Friday, February 12, 2016



A genuine purge! 

That's what some strategists are calling for after a brutal period of trading for Wall Street—and globally—that has seen the S&P 500 index fall 9.3% in the first six weeks of 2016, with the Dow Jones Industrial Average 8% lower and the Nasdaq Composite Index down more than 14%.

This recent rout in the market, which has taken a fresh leg lower on concerns about the balance sheets of some of the biggest European Banks implies that the best cure for a market slump is a serious decline that removes all the bad blood. The woes of plunging crude-oil prices have taken a back seat to fretting about the banking sector in the U.S. and in Europe.

Given the volatility and uncertainty rampant in the market, the time to get into the market isn't going to come until everyone wants to rush to the sidelines at the same time. The best entry point in this battered stock market won't occur until correlations for the S&P's 10 sectors relative to the overall market reach 90 or greater. A correlation of 100 means that assets move in the same direction.

The 7-year bull market is running out of steam, the steam being the number of stocks contributing to its advance. This occurs at the end of all cyclical bull markets. Once the relatively few stocks that are still propping up the market roll over, there is no foundation of support left to prevent a significant decline. This isn't doom and gloom propaganda. It's just part of the market cycle and should be something to monitor closely as we enter 2016.

Eventually the few stocks that are propping up the major indexes are going to collapse under the weight of that burden. And at that point, there will be no foundation left across the broad market to continue to buoy the averages. Since the start of the year, and in particular over the past week, that inevitable reckoning has been unfolding. 

The few leaders left standing have finally succumbed to the selling pressure that preceded them in the rest of the market.  The reversal will be powerful as all of the inflows attempt to exit at once.

Simply put, the credit cycle has turned and is accelerating rapidly - crushing any hopes for debt-funded shareholder-friendliness.

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