The major stock market indexes were swamped by intense Distribution (professional selling) again today and undercut their 50 day moving averages like a Jianshi warriors sword through bamboo. A rejection by the Chinese to buy American farm products and a simultaneous blatant devaluation of their currency pushed global stock markets off the Great Wall. Our “core 4” market internal indicators are now all in the RED zone and our Current Market Outlook has been downgraded to “Market in a Correction” with a “red” light.
A few days ago we stated that we didn’t expect the market to stay in a yellow condition for long. That proved very insightful with today’s move to red. We also wrote… “However, a second possible outcome would be the exact opposite of that ideal scenario. The fear of a looming recession could begin to build (what does the Fed see that Wall Street doesn’t?) and cause investors to desire to reduce their risk levels and pare back their stock allocations. (Read panic.) Early in that process our light would change to “red” as selling would beget selling and a correction would likely take hold. Either way, we don’t expect a yellow condition for long.” (Underline & bold emphasis added)
While many pundits are quick to lay blame for the markets rout on the escalating US-China trade war (which is true in large part), a growing perception of a bigger threat is beginning to take root: Recession. Nothing kills a bull market more swiftly than a recession. A slowing world economy, burgeoning US debt levels, and excessive recent rate hikes are all contributing to a increasing downward pressure on our economy.
With today’s awful action it is easy to become despondent and to extrapolate losses far into the future. A word of advice: DON’T. No one knows how long a correction will last or how far it will fall. But the “math of the market” will identify its bottom within just a few days of it happening. There was a ray of sunlight today as the Put-Call ratio spiked to a level that suggests the market may be ready for a meaningful bounce within the next few days. While we are hoping for that, the growing technical evidence of a looming correction has caused us to raise the cash/ST fixed income levels over the past several days in our 5 strategies. They currently stand at 40, 47, 59, 61, & 100%. Once again proving we are serious about taking proactive steps to preserve our clients capital in a down market. Keep buckled up & stay tuned.
Have a Triumphant day! ®