By Gary Kaltbaum October 26,2018
We were asked on tv yesterday whether it was good that right after a 600 point drop, the market got back 400 the next day. We simply replied that we did not see it as down 600, up 400. We saw it as down 2400, up 400. In other words, the trees were the two day, down/up move. The forest was everything that has happened all year and the nausea since the recent highs. In a nutshell, we hope that explains the thought process. The trees are the short term…a 1 out of 10 on the importance scale. The forest is the big picture…a 10 out of 10 so once again, the big picture.
The big picture is:
Before the BIG 4 indices gagged, about 50% of the market was already bearish. For weeks and weeks, we listed for you AUTOS, GAMING, PAPER, STEEL, COMMODITIES, CHEMICALS, HOUSING, HOUSING-RELATED as well as other areas…and to be clear, many of these areas have not just headed down, they have been smoked. Then came the all-important SEMICONDUCTORS and FINANCIALS. Then came the broader market measured by the SMALL and MID-CAPS. For months and months, we told you many important foreign markets were already in a bear market. The big picture had already weakened. In already weakened and narrow markets, it is easier to sell off the rest if they decided to as termites were already eating away at the market’s internals.
The big picture is that in early October, they finally came after the rest. On a daily basis, all the leading groups topped out. All the leading growth names topped out
The big picture is that we have always told you markets are great forecasters of the future. Sometimes this works in the short run as earnings and economic slowdowns can be fleeting. And sometimes, they are of import. The big picture is that NOW we are catching wind of what the underlying market had been telling us. Guidance is coming down…and is coming down everywhere. Texas Instruments to beer…to machinery…to the NY GIANTS offense. Global economies are slowing down. Also, as you can see, the head honchos, top dogs, big cheeses of the market are not immune as even the almighty AMAZON (AMZN) cuts guidance markedly.  To accentuate this theme, notice what is holding up best…UTILITIES, CONSUMER STAPLES and DISCOUNT RETAIL, all the areas that benefit most from slowdowns, as they are more resistant to the slowdowns. We must also add that over 1/3 of S&P companies that have reported have mentioned tariffs in their conference calls. Hear that Donald?
We do not know exactly how this plays out in the short run. We have no clue how we finish today…but again, the short run does not matter much. The big picture is everything. Also:
All major indices, in fact, just about everything now trades below not only short term, not only intermediate term…but now the longer term 200 day moving average. Absolutely nothing good can happen until price gets back above…a physical impossibility. Only bad can happen staying below these levels. It is imperative price gets back above before we can even think about talking positively. It is simply impossible to have bullish markets when trading below.
Secondly, and this is meaningful, margin is still at all-time highs. Remember, margin is the best friend of bull markets as margin accentuates positive returns. But margin is the biggest enemy in bearish markets as it accentuates the downside. As markets worsen, margin always comes off…which in turn, makes the drops harsher. The emotions of greed and fear will be moved by price. We suspect if we continue lower, fear will drive margin down, worsening the drop.
We wish we had better news but while many deal with the idea of hope and will call bottoms on every uptick, we have always dealt with the idea of reality AND PRICE IS REALITY. We are also a wee bit worried that almost no one is calling for a bear market in stocks. In case you have forgotten and we understand why, bear markets have not been extinguished…and many areas are already in bear markets.
Lastly, we expect that in the weeks ahead, Powell and company will start floating noise that incoming data is telling them to slow their roll. We suspect we are already at or near the end of the rate hikes…at only 2%…and Trump may just need to call helicopter Ben.
3 replies
  1. Nick
    Nick says:

    Thank you Gary for being THE MOST OBJECTIVE financial writer I know. It is extremely difficult to find anyone who can write
    what is going on without being biased.
    Sincere Appreciation!


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