darlings, ignited this latest round of selling when they collapsed starting last Tuesday.  The decline in biotechs yesterday was a major reason stocks fell so sharply yesterday.

2. A collapse in global mining giant Glencore shares is starting to make investors nervous that the broader commodity crash may result in mining company bankruptcies, similar to what we saw in the spring/early summer of 2008.

Since this sell off began in mid-August, our subscribers have not only known “Why” markets were falling but they have had a set of key leading indicators to watch every day, so that they would know when this correction becomes something more.

As a financial advisor, during volatile times like these, you have to be able to articulate the risks in the markets, and explain how you will successfully navigate those risks.

We have been totally dedicated to making sure our subscribers know what’s really driving markets because we firmly believe volatility like this is an opportunity to strengthen your relationships with current clients and impress prospects who are currently with other firms.

We all know that successful advisors grow their books by connecting with high net worth clients, and to build trust with those clients you can’t just repeat company “perma-bull” strategies.

That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them daily at 7 AM and quickly identifies the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market. 

The Sevens Report is the daily market cheat sheet our paying subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.

We firmly believe we offer the best value in the independent research space.

Right now, as the S&P 500 is teetering above the August lows, in addition to the previous two macro risks, we are monitoring another momentum based risk and over the past week we have:

1) Explained those Risks to subscribers

2) Identified Leading Indicators that will tell us when these risks get worse and

3) Proposed a tactical strategy using specific ETFs that will Protect Portfolios if these risks cause a breakdown in stocks. 

Our paying subscribers had this information last week and have already sent the analysis to current and prospective clients, showing them they are aware markets are nearing a tipping point, and most importantly demonstrating they recognize risk to portfolios and have a plan should those risks materialize.

That is how The Sevens Report helps subscribers grow their client base and ultimately their AUM.

We have included excerpt from our paid report as we want to make sure advisors know the major risks to portfolios as we approach this critical 4th quarter.

Leading Indicators are Rolling Over and That’s Not Good (Sevens Report Excerpt)

Our two leading indicators did it again last week as they forecasted this re-test of the August lows in the S&P 500.

These ETFs saw their rebounds stall last week and began to fail at resistance, and now one of these leading indicators has plunged to new 11 month lows while the other continues to teeter on support near a recent breakout.  These are not good signs for stocks.

Also, given the shift in what is causing this renewed selling in stocks, yesterday we introduced to subscribers a new, shorter term leading indicator that will have to stabilize before the broad market can settle down.

Leading Indicator #1:  A Real Time Barometer on China and Global Economic Growth Fears

This leading indicator is a specific commodity ETF that has large exposure to specific industrial commodities – which are a proxy for:

1) Chinese growth and

2) Emerging market sentiment.

It has been a strong leading indicator for China in 2015 as it broke a four month uptrend in early July, right before the rest of the market got dragged down by “China” worries.

As the chart above shows, this leading indicator broke a 2 month downtrend, but it is now retesting that breakout, and if it cannot hold the $15.00 level that will be a negative signal for risk assets.    

Leading Indicator #2:  A Real Time Measure of Financial Stress in the US

With oil plunging to fresh, 6 ½ year lows below $40/bbl. in late August, concerns continued to rise that we will start to see stress in the junk bond markets, as a lot of risky “junk” loans have been extended to small oil companies over the past several years and bought up by bond funds who were starving for higher yield, and the health of those loans was beginning to come into question.

The potential exists for a stampede out of overvalued junk bonds that could grow into a bigger bond crisis here in the US, given the still over owned nature of bonds. And, while we’ve been talking about this risk for months, it was refreshing to see the WSJ confirm our fears yesterday via a very negative junk bond article which articulated many of our concerns.

To monitor this risk, we are watching a specific bond market ETF that has been a fantastic leading indicator of market pullbacks for over a year, and it correctly forecasted the July 2014 pullback, the Sept/October 2014 pullback, and the December/January 2015 pullback.

Most importantly, though, it’s also bottomed each time before the broad market, and we expect that to happen again this time. Unfortunately it has not yet broken through resistance and still has some work to do on the charts in the near term.

This chart above is particularly worrisome, because this leading indicator ETF failed right at the downtrend and crashed to new lows yesterday, implying the bottom is not yet in – and that is a bad signal for stocks.

Our “Pure Play” Hedge

Because of the concerning signals from these leading indicators, in yesterday’s paid edition of The Sevens Report we again identified an ETF that successfully protected portfolios during the August declines, and did so again over the past week as stocks have collapsed basically to the August lows. 

During the August declines, this ETF rose 15%, protecting portfolios from the volatility.

Over the past week this ETF has risen 6.0% compared to a -4.0% decline in the S&P 500. and remains an attractive way to protect portfolios against a further China/bond market inspired decline in stocks. 

Our paid subscribers know that we will tell them when those indicators in commodities and bonds go from flashing a “warning” sign to flashing a “crisis” sign and that we will give them specific ETFs that can protect portfolios should things get worse.

Given the market volatility I am extending a limited time, special offer to new subscribers of our full, daily report that we call our “2 week grace period.” If you subscribe to The 7:00’s Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click here to subscribe and get our three leading indicator ETFs and hedge ETF.

Value Add Research That Can Help You Grow Your Business

Our subscribers have told us how our focus on medium term, tactical opportunities and risks has helped them outperform for clients and grow their books of business.

In three years of doing this the absolute best feedback I’ve ever received was when a client (an FA from a bulge bracket firm based in Florida) called me late last year and said our Report helped him land a 25 Million dollar client!

But, while obviously not as monetarily impressive, we continue to get strong feedback that our report is: Providing value, Helping our clients outperform markets, and Helping them build their business: 

Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – FA from a Bulge Bracket Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent RIA.

“Great service from a great company!!” – FA from a Bulge Bracket Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Bulge Bracket Firm”

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The 7:00’s Report right now.

Begin your subscription to The 7:00’s Report right now by clicking this link and being redirected to our secure order form.

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Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

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