Thursday, January 14, 2016

Six Reasons The Cyclical Bull Is Ending......

Six Reasons The Cyclical Bull Is Ending

This Fed induced cyclical bull market is wheezing to the finish. Bear markets have already have begun in some key indexes, and the major averages (which are off roughly 10% from their highs last May) seem to be headed down the same path.

Markets are besieged by negative global macro forces and the Federal Reserve has begun to raise interest rates. Key technical indicators are flashing serious warning signs.

Something is very different this time. Bears are emerging from their cyclical  hibernation.

Six reasons the cyclical bull is ending:

1. China's slowdown is having a big ripple effect: China's annual GDP growth has 
slipped below 7%, but it may be even lower:  A survey of 2,000 Chinese manufacturers showed that "almost none are currently investing in new equipment and factories," The New York Times reported.

That follows a huge infrastructure-building boom. "China put in place more cement and concrete between 2011 and 2013 than the United States did in the whole of the 20th century," former Treasury Secretary Lawrence Summers wrote in The Washington Post.

That's astounding, and it means massive overcapacity, not only in China but in raw-material suppliers from Brazil and South Africa to Canada and Australia. Because many huge projects begun years ago to meet Chinese demand are just coming online, "the excess could take years to work through," The Times reported.  In 2015 commodities had their worst year since the financial crisis, and are in a secular bear market that could last the rest of this decade.

China's government, which failed miserably to stop its stock market's plunge, is now desperately devaluing the renminbi to prop up struggling exporters. That's hurting low-cost emerging market competitors, especially in Asia, which may resort to competitive devaluations to protect their market share.

2. The Fed is raising rates: Though rate increases are likely to be modest and gradual, the dollar's value will still rise, depressing commodities prices even further and squeezing emerging markets, which have issued trillions in dollar-denominated debt. Big defaults will shake markets going forward
. A stronger dollar will continue to pressure the earnings of multinational U.S. companies as well. A two-month contraction in the U.S. ISM Manufacturing index has brought it to levels last seen in June 2009 and it looks like it is going much lower.

3. U.S. earnings won't be great, while stocks aren't cheap:  Between the energy bust and the stronger dollar, Sam Stovall of Standard & Poor's Capital IQ expects a second consecutive decline in quarterly earnings when companies report fourth-quarter results, and 2015 could be the first year since 2009 to post an annual  earnings decline.  The S&P 500 trades at 15.75 times projected 2016 earnings per share, about its median multiple since 1988. But that may be based on optimistic analysts' projections of 7% earnings gains that will likely be cut later in the year.

4. Market leadership is narrow: The FANG stocks (Facebook, Amazon, Netflix and Google) and the rest of the "Nifty Nine" (Microsoft, Salesforce, eBay, Starbucks and Priceline) accounted for most of the 
stock market gains in 2015 as "investors run out of ideas and instead pour money into a few companies with a positive story to tell," wrote John Authers in The Financial Times, who compared them to the Nifty Fifty at the tail end of the 1960s bull market. The 10 top S&P 500 SPX, -1.61%  stocks were up 14% while the other 490 were down 5.8%.

5. Some indexes already are in bear markets: On Monday, the small-cap Russell 2000  index entered bear-market territory, with a 20% decline from its all-time highs last June. More ominously, as of Monday's close, the Dow Jones Transportation Average was 25% below its December 29, 2014 record peak. According to Dow Theory, the Transports' long-lasting bear market spells trouble for the Dow Jones Industrial Average. According to Bespoke Investment Group, on average, stocks in the broader S&P 1500 are more than 20% off their peaks.

6. Seasonal indicators look bad: The first five trading days of January were the worst since 1930. And the traditional Santa Claus rally — covering the last five days of 2015 and the first two of 2016 — never materialized. When both of those occur and the entire month of January posts declines, the full year has been flat or down every time except 1982 , according to the Stock Trader's Almanac.

As the Almanac's founder Yale Hirsch famously said, "If Santa Claus should fail to call, bears may come to Broad and Wall." And many other places, too, if things keep going the way they are now.

GET READY FOR THE CONTINUATION OF A VERY NASTY SECULAR BEAR MARKET, AN OUTCOME MADE WORSE BY THE FED PRETENDING TO FIX A VERY BROKEN MARKET WITH NOTHING BUT SLIGHT OF HAND.

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