Six Signals of a Market Bottom (Post Labor Day)

I was supposed to be on vacation last week, but when markets are this volatile, it’s impossible to really be on “vacation,” and as I’m sure you’ve experienced this summer, I ended up talking markets with other guests who were watching CNBC at the various restaurants and lounges around the resort.

As usual, the small talk eventually turned to what we do for a living, and once I told them what I do, the #1 question I got was “Why is the Market Going Down?”

My answer was this:

“The market is falling because investors are afraid that a Chinese economic slowdown will result in a global economic slowdown, and the Fed’s folly will be to hike rates into it, making things worse.  And, with stocks still near all-time highs, people are nervous about losing all their gains.  That’s why stocks are falling.”

After giving that explanation they all asked for a sample of our Sevens Report, and after sending it to each of them I had several people come up to me later in the week and say they wish they got something like this from their advisor!

In fact, if I were an FA, I would bet I would have picked up some new clients over my vacation – all because I could confidently, directly and quickly explain to them why stocks were falling and tell them whether it was a potential repeat of 2008 (so far, it is not).

The experience I had on my vacation further confirms that in these volatile markets, investors want an advisor who can quickly, confidently and directly explain:

  1. What’s going on in markets
  2. Why it’s happening
  3. How they plan to protect portfolios or seize opportunities

Volatile environments like these are why I 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. 

All in under 7 minutes every morning, every trading day.

Our subscribers are using this opportunity to solidify relationships with new and old clients by demonstrating their control of the situation, and we believe that will lead to more lifelong clients and greater referrals.  Now is the time to do the work that will help your business for years to come.

Stocks are nearing a key tipping point as next week will be the most important week of the year and we’re seeing that reflected in markets as last week the S&P 500 dropped 3.4% on more bad Chinese data, while today markets are rallying more than 1% on “not as bad as feared” Chinese trade data, good European trade data, and “Dovish” comments by Fed President John Williams.

The calls for a “Bottom” or a “Bear Market” are equally deafening on the financial media, but the truth is we just don’t know yet – so we are staying focused on our “Six Steps to a Market Bottom” and the leading indicators that predicted this decline.

We’ve included our latest macro commentary below as a courtesy.

Signs of a Bottom or Just a Head fake? (Sevens Report Excerpt)

We continue to monitor our “Six Steps to a Market Bottom” and while there has been some progress made, it’s still way too early to declare an “All Clear” in stocks.

1. Markets need to see competence from Chinese authorities. Accomplished Two Weeks Ago. Chinese authorities cut one-year lending rates, lowered reserve requirements, initiated liquidity injections and began to outright buy stocks to support the market beginning last week. But despite all of the efforts, the market continues to have a confidence problem with Chinese leadership that needs to be further resolved, which is likely achievable by ongoing and further efforts to induce stability in the markets.

2. Economic data does need to stabilize in China. When: Next Week.  Chinese August trade balance this morning “Wasn’t as Bad as Feared” and stocks are rallying on that number, but the trade balance doesn’t imply stabilization in the data and other key Chinese economic reports don’t come out till this Sunday (they are Retail Sales, Industrial Production and Fixed Asset Investment).

3. The Fed needs to get on one page and stop letting the market view the indecisiveness in real time. When: Next Week. The jobs report did increase the chances of a Fed hike next week but this morning John Williams was “Dovish” in the WSJ.  “Lack of Fed Clarity” remains a significant headwind on stocks.

4. US economic data needs to stay decent. When: Potentially This week. The jobs report was stronger than the headlines implied and the truth is that (so far) US and European economic data is not being negatively affected by the China turmoil.  We are completing additional research today and could mark this step as “Complete” this week, and in doing so add to our three preferred tactical ETFs.

5. Oil needs to bottom. When: Potentially This Week. In today’s Report we identified a key technical level that, if held, will signal to us that the bottom in oil is “in” as fundamentals are slowly turning less negative (which is enough for a bottom near term).  If a bottom is “in” for oil we will add to our three preferred tactical ETFs.

6. People need to get back to work (i.e. trading desks need to get back to full staff and add human liquidity). When: Potentially This Week.  It usually takes a few days for trading desks to get back to full staff, but we are watching volumes closely and if they rise back to “Pre-Summer” levels over the next day or so we will add to our three preferred tactical ETFs.

Bottom line: This week brings the potential to have us add half of our total “Buy the Dip” allocation, and if elected we will add to the three tactical ETFs we are using to buy this dip in markets.

But, in volatile markets it pays to be patient, so that’s what we are doing. 

Subscribers trust us to alert them first thing each morning if another “Step” has been met – because we do not want to miss the opportunity of buying this dip, should the market continue to stabilize.

Staying Focused on Leading Indicators

Fundamentals have gotten marginally better over the past two weeks, but we know all too well that in the short term markets can nicely ignore fundamentals, and the price action of last week (and all of August) remains concerning. Because of that, we continue to also focus on our two key leading indicator ETFs.

Both are consolidating the recent bounce off the bottom, and it should become clear in the next week or so whether a bottom in those two indicators is “in” right now.

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.

Most recently it broke a two month old downtrend two weeks ago and is now consolidating that move. And if it can hold these current levels, then it will indicate a “bottom is in” for this leading indicator.

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.

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.

After bouncing off the bottom this leading indicator ETF is also consolidating recent gains, and if it can hold and move higher this week, that will be another sign that the bottom is “in.” 

Bottom line, the next two weeks are going to be critical with regards to signaling whether this correction is nearing an end, or if this bounce in stocks and commodities is just a counter trend rally in a now declining market.

No one can know for sure at this point and that’s why we are focused on key leading indicators for the two risks to this multi-year stock market rally.  Those leading indicators are in the commodity and bond markets, and you need to have an analyst who knows those markets and who is watching those indicators for signs of further stress or for signs of a bottom. 

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

As a courtesy, 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 this link to start your quarterly subscription and learn which two leading indicator ETFs we are watching.

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Best,
Tom

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

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