Pullback (Two Macro Risks to Watch)

“What do you think about the markets here?”

My wife and I attended a wedding last Friday night, and I was very surprised by the number of people coming up and asking me that question.  I’m sure a lot of you have seen a similar uptick in questions given all the recent volatility.

And, it’s a bit concerning, because the last time I got this many questions about the markets was back in the summer/early fall of 2008.

Stepping back, though, I suppose I shouldn’t have been that surprised – volatility has clearly risen over the past month, and between Greece, China, commodities imploding and rising “chatter” on the news media regarding the Fed hiking rates, it’s obvious to even the casual investor that after 5 years of a bull market, stocks are nearing a definitive tipping point.

The problem is that cutting through all the noise in the market has gotten exceeding difficult since the start of June.

On one hand, the financial media is becoming seemingly more sensational and panicked every day (remember how much coverage focused on Greece – you would have thought the EU was breaking up in June, but as we told you and paying subscribers since February, it was never that much of a risk).

On the other hand, I keep reading perma-bull analysis from a lot of sell side firms and wealth management shops that makes the looming first rate hike in nearly 10 years seem like little more than a bump in the road.

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.

With the help of The Sevens Report, that’s what a long time subscriber from Raymond James did with a very wealthy prospect, and it ultimately netted him a 20 million dollar account!       

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 for them 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 believe there are 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 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 subscribers to The Sevens Report to help growth their client base and AUM.

We have included a an excerpt of that analysis today as a courtesy, because we want to make sure advisors know the two major risks to portfolios as we approach this critical September to December period for markets.

Two Real Risks to the Rally (Sevens Report Excerpt)

Risk #1:  China and the Fed Cause a Global Slowdown

Most people know that “China” has been responsible for recent market volatility, but not a lot of those people know why Chinese growth concerns and a volatile Chinese stock market are risks to the S&P 500.

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.   It’s simply unknown just how much turmoil a Fed rate hike will have on overvalued emerging market currencies and emerging market debt, but we do know the answer isn’t “None.”

Bottom line, China poses a series of risks to the global economy and US stocks, and that’s why it’s having such an influence on our markets.  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.    

We will continue to watch this ETF as a leading indicator for China and the Emerging Markets broadly.

Risk #2: Junk Bonds Create a Bond Crisis. 

With oil plunging to six month lows yesterday, concerns have risen 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 is under $50/barrel again.

This is the same concern that led to the broad market dropping last December/January.

What’s more, with the Fed potentially hiking rates next month, that could put even more pressure on the junk bond market, and 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.

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.

Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor

We aren’t Market Bears, but things are going to continue to be volatile for the rest of 2015, plain and simple.  How could they not?  Over the next three months we will learn whether 1) China is experiencing an economic “Hard Landing,” 2) If the rebound in Europe is for real, and 3) Whether the Fed will raise rates for the first time in nearly 10 years! 

If all we do is help you cut through the noise in this market for the next three months, it will be well worth the $195 total cost ($65/month billed quarterly).

Over the next few months, the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back) will be able to retain more clients and close more prospects. 

We view the next few months as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every trading day they know:

1) What’s driving markets,
2) What it means for all asset classes, and
3) What to do with client portfolios.

We monitor all asset classes, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can profit from these trends.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.  We don’t.

But, we have gotten this market right so far in 2015, and it’s helping our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility and drop in stocks and bonds has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation. 

That’s our job.  Each and every trading day.

And, we are good at it.

In late November we told our subscribers that oil, XLE and the Dollar Index were the leading indicators of markets, and until the first two stopped declining and the latter stopped rising, stocks would be under pressure.

During the September/October declines, our subscribers knew junk bonds (and the ETF JNK) were the leading indicator for the market.  When JNK bottomed, so did the market.

Last April, when the S&P 500 declined 4% in two weeks, we alerted our subscribers that the “momentum” sectors of internet stocks and bio-techs were responsible for the drop, and specifically identified QNET and NBR as two leading indicators to watch.  When they bottomed, stocks bottomed, and our subscribers knew it.

In January 2014, when the S&P declined 7% in three weeks, we correctly identified that emerging market currencies were the “reason” for the drop, and identified the Turkish Lira as the key indicator to follow.  When it bottomed, stocks bottomed, and our subscribers knew it.

We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.

And, if for any reason over the next two weeks you’re not totally satisfied, you can receive a full refund.  With retention over 90% and hundreds of satisfied subscribers, we are confident you’ll see the value in our daily Report. 

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.

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

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