More Market Deterioration!

Sorry about the length but we have some important things to add from our recent reports of a narrowing market.

Over the past weeks, months and in some cases, over the past year, we have been telling you to avoid all the areas of the market that had topped and went into their own private bear markets. For instance, the Oils and most commodity areas back in last August, gaming about same time, reits and utilities back in January, the transports back in March and so on. This has led us to tell you in every report that regardless of the major indices hanging near highs, fewer and fewer areas and fewer and fewer stocks were participating as the market’s leadership continued to narrow. We have also told you that the ultimate outcome of this narrowing (if things do not improve) is that eventually, underneath the weight of so much damage, the major indices would follow suit.

Unfortunately, the deterioration continues. Amazingly, with most major indices a few percent off their highs, as of the close Friday:

There were just 83 new highs on the NYSE and NASDAQ and a whopping 630 new lows. These are numbers usually found in bear markets.

Our in-depth scan of stocks now show just about 35% of all stocks in shape with a whopping 65% in downtrends.

Our in-depth scan of 200 sectors is now down to a handful of good areas.

These are not the numbers of a healthy stock market but a market in deep trouble. Notwithstanding Janet coming out with QE4 (a distinct possibility if the markets head south), it is very much time to pay attention to vital support levels for the major indices. Yellen will be yapping this week. But first:

The all-important transports remain in their own private bear market. The all-important semiconductor index has now moved into its own private bear market. The -all-important biotechs are now teetering as Biogen really coughed one up. The Dow, Nyse now trade below the longer term 200 day moving average. To make matters worse, all the other major indices have now moved below initial lines of support/moving averages. We can go on. Just know things continue to deteriorate. Shorter term, things are oversold here so maybe a bounce but would not go much further than that.

We have seen this before. We saw it at the end of 1999 and into the 1st quarter of 2000. Tons of stocks and areas were already bearish but there was still fireworks in a select few areas, namely tech, internet and a few mega-cap, low beta names. We all know what happened when that narrow list finally joined the ugly. Then there is late 1972. We were not around for the “nifty-fifty” in 1972 but we have studied it closely. A select group of names kept going while the average stock was being yonked. Eventually, the select names came in, which led to some serious ugly by the market. We are not saying the same happens. We are just saying that so far, this market is setting up the same way. There is a reason for why this happens. Big money continues to realize most of the market is a losing proposition so they continue to sell everything and buy into anything that is holding up. That narrow list keeps working so the money keeps plowing in until all the names that are working get stretched and then party over. What we are seeing is classic. All that needs to happen now is for the rest of the major indices to confirm by breaking vital support. This has not happened yet but stay tuned!

We are not kidding when we say watch Dow 17465 but much more important at 17037. The same for S&P 2040 and then more important at about 1980. Next up is the russell 2000 at 1206. We do not have to mention the Nasdaq/NDX yet as it has held up the best as the big money has flown into a few mega-cap names like Amazon and Google…but beware, the big money distributed both names off of their big gaps and cannot help but mention Apple as it had a not so thrilling reaction to the number. Simply put, a break of $119 for Apple would complete a major top for the stock. If by chance this happens, expect the market to not take kindly to it.

Of course, we couldn’t leave you without talking sentiment and time as sentiment continues to be off-the-charts too frothy and speculative…which is a bright red flag for us. For starters, margin has been skyrocketing. Margin is your best friend in bull markets but destroys when markets turn down. How about the 200 or so Biotechs brought public by the wonderful investment banks over the past 2-3 years? Only one issue…they have no sales. Remind you of anything? On top of that, there have been a massive number of IPOs, a ton of secondaries, massive insider selling, mergers at any price and do not forget the gargantuan price for private equity companies. We can go on and on.  As far as time, because of central banks, we have not had a bear market since 09 and haven’t even had a 10% correction in about 3 years.  In other words, way way way way overdue! In case you don’t remember, bear markets do happen.

Our biggest worry remains that central banks have done it again…created another bubble. Central banks around the globe have printed upwards of $20 trillion and have kept rates at 0% forever. In some cases, there are negative rates. This has created distortions all over the place and bubbles aplenty. This has caused a “one-sided” trade where the world feels comfy that nothing can ever go wrong. Price just does not matter!  (housing anyone?) We worry that when everyone is on one side of the trade, there is only one thing left to do if things turn south. We are already starting to see some unwinding in the junk bond market. We have told you many times that junk and corporate bonds are about as distorted as anything out there. Central banks forced savers to buy income at ridiculous prices, which means ridiculous yields. The simple problem is that you can no longer make a decent return safely. Before Bernanke got his slimey hands on interest rates, you could buy 3-5 year treasuries and get 6%. You could have both safety and income. No more!

Notwithstanding Yellen going back to do the maniacal Bernanke dance, you continue to be put on alert!