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Wednesday, December 10, 2014

Update 12/10

Splat.  Today was the big down day I mentioned was coming.  They always seem to be the result of the low volatility rise like we had the last few weeks.  Here is the daily chart.

SPX closed back under the trend line from 2012.  The selling was enough to just barely trigger my over sold buy signal.  As you can see on the chart the last two buy signals were not all that close to the low.  The breadth was 81% negative so the selling was broad based.  There were 116 new highs and 262 new lows.  Most of those new highs happened early in the day as yesterday's reversal brought out some buyers this morning.  However, every time the market bounced the sellers pounced.  All day long.  The TRIN closed at 3.3 which is quite high and shows some panic.  A reading that high will often bring out buyers the next morning.  The blue bar indicates SPX closed below its lower Bollinger band so it is a bit extended in the short term.  Its in the middle of nowhere as far as support goes though.  It could easily keep going down to the 100 DMA over the next few days.  This megaphone pattern is inherently unstable.  There is no strong structural support anywhere.  That is why this pattern so often makes an important top.  Lets have a look at the futures chart.

The futures ended the day below the 100 SMA.  Like the daily chart they have a blue bar so they are extended on the down side.  ADX is showing a pretty strong down trend developing here.  The -DI line must cross below the blue ADX line before we can consider any kind of bottom might be in place.  Patience.

While the big boys were not interested in selling into the gap down yesterday they were more then willing to let it go today.  Fear was in the air.  I heard people talking about contagion.  There is good reason for some fear.  Oil price drops of this magnitude and speed are normally associated with global recessions.  OPEC reduced their demand forecast for next year adding to that fear today.  I also heard talk of some of the energy companies talking about selling shale assets to shore up their balance sheets.  Clearly stress in the oil patch is rapidly building.  We went from cap ex cuts to selling assets in just a few weeks.  I can see why.  On top of the $200 billion in energy related junk bonds there is over $300 billion of covenant-lite loans (definition).  Those are probably barely a step above junk bonds in reality.  The numbers make this potentially a bigger problem then the subprime mess that caused the financial crisis.  There is one thing that might make it even worse.  The mortgage mess had assets that could be foreclosed on and resold.  The collateral for these loans is oil in the ground.  You can't repossess that and to sell the rights you have to have a buyer.  Its much easier to find a buyer for a house.  Not everybody is going to drill for oil.  Finding a buyer will be oil price dependent.  I read the other day there was a 40% drop in new well permits in Nov.  Lower prices will only make demand worse.

Today turned the short term trends for SPX and COMPX down.  While we are a bit over sold in the short term it seems unlikely we are at an important low yet.  For more then 18 months when the market sold off this hard it always closed below the 100 SMA before the final low.  The last pullback went below the 200.  While it could always be different this time, it might not be. 

Fear overtakes the stock market periodically.  Some times those fears prove to be unfounded.  Those instances make great buying ops.  However, some times the fear is legitimate.  It can often be difficult to know which is going on during the fear episode.  In this particular case the fear of a global economic slowdown and contagion from the oil patch seems justified.  There is considerable economic evidence from around the world of problems.  The numbers in the energy related bond market data show clear potential for trouble as well.  The lower the oil price goes the more trouble there will be.  In 2008 the price went from over 140 to below 40.  People kept calling for a bottom all the way down.  It didn't stop until OPEC cut production.  I don't see any chance it stops this time until production is reduced.  I have seen a number of articles and people on TV blowing off any problems from the drop in price.  At this point the extent of the possible trouble is unknowable.  Anybody that says not to worry is either ignorant or has an hidden agenda.  Remember Bernanke telling us the subprime crisis was contained shortly before the worst recession since the great depression.  Maybe this all blows over and nothing bad happens.  However, I just keep wondering about how the market internals started falling apart at the same time the oil price slide started.  If something bad happens people will be writing articles about how all the market internals were issuing all these warning signs ahead of time.  Every thing that I know of that has been a warning sign of a big market decline has happened this year.  I don't think it is wise to just ignore that fact.


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