Pullback (Leading Indicators Breaking Down)

Yesterday morning, I was extremely humbled when I received a hand written note from a subscriber from Wells Fargo Advisors thanking us for how we are helping him navigate this increasingly volatile market, and helping him get more assets and acquire more clients.Regardless of what business you’re in, if your paying customers are writing personal thank you notes, it’s a sign that you’re doing something right and, most importantly, providing value.

Our goal at The Sevens Report is to help our paying subscribers get hand written, “Thank You Notes” from their wealth management clients as they show their value and earn their fees, and it’s volatile times like this current market where we can help them do that.

The reason I say that is because we are now in the most volatile market we’ve seen in years.  Just take a look at the last four day’s trading range in the Dow:

Thursday:  Down 178
Friday:  Down 140
Yesterday:  Up 256
Today:  Down 235 (as of this writing).

This volatility is causing an increase in nervous client calls for our FA subscribers, and we imagine you’re experiencing the same.

But, we believe volatility like this is an opportunity to strengthen your relationship with your clients and impress prospects who are currently with other firms. 

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

Instead, you have to be able to articulate the risks in the markets, and explain how you will successfully navigate those risks.

That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them every day 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 assetsWe firmly believe we offer the best value in the independent research space.

Right now, despite all the volatility and noise in the markets, we are monitoring two specific risks that could cause this market to break down.  And, over the past two weeks 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 yesterday 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.

Today, China’s currency devaluation news is causing even more volatility in stocks, but over the past few weeks we’ve made sure our paying subscribers were aware of the risks China poses to investors, so they can demonstrate to their clients that they weren’t blindsided by today’s news.  That’s the kind of analysis that leads to more AUM and more clients.

We have included an updated excerpt on the risks to this market we want to make sure advisors know the two major risks to portfolios as we approach this critical September to December period for markets.

Risks to the Rally Are Growing (Sevens Report Excerpt)

Last week we identified the two macro risks that could cause a material pullback in stocks, and unfortunately both of those risks have risen since then.

Risk #1:  China and the Fed Cause a Global Slowdown (Currency Devaluation Increases This Risk)

As we are seeing again today, regardless of where you are invested, “China” is a material risk to stocks because:

First, if China slows further, it will cause more downward pressure on commodities and contribute to a slowing global economy.  That could cause widespread deflation, and with most global central banks already at 0% interest rates, the world’s central banks are very much “Out of Bullets” to fight another deflationary scare.

Second, if China slows further it will put more pressure on other emerging markets in Asia and Brazil, which are already weak economies.  Given the amount of debt these countries have, worries about a repeat of the Asian Debt Crisis of the late 90’s will begin to surface.

Third, if the Fed raises rates, it will cause emerging market currencies to fall even further, making their economic pain worse in the short term.

And, over the past few days, more bad economic data and the news of China’s shock currency devaluation have increased that risk and is causing commodities to trade to new lows today and global stock markets to fall. 

This move from China is important because it 1) Shows rising concern from Chinese authorities regarding their economy, and 2) Could ignite another round of global currency wars as Asian and European countries move to further devalue their currency in retaliation – resulting in a stronger US dollar and more pressure on US corporations.

 

Despite the negative sentiment towards China, though, at this point it isn’t a bearish game changer, but the risk of it becoming a major bearish influence is real, if growth slows a lot more.

To monitor this risk, we are watching 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, and most recently broke a four month uptrend in early July, right before the rest of the market got dragged down by “China” worries.    

This leading indicator hit a new low last week and is testing it today given the new China news.

Whether or not this ETF holds this low will tell us whether the macro risk of China is growing, or receding, and we will alert our paying subscribers when that signal is given.

Risk #2: Junk Bonds Create a Debt Crisis.

With oil plunging to fresh, multi-month lows again today, concerns continue 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 is now being called into question with oil under $50/barrel again.

But, it’s not just falling oil that is causing these risks to rise:

First, Friday’s jobs report increased the likelihood of a Fed rate hike in September, causing additional stress on non-Treasury bonds.

Second, China is causing general macro-economic ripples across asset classes, and we are seeing risky assets, including emerging market debt, get hit hard.

Bottom line, pressure on the “junk” sector of the bond market is rising, and this is important because it is the same concern that led to the broad market dropping last December/January.

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.

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 it looks as though it’s trying to form a bottom now.

This ETF is literally sitting just above 52 week lows, and if that support breaks today we will take that as an incrementally negative signal.

Bottom line, key leading indicators for these two risks to this multi-year stock market rally are in the currency and bond markets, and you need to have an analyst who knows those markets and who is watching those indicators for signs of stress. 

Our subscribers know that we will do that for them, and we will tell them when those indicators in currencies and bonds go from flashing a “caution” sign to flashing a “warning” sign.

Click this link to start your quarterly subscription and learn which two leading indicator ETFs we identified for our paying subscribers last week.

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”

If reading The 7:00’s Report each day helps you retain just one client with an average balance of $80,000 (based on an assumed 1% management fee), then you’ve already more than paid for the subscription price.  Subscribe today and give yourself the market intelligence you need to help reassure your current clients, and acquire new ones.

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.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65 dollars.  To sign up for an annual subscription, simply click here.

Best,
Tom

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

Leave a Reply