Tuesday 18 October 2016

"The stock market is turning into a sloppy, ugly mess—and it could get worse" By Mark Decambre From "Market Watch"!!

The stock market is turning into a sloppy, ugly mess—and it could get worse

Dow industrials on pace for longest streak of monthly losses in 5 years. Here are some of the reasons behind the slide
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It is rough out there.
By 

It is getting dicey out there for Wall Street investors, although stocks eked out a modest rise on Friday.
U.S. equities have been bouncing around lately. And the trend has been predominantly lower. Although it hasn’t been the sort of dizzying tumble for equities that would elicit an instant spike in fear, it has been, however, the kind of plodding descent that has the Dow Jones Industrial Average DJIA, -0.29%  down nearly 300 points since the end of July.
In fact, the Dow and the S&P 500 index SPX, -0.30%  are on the verge of tallying three straight months of declines, with October shaping up to be the ugliest monthly fall since January—the month after the Federal Reserve raised rates for the first time in a decade.
But, if the Dow posts a loss in October it would be the first time the blue-chip index logged three consecutive monthly declines since the period ended in September 2011. The S&P 500 notched three consecutive monthly loses earlier this year, ended February.
On Friday, stocks ended nearly flat, with only the Dow posting a significant gain buoyed by a rise in the banking sector’s Goldman Sachs Group GS, -0.89% Friday’s wobbly moves, where stocks started off sharply higher before fading, has characterized a market that appears to be increasingly on tenterhooks. Here’s what may be contributing to the recent spike in Wall Street anxiety levels:
1. October trade
Ryan Detrick, senior market strategist at LPL Financial, points out that October is inherently a volatile month for stocks. “October has a reputation as a month you better buckle your seat belts for a reason. Nearly all the volatility records seem to take place during this month,” Detrick said in a recent research note.
Detrick points out that 10 of the largest one-day drops were in October, dating back to 1928 (as the following table shows):

2. Ominous charts point to a crash (a la October 1987)
A number of analysts are pointing to the possibility of a big selloff in stocks, citing bearish technical patterns. Murray Gunn, technical analyst at HSBC, in a Wednesday note said investors should look out below if the S&P 500 closes between 2,116-1,991 and if the Dow industrials breach the 17,992-17,063 level. The thinking behind that call is those levels represent recent lows that may trigger buying by computer-driven traders and other investors. In other words, those levels then tend to act as so-called support. But slipping below them can mean a painful dip into darkness.
HSBC
Murray’s chart of the Dow industrials and ominous patterns forming.
Other market statisticians, including Carter Braxton Worth of Cornerstone Macro, have pointed out that although stocks have been hovering around all-time records, their recent crawl lower is a bad sign and suggests that equities are gradually breaking down.
Here’s a chart of important levels for the S&P 500 put together by MarketWatch’s Tomi Kilgore:

On Thursday, the S&P 500 hit a low of 2,114 before bouncing back, while the Dow’s Thursday low was 17,959, before rebounding somewhat. Still, Murray said “the possibility of a severe fall in the stock market is now very high,” and compared recent moves in stocks with those that preceded the 1987 stock-market crash.
3. Weak corporate earnings
Alcoa IncAA, -0.34% delivered weak third-quarter results to unofficially kick off earnings season. S&P Global Market Intelligence warned that earnings season is turning out to be a story of tepid growth, down 1.2% for the third quarter. S&P said particular attention needs to be paid to the consumer-discretionary sector, which includes brands like Nike IncNKE, -1.14% Ford Motor Co. F, -0.25% and Staples Inc. SPLS, -1.98% and is on track to report its lowest quarterly results since 2012 (as the chart below shows):
S&P Global Market Intelligence
Why is this bad? Weak earnings can mean there is not a lot of fundamental justification to buy stocks, which are considered risky compared with, say, the U.S. 10-year Treasury note TMUBMUSD10Y, +0.15% Better earnings from stocks mean that investors are getting good value for their buck. Weak or stagnant earnings suggest that investors are overpaying. And there have been a raft of market participants pointing to bubbles forming in the market, citing things like price-to-earnings ratios.
Indeed, S&P 500 companies are expected to post their sixth straight quarter of declining earnings, according to FactSet data. And although it is still early in the season, several corporations have issued profit and/or sales warnings over the past few weeks. That all implies that there is still weakness in the economy, despite a labor market that has been chugging along. Tepid earnings are a big reason the market is bound to sink, or, at the very least, can’t go much higher, some industry experts argue.
4. Biotech woes
The biotech market can be a canary in the coal mine as a measure of risk-taking. And it is starting to lose steam after a nice run, trading below both its 50-day and 200-day moving averages, as gauged by the iShares Nasdaq Biotechnology ETFIBB, -0.14% Falling below or trading above a moving average is usually interpreted as a measure of momentum.
Source: FactSet
The iShares Nasdaq Biotechnology ETF trading levels compared with its 50-day and 200-day moving averages.
Problems in biotech are multiple, but the primary forces could be centered on a scaling back of general risk appetite, as the sector is a proxy for bullish bets on U.S. stocks, and as a bet on the outcome of the U.S. presidential election. Democratic candidate Hillary Clinton has been critical of biotech companies, which can pressure the sector if investors believe she’s likely to win the race for the White House.
5. The pound and the dollar
TimeBritish PoundNov 15Jan 16Mar 16May 16Jul 16Sep 16
US:GBPUSD
1.11.21.31.41.51.6
The pound GBPUSD, +0.5089% which has been battered by intensifying talk of the U.K.’s plan to exit from the European Union, is hovering around its trade-weighted low, while the dollar has been creeping higher.
The dollar DXY, -0.20% has been a headwind for stocks and its abrupt surges higher on shifting views of a rate increase by the Federal Reserve have been disruptive to markets of late. A stronger buck means reduced sales for U.S. multinationals when money is repatriated into dollars. And a sustained rise could cause companies to lower their earnings outlooks for future quarters. The dollar has surged almost 3% so far in October.
Meanwhile, the pound’s steady drop has been a cause for worry because it is unclear how the U.K.’s economy will fare amid the tumbling currency, despite the benefits it offers the FTSE 100 UKX, +0.62% which is comprised predominantly of multinational companies that profit from exporting goods. Uncertainty in Europe is a problem that can cause jitters for the U.S., because it hints at broader global problems.
6. China
Concerns about China’s economy have resurfaced. Lackluster export data on Thursday reminded investors of the view that the world’s second-largest economy is petering. In August 2015, it was China’s stock-market woes and its sluggish economy that sent global markets into a tailspin.
7. U.S. presidential election
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Like the market, Trump has been on a losing streak.
Republican candidate Donald Trump’s recent debacles have begun to lead some strategists to believe that a victory for Clinton isn't just assured, but that Democrats might see sufficient gains during the November elections to gain control of the House. That is not viewed as a categorical good thing for the market—financialsKBE, -0.51% XLF, -0.46%  and the aforementioned biotech sector have been wobbly.

To be sure, there is plenty of time to right the stock-market ship. Earnings could surprise to the upside and calm may set in after the election, pushing the S&P 500 and the Dow to fresh records, but right now it is looking a bit iffy.

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