Six Signals of a Market Bottom (Updated)

“Was That the Bottom?”

A sophisticated, ultra-high net worth client asked one of our subscribers that yesterday, and that subscriber (an RIA from LPL) let me know that The Sevens Report helped him give a straight forward, well-reasoned, and direct answer that gave the client confidence he was on top of the markets and in control of his portfolio.

The truth is there is some reason to be cautiously optimistic:

  1. The S&P 500 held a test of the August lows last week.
  2. Stocks rallied despite a soft jobs report.

But, it’s still too early to definitively say that a bottom is “in” for this market, because our leading indicators are still not confirming this move. 

For advisors today, whether you are at a wirehouse or an you’re an independent RIA, it’s more challenging than ever to stay focused on what’s truly driving markets and keep clients positioned properly.

That “noise” from the outside world is almost deafening:  Many of the same analysts who were saying the market was about to collapse last week, are now saying the bottom is in, despite the fact that fundamentals remain largely unchanged. 

Our job during times like this is to eliminate the information overload, cut through the short term noise each trading day and deliver the unemotional, fundamental and technical analysis that can help our paid subscribers reassure clients, protect portfolios and seize opportunities across asset classes:

  • Stocks
  • Bonds
  • Currencies
  • Commodities

And we are delivering this macro research each day at 7 AM because as we saw again over the past five trading days where stocks rallied 6.5% in nearly a straight line, that this is a quickly changing landscape and waiting a few days for a macro update from the firm’s CIO or global strategy team simply isn’t going to cut it.

Over the past 5 trading days we’ve made sure that our paid subscribers have known:

  • Why the jobs report wasn’t as bad as everyone said it was.
  • That stocks are NOT rallying because of a “dovish” Fed and “bad” data is not “good” for the market.
  • What two factors still need to be resolved before we can say a bottom is truly “in.”

They’ve had this information spelled out for them in plain English, at 7 AM each day, along with a clear conclusion regarding whether we think this is the start of a bear market (we do not, yet).

We did this so that when clients call in a panic, our subscribers can show them that they 1) understand what is happening in markets, 2) know what it will take for a bottom to form, and 3) have a plan for their portfolio depending on what happens.

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.

Despite the impressive 6.5% rally in the S&P 500 over the past 5 trading days, it does not mean the bottom is in for stocks.

Earlier this summer we identified two key ETFs that have acted as leading indicators for stocks and two weeks ago they started to roll over, forecasting the decent declines.  Since last week they have stabilized but both remain below levels that would confirm a bottom is in for the broad market.  We have included an abbreviated version of that updated analysis in the excerpt below:

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

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

1. Markets need to see competence from Chinese authorities. Accomplished Late August. Chinese authorities cut one-year lending rates, lowered reserve requirements, initiated liquidity injections and began to outright buy stocks to support the market beginning in September. 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. US economic data needs to stay decent. Accomplished Early September. Despite the lack luster jobs report and slowing manufacturing PMIs, overall economic data in the US remains “decent” and isn’t slowing quite as badly as the media is implying.

3. People need to get back to work (i.e. trading desks need to get back to full staff and add human liquidity). Accomplished Early September.  With summer vacation firmly behind us and the September religious holidays also past, trading desks are back at full staff, which should help eliminate the type of random volatility we saw back in late August.

4. Oil needs to bottom. When: Potentially This Week. Fundamentals are getting less bearish as production and rig counts are declining, but we need to see more macro-economic stabilization before declaring a bottom is “in.”

5. Economic data does need to stabilize in China. When: Next Week.  Data from China over the last month was “Not as Bad as Feared.”  August Trade Balance, August Fixed Asset Investment and Industrial Production missed estimates but not by that much, Retail Sales beat estimates and “official” September manufacturing PMIs rose to 49.8 from 49.7, the first increase in months. If the latest round of the September data, which comes next week, can stabilize that will be a positive and we will likely add to our three preferred tactical ETFs.

6. The Fed needs to get on one page and stop letting the market view the indecisiveness in real time. When: December. The disappointing jobs report further clouded the date of Fed “liftoff” and October is now completely off the table.  So, we are stuck till December, at the earliest, for needed Fed clarity on when rate hikes will begin.

Bottom line: We have added 1/2 of our total “Buy the Dip” allocation to our three preferred tactical ETFs since the declines in late August, and feel comfortable with that exposure.  Over the next two weeks we could add to the three tactical ETFs we believe can outperform into year end.

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.

Make sure you have an analyst team working for you that’s committed to helping you seize this potential opportunity in stocks, while also staying vigilant to a further decline.

If all we do is help your successfully navigate this challenging environment for the remainder of 2015, it will be well worth the quarterly subscription cost.

Click this link to start your quarterly subscription for just $65/month ($195 total)

Leading Indicators Not Confirming a Bottom (Sevens Report Excerpt)

Our two leading indicators did it again over the past two weeks as they forecasted the re-test of the August lows in the S&P 500.

These ETFs saw their rebounds stall two week ago and began to fail at resistance, and one of these leading indicators plunged to new 11 month lows while the other teetered on support near a recent breakout.

These leading indicators have bounced off of last week’s lows, along with the broad market, and while there is some reason to be cautiously optimistic, neither are confirming a bottom is “in” yet.

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, and has spent the last month testing support at that break.  Over the past few days, it has rallied to near one month highs, but it’s going to take a much bigger rally to give a true signal that the bottom is “In.”

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 last week 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, the December/January 2015 pullback as well as this current pullback.

Most importantly, though, it’s also bottomed each time before the broad market, and we expect that to happen again this time.

So, it is concerning that this ETF traded to a new low last week, and while it has bounced nicely from those levels, it’s still a long way from breaking a downtrend. 

No one can know for sure at this point whether a bottom for the market is “in” 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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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!

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Best,
Tom

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

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