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The 1-Minute Market Report – October 12, 2018

The 1-Minute Market Report - October 12, 2018

What occurred final week. What we’re awaiting subsequent week.

Two dangerous weeks in a row. What subsequent?

There isn’t any query that two dangerous weeks in a row have shaken issues up. The spike in bond yields has spooked sufficient of the intrepid dip-consumers to render them, at the very least briefly, powerless towards the rally-sellers. Particulars to comply with.

How dangerous have been the previous two weeks out there?

Within the Grand Scheme, not even near a “rout” that many pundits are saying it was. A mean down week out there produces a decline of 1.eight%. So a mean down two weeks produces a decline of three.6%. These final two weeks took the market down 5%. Worse than common, however let’s keep in mind – to date that is only a pullback in a bull market. It might flip into one thing worse, however we’re distant from making that sort of market name.

Chart 1. S&P periodic returns.

There have been some notable modifications within the periodic return numbers. The 1-month return went much more destructive than it was final week. The three-month return was even worse, and it’s now unfavorable as nicely. And the 12-month return dropped all the best way from 16.1% simply three weeks in the past, all the best way down to eight.5%. This can be a concern to me, however not but an instantaneous name for aggressive promoting.

This Week

SP 500 periodic returns

Final Week

sp500 periodic returns

Let us take a look at the important thing markers for the market. For many who are new to this weekly report, I monitor the space above or under a number of the key ranges that technicians and chartists obsess over. It has relevance as a result of chart watchers have huge followings and what they are saying concerning the course of the market has impression.

The most salient level from this comparability is the truth that the market has now taken out three help ranges, or Key Markers as I wish to name them. However once more, let’s put this in context. It often takes no less than 5 violations of help to verify a brand new bear market. Do not get forward of the indications.

What’s notably disturbing is that we at the moment are inside spitting distance of the 200-day shifting common. We traded under it on Thursday, however on Friday the dip-consumers got here out of the woodwork to save lots of the day, a minimum of for now. There’s a giant cohort of technical analysts who flip very bearish if we shut under the 200-day.

Chart 2. Distance from Key Markers

This Week

Final Week

sp500 distance from key markers

Chart three – chart of the week

The chart under appears dangerous. Fairly dangerous, the truth is. However let’s put it in perspective. Even after a nasty two weeks, the market is barely in pullback territory (a decline of 5% to 10%). Pullbacks out there are as regular as pimples on a youngster’s face. They occur.

Do not assume that the sharpness of the drop signifies that the celebration’s over for the bull. The market can rally from right here, because it has achieved many occasions all through historical past. However there isn’t any denying that this chart is ugly.

SP 500 %Chg YTD

Chart four. The Market Dashboard

Take a look at the drawdown chart within the higher left of the dashboard. The precise variety of minus 5.6% is not an enormous deal by itself. It is the swiftness of the decline that will get my consideration.

Vix and Bollinger Bands, my two proxies for worry and loathing out there, have begun to spike greater. The yr-over-yr change within the S&P 500 is nostril down. How low will it go? I solely care about one factor: what’s the chance that a bear market will arrive someday within the subsequent 12 months. I’ve a mannequin for that.

Ultimate Ideas

This week I am watching the bond market. Particularly the 10-year Treasury bond, which has had a notable spike in price, with a corresponding drop in worth. That is the proximate reason for the shift from danger-on to danger-off for fairness buyers.

We’re caught in a Catch-22 with bond charges. If the 10-yr Treasury continues to rise it can add gasoline to the selloff in equities. But when it backs down, because it did on Friday, and the Fed continues to ratchet up brief-time period charges, the outcome might be an inverted yield curve, which might truly be a worse state of affairs for fairness buyers. Why?

As a result of an inverted yield curve is among the many most dependable indicators of an oncoming financial recession. A recession brings a bear market. That is the actual menace immediately.

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