Painting Pictures Of Weakness

We saw earlier this a year in October when investors shocked seasonality trends and made October excessively bullish in nature. Energy and mining shares lead rallies that returned value lost in the August corrections. The winter months were approach with the same seasonality assumptions with a Santa Claus rally looming over the hopeful wallets of investors. Black Friday brought the first bad news with sales and traffic numbers down from last year. A drawing off of consumer confidence and consumption from earlier in the year weighed on the hopes of shoppers spending more on their gifts. December's rallies were finally dashed by energy pressure from OPEC acknowledgement and encouragement of their peak production still seeking to destroy shale producers. A quarter point rate hike seemed to be just subtitle to that the larger headline. In just two weeks from December 4th to the 18th, U.S. priced oil has dropped a stunning -15.46% with no signs of higher demand. At the same time, natural gas has fallen -18.98% in the same period has a warmer winter endangers demand for heating around the country. These two stats have weighed on energy shares which have created bearish undertones in the overall market. The uncertainty continues. The S&P 500 closes -1.78% lower as it approaches the 2,000 mark that had been crossed, both up and down, earlier in the year. The Dow Jones -2.10% slide also puts it near its significant 17,000 point level. Once again, stocks threaten to retract back to prices that reflect late August when a Chinese stock bubble popped and erased millions of dollars of wealth from major stock exchanges. Monetary institutions used that signal to boost stimulus for local economies with the Bank of Japan cutting rates and the ECB extending asset purchases to support corporate bond and equities prices in the eurozone. Meanwhile, Mario Draghi ambidextrously demands further austerity from debt-slumped eurozone economies in Portugal, Greece, and Italy. Solutions look far-fetched, and risks build up daily.

But there's no point in building up a pessimistic image because that fuels irrational investing that can exaggerate losses.

Let's look at some charts that tend to indicate the state of the market as a whole.

The common litmus test of the market of comparing the Dow Industrial and Dow Transports reports harrowing news for 2016. Looking back at late August, both averages fell to nearly equal levels with recoveries in the Transport Average (black) rallying past Industrials (blue). Typically, with transportation stocks leading, the markets perform better and show greater demand. With the rebound in these stocks more prolific, larger demand supplied the gains of the next couple months to replenish equities to their pre-August levels. It may also be worth noting the momentum and reversal indicators at both of the blue lines marking the corrections. RSI levels for August were very oversold and snapped back like a rubber band in October. Now, the same statistic is just under the midpoint. The MACD spread grew very large in just a week but also recovered in about two weeks. Currently, the MACD line continues its trend underneath its counterpart while gap widens.

Small-cap and large-cap differences describe trends with their unique reactions to weak markets. Smaller firms' shares typically respond first with their high levels of beta. These fast-moving stocks, when compared to their slower counterparts, can describe major trends before they actually happen. For example, the August correction was mildly predicted by the Russell 2000 (black) when it started to deviate from the S&P 500 (blue). That weakness halted after the turbulent losing sessions and both indices consolidated. Starting in October, though, a spread with the small-caps lagging began to widen. The current weakness has accentuated this trend with Russell losses being the more volatile and containing the most risk.

The last chart for today describes some of the fixed income choices that have been made over the past couple of months. As their labels indicated, GOVT (blue) follows a portfolio of Treasuries while JNK  (black) describes overall high yield trends.Their relationship has been rather complex through the beginning of the year with their performances not majorly impacted by the August correction. In early November, we start to see major trends emerge in both Treasuries and junk bonds; whether that is most associated with rate hikes or economic weakness, no one will ever really know. Demand for Treasuries explodes with its price rallying beyond both 50-day and 200-day averages. On the other hand, high yield bonds fall even further. With or without rate hikes, the atmosphere of the market has clearly gotten too risky for some of the most daring investors. Charts like this would discourage small business start-ups and inhibit spending from small institutions threatening to go bankrupt. One thing that is common during a recession is the tendency for consumers to retreat their spending back to large-cap producers. These are the ruts in which we have been forced into. Ruts that must be massaged out of the system in the next year. The further bearish action could bring equity values down to reasonable post-August correction levels. I would throw out 16,500 as a proposed support for the Dow. Energy will continue to weigh on stocks until the commodity problem is fixed, and that's just the truth. For those who found interest in my charts, feel free to use them for your own arguments or reports. My charts and graphs are always open for anyone's use. Check out my Flickr page for more images!