Hate Mail, Crumbling Factories, and Sinking Stocks

By Tony Sagami 

The bulls are mad at me. I’ve been heavily beating the bear market drum in this column since the spring. The S&P 500, by the way, peaked on May 21, and this column has been generating a rising stream of hate mail from the bulls as the stock market has dropped. My hate mail falls into two general categories: (1) you are wrong, and/or (2) you are stupid.

Well, I may not be the sharpest tool in the Wall Street shed, but I haven’t been wrong about where the stock market was headed. This column, however, isn’t about me. It’s about protecting and growing your wealth—and that’s why I have been so forceful about the rising dangers the stock market is facing.

Make sure you watch this weeks new video...."500K, Profit and Proof"

One of the themes I’ve repeatedly covered in this column is the rapidly deteriorating health of the two most basic economic building blocks of the American economy: the “makers” (see August 25 column) and the “takers” (see July 14 and August 4 columns).

There are thousands of economic and business statistics you can look at to gauge the health of the US economy, but at the economic roots of any developed country is the prosperity of its factories (makers) and transportation companies (takers) delivering those goods to stores.

This week, let’s look at the latest evidence confirming the piss poor health of American factories.

Factory Fact #1: The Institute for Supply Management released its latest survey results, which showed a drop to 51.1 in August, a decline from 52.7 in July, below the 52.5 Wall Street forecast, and the weakest reading since April 2009.

NOTE: The ISM survey shows that raw-materials prices dropped for 10 months in a row. If you own commodity stocks—such as copper, oil, aluminum, or gold—you should consider how falling raw materials prices will affect the profits of those companies.

Factory Fact #2: Despite all the crowing from Washington DC about the improving economy, US manufacturing output is still worse today than it was before the 2008-2009 Financial Crisis, according to the Federal Reserve.

Factory Fact #3: Business inventories increased at the fastest back to back quarterly rate on record. Inventories increased 0.8% in Q2, following a 0.3% increase in Q1, and now sit at $586 billion. That’s a 5.4% year over year increase!

Remember, there are two reasons why businesses accumulate inventory:

• Business owners are so optimistic about the future that they intentionally accumulate inventory to accommodate an upcoming avalanche of orders.

OR

• Business is so bad that inventory is starting to involuntarily pile up from the lack of sales.

Factory Fact #4: The Manufacturers Alliance for Productivity and Innovation (MAPI), a trade association for US manufacturers, is none too optimistic about the state of American manufacturing.
The reason for the pessimism is simple: US manufacturers are struggling.

• U.S. manufactured exports decreased by 2% to $298 billion in the second quarter, as compared with 2014.

• The US deficit in manufacturing rose by $21 billion, or 15%, compared with the second quarter of 2014.

“The US $48 billion deficit increase in the first half of the year equates to a loss of 300,000 trade related American manufacturing jobs, and the deficit is on track for a loss of 500,000 or more jobs for the calendar year,” said Ernest Preeg of MAPI.

So what does all this mean?

When I connect those dots, it tells me that American manufacturers are struggling. Really struggling.
Take a look at the Dow Jones US Industrials Index, which peaked in February and started to drop well ahead of the August market meltdown.

You know what’s really nuts? The P/E ratio for this struggling sector is almost 19 times earnings and 3.3 times book value!

Is there a way to profit from this slowdown of American factories? You bet there is.

Take a look at the ProShares UltraShort Industrials ETF (SIJ). This ETF is designed to deliver two times the inverse (-2x) of the daily performance of the Dow Jones US Industrials Index. To be fair, I should disclose that my Rational Bear subscribers have owned this ETF since June 16, 2015, and are sitting on close to a 15% gain.

Critics could say that I am “talking up my book,” but I instead see it as “eating my own cooking.” My advice in this column isn’t theoretical—we put real money behind my convictions. That doesn’t mean you should rush out and buy this ETF tomorrow morning. As always, timing is everything, so I suggest you wait for my buy signal.

But make no mistake, American “makers” are doing very poorly, and that’s a reliable warning sign of bigger economic problems.

Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Hate Mail, Crumbling Factories, and Sinking Stocks was originally published at mauldineconomics.com.

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The 10th Man....What a Correction Feels Like

By Jared Dillian

Back in the summer of 2007, when I was working for Lehman Brothers, I had a vacation to the Bahamas planned. This was unusual for me. Up until that point, in six years of working for Lehman, I had taken about five vacation days—total. But my wife and I were going to a semi primitive resort on Cat Island, the most desolate island in the Bahamas. Interesting place for a vacation. Suffice to say that it’s plenty hot in the Bahamas in August.

The market had been acting funny for a while, and I had a hunch that there was going to be trouble while I was gone, so I bought the 30 strike calls in the CBOE Market Volatility Index (VIX). I was betting that volatility was going to go up a lot in a short period of time. In fact, these options—which I spent a little over $100,000 on—would be worthless unless there was outright panic. I gave instructions to my colleagues to sell the call options if the VIX went over 35. (Note: my memory on the details of the trade, like the strike of the options and the level of the VIX, is a little hazy. The specifics might have been different, but you get the general idea.)

So there I was, sunning myself at this primitive resort on Cat Island and the world was melting down, and I was completely oblivious to what was going on back on Wall Street. Coincidentally, the local Bahamas newspaper had a picture of black swans on the cover one day. I staged a photo of me in a hammock reading the newspaper with the black swans on it. I still have that photo.

I got back to civilization and checked the markets. I saw the chart of the VIX. I could hardly contain myself. If my colleagues had executed the trades properly, I would have had a profit of over $800,000. But when I got back to work and opened my spreadsheet, I found that I’d made less than $100,000. What I had failed to consider was that if the world actually was blowing up, the guys would have been too busy to execute my trade.

So there is this whole idea of state dependence that we have to consider when we’re talking about the market. Like, you might have a plan to buy stocks when the index gets below a certain level, but when the market gets to that point, you: a) may not have the capital; and b) might be panicking into your shorts. It’s nice to have a plan, but, paraphrasing Mike Tyson, everyone has a plan until they get punched in the face.

I remember reading Russell Napier’s book about bear markets, called Anatomy of the Bear. It talked about all the big bear markets in the US, including the granddaddy of them all, the stock market crash of 1929 and the Great Depression. One of the things that I learned from this book was that if you can time the bottom exactly right, you can make a hell of a lot of money in very short order. For example, if you had bought the lows in 1932, you could have doubled your money in a matter of months.

I wanted to do that. I prayed for a bear market, so I would get my chance.

Little did I know that I would get my chance just two years later—and blow it.

When the market is down 60%, it’s scary as hell to buy stocks. Hindsight being 20/20, you can say, “What, did you think it was going to zero?” Actually, yes—in March of 2009, people thought it was going to zero.
But for those people who: a) had capital; and b) weren’t terrified, it was a once in a lifetime opportunity.

A Thousand Days with No Correction

So let’s talk about a). Does everybody have capital? Remember, the hard part of this is not picking bottoms. Many people can do this quite capably. Panic/liquidation is very easy to spot. But few people have the ability to take advantage of it, because they’re fully invested.

As for b), you tend not to be terrified if you have capital.

Everyone knows by now that the stock market is correcting. The price action is pretty terrible. Will it get worse? I think so. We’re seeing excesses (corporate credit, growth stocks, IPOs) that we haven’t seen in many, many years. It’s been over 1,000 days since we’ve had a correction of any magnitude. With the market down about 5%, nobody is particularly worried, because every other time the market was down 5%, it ended up going higher.

Back to state dependence. What is it going to feel like if the market goes down further? How will people behave if the S&P 500 gets to, say, 1,700?

I can tell you what it will be like if the S&P gets to 1,700. It’s going to be like it was in August of 2007 when my coworkers forgot to sell my VIX calls because they were buried under an avalanche of panicked sell orders from institutional money managers. Pre-algorithmic trading, the trading floor used to get pretty noisy. I used to be able to tell you what the market was doing just from listening to the floor. At SPX 1,700, trading floors will be very noisy.

It’s been so long since we’ve had a correction, I’m guessing that most people have forgotten what a correction feels like. When you go that long in between corrections, people are sitting on a mountain of capital gains. And unless the capital gains really start to disappear, there is little pressure to sell. But if you’re the owner of, say, airline stocks, and you’ve watched them evaporate to the tune of 30%, that tends to focus the mind a little bit.

As with any steep correction, there will be fantastic opportunities, but they will only be available to those who have capital. Remember, bear markets don’t just destroy the bulls’ capital, they destroy the bears’ capital, too.

Bear markets destroy everyone’s capital.

Jared Dillian

The article The 10th Man: What a Correction Feels Like was originally published at mauldin economics

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Will The Dollar Ruin The Santa Claus Rally in the S&P 500?

Experienced traders recognize that volume typically dries up going into the holiday season. Light volume and the holiday seasonality generally push equity prices higher. The discussion of whether Santa Claus comes to Wall Street has arrived in earnest.

I do not envy Santa as he has the most arduous task of determining if Wall Street was naughty or nice. I suppose it depends on whether he reviews recent performance, or if past performance comes into play. Clearly coal will likely be found in a few stockings soon enough. If I were John Corzine, I would not expect to get a lump coal, but something far worse potentially.

In all seriousness, the bullishness has gotten pervasive in the media and economic data points such as unemployment and consumer credit have improved according to the government. One way to gauge investor sentiment is to look at the weekly advisor sentiment numbers courtesy of Bloomberg and Investor’s Intelligence.

According to this week’s advisor sentiment numbers, advisors who are bullish advanced to 47.4% from 44.2% last week. Bearish advisors dropped to 29.5% from 30.5% from the previous week. The 29.5% bearish data point matches a level that has not been seen in nearly 4 months. Bullishness has clearly become the leading expectation in the marketplace.

Only one asset has the opportunity to be “The Grinch” and ruin Christmas on Wall Street. If the U.S. Dollar rallies sharply, risk assets are certain to get hammered lower. In addition to the bullish tenor of market participants, most market pundits and gold bugs believe strongly that the U.S. Dollar is doomed fated for lower prices.

When I look at the long term momentum of a stock or commodity contract I will look at a monthly chart and plot the 12 month moving average against the price action. While it seems simple, equity and futures positions adhere to the 12 month moving average quite closely in many cases. The analysis is very simple as prices above the 12 month moving average equate to bullishness and prices below the moving average predict lower prices. The monthly chart of the Dollar Index futures is shown below:

As can be seen above, the Dollar Index futures are showing strength currently. The 12 month moving average is starting to flatten out which is also a bullish indicator. When looking at the daily time frame we can see that price action is trading inside a wedge pattern and is bouncing higher off of support:

An additional catalyst that could push the U.S. Dollar higher is the economic tragedy that is Europe. European political leaders need to come up with a series of strong solutions that will stabilize their economic crisis otherwise the Euro will weaken further. A weakening or potentially crashing Euro will push buyers back into the U.S. Dollar. This would in turn place downward pressure on equities and commodities.

S&P 500

On Thursday the S&P 500 flushed over 2% lower by the close as the European Central Bank disappointed investors with an expected 0.25% rate cut and no new bond purchase announcements. The bulls will tell you that the Thursday the week prior to monthly option expiration usually is volatile and price direction is generally in the opposite direction of the primary trend. We will find out next week whether that axiom holds true. The daily chart of the S&P 500 is shown below:

The strength of Thursday’s move is not going to easily be reversed. The European leaders need to shock the market with tangible decisions and launch a major offensive against their growing fiscal issues. If European leaders disappoint investors, the reaction to the news could be a violent selloff that leaves bulls flatfooted next week.

Those who are leaning long in size should consider that their trading capital is being leveraged on the hope that European leaders can come to a groundbreaking agreement. I will be in cash watching the price action in the S&P 500. However, once the dust settles and others have done the heavy lifting, I will likely get involved with a directional trade. Until then, I am just going to ponder if I were Santa, would Wall Street get a present or a lump of coal?

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J.W. Jones

The SPX Dances Between Excitement and Danger

Many readers might remember that exactly two years ago the S&P 500 tagged the infamous 666 price level before putting on a monster 2 year rally that saw it surge over 100% to the February 2011 highs. Investors today are staring at a rising wall of risk while corporate credit spreads remain bullish, corporations have been able to expand margins and produce increasing profits, and Federal Reserve Chairman Ben Bernanke has declared that there are no inflationary concerns. Quite frankly I am going to leave Ben Bernanke alone simply because so many other people will do a better job of declaring him incompetent and the creator of massive bubbles in risk assets, but I digress.

Right now investors have to weigh rising oil prices, geopolitical conflict in the Middle East, the threat of higher interest rates and inflation against the bullish backdrop discussed above. The price action in the broader market place is talking, but we have to listen with an open mind currently. There are two key price levels that are obvious when we look at a daily chart of SPX. First of all, the SPX 1331-1332 price level is acting as major resistance and holding the bulls in check. Should this level be breached to the upside on a daily close, we could see prices extend higher to test recent highs. These charts illustrate the key upside level around 1331-1332.....Check out "The SPX Dances Between Excitement and Danger"


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New Video: Where is Gold Headed and How Can You Prepare?

The gold market has been pushing out its normal level of frustration and anxiety for the past several weeks.

So the question becomes, is the gold market pausing to move higher, and of course the Bulls would argue this, or is it forming the head and shoulders top that many technicians are looking for? Of course, this would be a bearish sign for gold if this technical formation is completed.

We've just finished a short video that shows you what we're looking at right now in gold and how I think it is going to be resolved. The video is a little over 2 minutes. It's quick and to the point while supplying you with what you need to take your place in or out of this market.

Just Click Here to Watch today's video "Where is Gold Headed and How Can You Prepare?"

You may also wish to attend our gold webinar which we are holding on the 2nd of December at 4 PM EST. The webinar is free of charge, but you need to register in order to attend. This is no hype, but we have limited space and it will be on a first come first served basis. The important thing is that you register as soon as possible.

Here is the link to register for the webinar

While you do need to register to attend our gold webinar, in order to watch today's short video no registration is required nor is there any charge.

We hope to see you at this week's Gold webinar so don't forget to register.

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New Video: A Battle Royal in the S&P 500

The battle between the bulls and the bears continues in the S&P 500 with neither side able to gain the upper hand. This choppy trading action will eventually lead to a large move one way or the other. The bulls are betting that we are headed higher and the bears are betting that the economy is going to tank.

In our latest video, we share with you some of the key technical points that are still in play and where the market needs to go in order to break out of the current logjam that it's in.

As always our videos are free to watch and there is no need for registration. Please let us know your thoughts by leaving a comment.


Watch "A Battle Royal in the S&P 500"


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New Video: The Battle of the Bull and Bears

The battle between the Bulls and Bears continues with very choppy trading action. The rally from a potential double bottom is cause for concern for the Bears, however the Bulls are in a similar situation as they have to prove their case with sustained market action.

In our new video, we outline some of the key levels that we think are important in the S&P 500 market. Volume continues to to be light and that is why the markets are moving around and are so volatile at the moment.

This is our first video this week, but expect many more as the market rotates. Don't miss our special risk free trial offer to MarketClub, my premium charting service, offered at the end of this video.


Just click here to watch "The Battle of the Bull and Bears"



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Key Stock Market Commentary For Monday Evening

GENERAL STOCK MARKET COMMENTARY
The U.S. stock indexes closed firmer today in quieter pre election trading. The stock index bears still have the near term technical advantage. However, there are now early technical clues to suggest market bottoms are in place or close at hand. However, as the weakening economic news continues to trickle into the marketplace, it will be hard for the stock market bulls to get excited about sustaining any solid uptrend in prices. Do remember that during serious economic weakness or recession that generally the stock market puts in a low well before all the bad economic news is reported.

ENERGY MARKETS
December crude oil closed down $3.84 at $63.97 a barrel today. Prices closed near the session low today. A firmer U.S. dollar pressured crude oil. Crude oil bears do still have the solid near-term technical advantage. Prices remain in a 3 1/2 month-old downtrend on the daily bar chart.

December heating oil closed down 993 points at $1.9849 today. Prices closed near the session low. Bears still have the near-term technical advantage. A 3 1/2 month-old downtrend is in place on the daily bar chart.

December (RBOB) unleaded gasoline closed down 1,302 points at $1.3657 today. Prices closed near the session low today and hit a fresh contract low. Bears are still in firm technical control. Prices are still in a 3 1/2 month-old downtrend on the daily bar chart.

December natural gas closed up 5.1 cents at $6.834 today. Prices closed near the session high on tepid short covering in a bear market today. Bears remain in technical control of nat gas. The next upside price objective for the bulls is closing prices above solid technical resistance at $7.332.

CURRENCIES
The December Euro currency closed down 116 points at 1.2625 today. Prices closed nearer the session low. Bears still have the near term technical advantage amid still no solid technical clues that a market low is close at hand. Prices are still in a 3 1/2 month old downtrend on the daily bar chart.

The December Japanese yen closed down 37 points at 1.0103 today. Prices closed near mid range today. No serious chart damage has been inflicted but the yen bulls are fading and need to show fresh power soon. A 10 week old uptrend is still in place on the daily bar chart.

The December Swiss franc closed down 143 points at .8521 today. Prices closed nearer the session low today and hit a fresh 14 month low. Bears still have the near-term technical advantage and gained more power today.

The December Canadian dollar closed up 127 points at .8452 today. Prices closed nearer the session high on short covering in a bear market. Bears still have the overall near term technical advantage, but the bulls have gained some fresh upside technical momentum recently.

The December British pound closed down 303 points at 1.5803 today. Prices closed nearer the session low. Bears still have the solid near-term technical advantage. Prices are still in a six-week-old downtrend on the daily bar chart.

The December U.S. dollar index closed up 520 points at 86.86 today. Prices closed nearer the session high today. No serious chart damage has occurred recently and the bulls still have the solid near-term technical advantage.



Precious Metals Market
December gold futures closed up $6.50 at $724.70 today. Prices closed nearer the session low. Short covering was featured. Bearish "outside markets"--a stronger U.S. dollar and sharply lower crude oil prices--limited the upside in gold today. Bears still have the overall near term technical advantage.

December silver futures closed steady at $9.73 an ounce today. Prices closed nearer the session low today. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices pressured the silver market today. Bears still have the overall near term technical advantage. Prices are still trading below a 3 1/2 month old downtrend line on the daily bar chart.
December N.Y. copper closed up 55 points at 183.45 cents today. Prices closed near mid-range today. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices limited the upside in copper today. Copper bears still have the near term technical advantage. Prices are still in a four month old downtrend on the daily bar chart.

FOOD & FIBER
SOFTS
March sugar closed up 27 points at 12.29 cents today. Prices closed near the session high today on more short covering. Prices are still trading below a 2 1/2 month
old downtrend line drawn from the August and September highs.

December coffee closed down 5 points at 112.95 cents today. Prices closed near mid-range today in quieter trading. Buying interest was limited by Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices. Coffee bears still have the near term technical advantage. Prices are still in a 10-week-old downtrend on the daily bar chart.

December cocoa closed down $86 at $1,967 today. Prices closed near the session low today amid bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices. Cocoa bears still have the overall near-term technical advantage and gained more power today.

December cotton closed up 27 points at 44.56 cents today. Prices closed nearer the session low today in quiet trading. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices limited buying interest in cotton today. The cotton bears still have the solid near term technical advantage.

January orange juice closed up 65 points at $.8095. Prices closed near the session low today. Short covering was featured. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices limited the upside in FCOJ today. Bears still have the overall near term technical advantage as prices are still in a four month old downtrend on the daily bar chart.

January lumber futures closed up $4.50 at $203.10 today. Prices closed near the session high and were supported by short covering in a bear market. Lumber bears still have the near-term technical advantage.

GRAINS
December corn futures closed up 3/4 cent at $4.02 1/4 today. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices pressured the corn market today. Prices traded sharply higher early in the session on short covering, but the gains faded as the day wore on.

January soybeans closed up 7 1/4 cents at $9.40 1/4 today. Prices closed near mid range today. Bearish "outside markets" a stronger U.S. dollar and sharply lower crude oil prices did limit the upside in beans today. Short covering was featured today. Soybean bears remain in near term technical command.

December soybean meal closed up $1.90 at $274.90 today. Prices closed nearer the session low today. Short covering was featured. Bears still have the overall near term technical advantage.

December bean oil closed up 114 points at 34.75 cents today. Prices closed near mid-range today on short covering in a bear market. Bean oil prices are still in a four month old downtrend on the daily bar chart. Bears still have the near-term technical advantage.

December Chicago SRW wheat closed up 25 3/4 cents at $5.62 today. Prices closed nearer the session high today on short covering. The wheat bears still have the overall near term technical advantage. Prices are still in a 6 1/2 month old downtrend on the daily bar chart.

LIVESTOCK
December live cattle closed up $0.55 at $93.25 today. Prices closed nearer the session high today and hit a fresh three week high on short covering. While the bears do still have the overall near term technical advantage, the bulls have gained some upside momentum recently, but have more work to do to better suggest a market low is in place. Prices are still trading below a four-month-old downtrend line on the daily bar chart.

November feeder cattle closed up $1.07 at $99.70 today. Prices closed near the session high today and closed at a fresh three-week high close on more short covering in a bear market. Bears still have the overall near-term technical advantage, but the bulls have gained technical momentum recently. Prices are still in a three month old downtrend on the daily bar chart, but now just barely.

December lean hogs closed down $0.40 at $54.40 today. Prices closed near the session low again today and hit a fresh contract low. Hog bears still have the near term technical advantage, amid bearish cash market fundamentals. Prices are still in a three month old downtrend on the daily bar chart.

February pork bellies closed down $0.87 at $83.90 today. Prices closed nearer the session low today and scored a fresh contract low. Bears still have the near term technical advantage. Prices are in a six week old downtrend on the daily bar chart.


December U.S. T-Bonds closed up 8/32 at 113 12/32 today. Prices closed nearer the session high on short covering in a bear market. T-Bonds and Notes will continue to likely trade in an inverse posture with the U.S. stock indexes. The next downside price objective for the T-Bond bears is closing prices below solid technical support at the October low of 112 17/32.

Let The Bulls Celebrate.....For One Night

The U.S. stock indexes closed solidly higher today and near the session highs on short covering in a bear market. Stock traders may have also been today factoring into prices the expected interest rate reduction by the U.S. Federal Reserve on Wednesday afternoon. The stock index bears still have the solid near-
term technical advantage. There are still not yet any significant technical clues to suggest market bottoms are close at hand. As the weakening economic news continues to trickle into the marketplace, it will be harder and harder for the stock market bulls to get excited about sustaining an uptrend in prices. Weekly high closes or closes near the weekly highs in the stock index futures would be a first clue that market bottoms are in place.

December crude oil closed up $0.06 at $63.28 a barrel today. Prices closed near mid-range today. Losses were limited today by a rallying U.S. stock market. Crude oil bears still have the near-term technical advantage. Prices remain in a 3.5-month-old downtrend on the daily bar chart. Even with a spike in the markets today the bulls still have a lot of heavy lifting to do to turn the trends around.