Six Signals of a Market Bottom (Updated)

Hi << Test First Name >>,

“What do you think about the markets here?”

I was asked that question again this morning by a fellow parent when I was dropping my son off at school and it continues to concern me because the last time I got this many questions about the markets was back in the summer/early fall of 2008.

And in this volatile environment being able to confidently answer questions on the market will mean the difference between closing your next big prospect this fall and starting to lose clients to this volatility.

It’s days like today when the market was down 350 points in the opening minutes of trade when clients call because they feel like they aren’t in control, again.

And, I believe the best way to retain those clients is to show them that you are in control when it seems like the markets are out of control.

And, the best way to do that is to know exactly what is moving the markets, and whether those factors are a bearish game changer, or just the market finding excuses for a normal, healthy correction.

It’s times like this when you demonstrate your value to your clients by reassuring them everything is alright.

It’s also when we demonstrate our value to our subscribers of the Sevens Report by making sure they have the clear, concise market analysis they need to explain:

  • What’s Happening in Markets,
  • Why Stocks are Falling, and
  • How You Plan to Protect Portfolios or Seize Opportunities.

One subscriber from a top insurance company wrote in yesterday saying:

This is a great report. Concise and to the point. Thank you!”- Ellen

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. 

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

Today, China’s soft PMI data 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 even with today’s disappointing data, they can demonstrate to their clients that they weren’t blindsided by the news.

That’s the kind of analysis that leads to More Clients and ultimately More AUM.    

As a courtesy, we have included an excerpt of our updated analysis on “The 6 Keys to a Market Bottom” below:

Updated: When Can We Hope for a Bottom? (Sevens Report Excerpt)

Last week we identified six events that had to happen before a market bottom would be “in.” We also mentioned specific timelines for those events that could lead to the market stabilizing, and we wanted to offer an update to that timeline.

Remember, however, that in order for it to be considered a legitimate “all clear” we need all of these things to occur.

1. Markets need to see competence from Chinese authorities. When: Happened last week. 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: Early September. Unfortunately, the next round of Chinese data won’t come until Sept. 8, with the August Trade Balance, and after the soft final August Manufacturing PMI the trade number will be even more important.

3. The Fed needs to get on one page and stop letting the market view the indecisiveness in real time. When: Potentially this week or next.  Unfortunately, there was no real improvement from Fed Vice Chair Stanley Fischer on Saturday at the Jackson Hole Central Bank conference, leaving us in “wait and see mode” with regard to confidence in the Fed.

4. US economic data needs to stay decent. When: This week. We kicked the week off with August PMI data this morning which was in line with estimates, but the real focus of economists and investors alike will be the August jobs report on Friday.

5. Oil needs to bottom. When: Potentially Happened Last Week. Oil rallied 30%, trough to peak, in just the last week ending yesterday, which on the surface seems optimistic for the energy market. However, as you will go on to read in the commodity section, the historic short-squeeze rally that began last Thursday is characteristic of massively oversold conditions in an oil bear market, which leaves us cautious on outright declaring this step “completed.”

6. People need to get back to work (i.e. trading desks need to get back to full staff and add human liquidity). When: After Labor Day (Tuesday, Sept. 8).

Bottom line: Focus this week will obviously remain on global economic data, the most important release being the US jobs report Friday, but investors will also be watching oil and the commodity markets as they look for recent rallies to hold. All of the other remaining “conditions” won’t be met until next week at the earliest.

Oil and Chinese shares will remain daily leading indicators as we move forward in the week. But until we get some further positive signals and ultimately market stabilization or signs that global volatility is subsiding, it will be hard for US stocks to rally to new highs for the week.

Click here to subscribe today and stay ahead of this volatile market

Staying Focused on Leading Indicators

For weeks we have stayed focused on two key leading indicator ETFs that forecasted this decline, because each is uniquely exposed to the main causes of this correction and late last week one of those two leading indicators broke through an important downtrend resistance line (bullish), an encouraging sign that that specific leading indicator may have just bottomed.

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, and most recently broke a four month uptrend in early July, right before the rest of the market got dragged down by “China” worries.

Last week however, it broke out through a two month old downtrend resistance line in a move that could potentially have just indicated a “bottom is in” for this leading indicator.

But now, following the massive short squeeze in oil, it is important that the gains “hold” and the ETF doesn’t simply roll over in what would be a huge “headfake” so we will continue to watch it closely.

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 last week, 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.

Bottom line, key leading indicators for these two risks to this multi-year stock market rally 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.

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

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

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