Pullback

This market continues to feel heavy.

On Monday stocks had their worst day in six weeks, bond yields hit 5 month highs and the S&P 500 just broke below the 200 day moving average for the first time since October 22nd, confirming what we told our paid subscribers two weeks ago: That if the October jobs report was stronger than expected, we could see both stocks and bonds decline.

And, we’ve definitely seen an uptick in calls from our subscribers this week who are thanking us for being a consistent voice of caution over the last few weeks.

We’ve been skeptical of this rally for three primary reason:

  1. The October recovery in stocks was largely due to positioning, as underinvested managers chased markets higher and the greater fear became missing a year-end rally, rather than locking in gains.
  2. Central banks (including the Fed) appeared more dovish in Sept/October but the truth is all that incremental easing is already priced:  The Fed likely will hike in December, the PBOC eased further and additional QE from the ECB is already priced in.
  3. Valuation are still high as 2016 S&P 500 earnings declined in Q3 to around $124, meaning the S&P 500 is trading around 17X current year earnings – an expensive metric for this environment.

And, our technical indicators are confirming those fundamentals (more on that below).

We’re not perma-bears, but our job is to make sure that our paid subscribers have an analyst giving them independent fundamental and technical analysis – because the last thing we want to have happen is for advisors like you to get caught in another sharp downtrend in the markets, especially with just 7 trading weeks left in the year.

Since this sell off began in mid-August (and this is still part of that sell off because markets haven’t made new highs) 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 Advisor Cheat Sheet, so that advisors can make sure they have an independent analyst that communicates and quickly identifies the risks and opportunities for:

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

Advisor Cheat Sheet is the 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.

Over the past two weeks, while most in the analyst community have been questions when stocks would hit new highs, we’ve been focused on fundamental and technical risks to this rally, 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 two weeks ago and have already sent the analysis to current and prospective clients, showing them they are aware markets are at a tipping point, and most importantly demonstrating they recognize risk to portfolios and have a plan should those risks materialize.

That is how Advisor Cheat Sheet 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 the end of 2015.

 

Three Charts That Make Us Cautious 

We always look for technicals to confirm our fundamental market strategy, and unfortunately some important leading and coincident indicators are confirming that it’s time to be cautious on stocks.
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) Global growth and

2) Emerging market sentiment.

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

 


As the chart above shows, this leading indicator recently broke down through key support at the $15.00 level and that is a negative signal for risk assets.    

Incidentally, the last time this indicator was this low was on August 25th, when the S&P 500 hit 1867 (nearly 10% lower from current levels).  

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

This is the junk bond indicator we showed you yesterday, and it continues to drop further from support.

 

 

Again, 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.

The last time this leading indicator was this low was October 5th, and the S&P 500 closed that day at 1987, nearly 5% lower from current levels. 
Indicator # 3:  Market Breadth Is Still Negative

While stocks have rallied close to all-time highs over the past month, measures or market breadth including advancers/decliners remains well below the May peak.

And when we put on a cumulative chart to smooth the data, it looks like the trend of advancers/decliners just rolled over (we are using NYSE advance/decline, which is the standard benchmark).

 

 

This anecdotally confirms one of the fundamental reasons were are cautious on stocks  – that the rally has been mostly due to positioning and concentrated on a few large cap stocks, not the broad buying that is the hall mark of a sustainable rally in stocks.

Our “Pure Play” Hedge

Because of the concerning signals from these leading indicators, in yesterday’s paid edition of The Sevens Report we have again identified an ETF that successfully protected portfolios during the August and September declines.  

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

During the late September drop in stocks, this ETF rose 6.0% compared to a -4.0% decline in the S&P 500.

This week, this ETF is up 3.2% vs. a 1.9% decline for the S&P 500 and remains an attractive way to protect portfolios against a higher rate/slower global growth 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.

 

 

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