Stocks Looking To Slide Into Bear Market, Participants ‘Rattled’

Stocks Looking To Slide Into Bear Market, Participants ‘Rattled’

$DIA, $SPY, $QQQ, $VXX

Stocks will fall about 5% from current levels and may even slide into Bear Market territory in the next few months as emerging markets continue rattle participants.

Some stock analysts forecast that the S&P 500 stock index will end the year at 1,820 from its current mark of about 1,920 on signs of economic weakness.

Thursday the US stock market finished mixed: DJIA -12.69 at 16272.01, NAS 100  +6.92 at 4627.08, S&P 500 +3.79 at 1923.81

Volume: trade was above average with more than 950-M/shares changing hands on the NYSE.

• NAS 100-2.3% YTD
• S&P 500 -6.6% YTD
• DJIA -8.7% YTD
• Russell 2000 -8.9% YTD

The fear is that we could even see prints in the low 1700’s which would entail a 20% move an official Bear Market in the S&P 500 from its Y 2015 high of 2134. Globally I expect things to be even weaker.

The S&P 500 fell 6.7% in Q-3, the worst Quarter in 4 years for the benchmark. China’s currency devaluation was a Key trigger for the sell-off as participants worry that the world’s 2nd-biggest economy was in trouble.

China’s devaluations are not over yet. There is more weakness ahead both fundamentally and within markets over Q-4 and perhaps into Q-1 of Y 2016.

A rise in the S&P 500 to a weekly close above 2,020 will hit the stop-loss trigger on institutional short position. A stop-loss order is intended to minimize trading losses.

Meanwhile, unprecedented monetary stimulus by central banks since the financial crisis in Y 2008 has invalidated Bearish calls by many analysts.

The Big Q: Looking for the Fed Put?

The S&P 500 would have to reach the 1,500’s in order for the Fed to respond with monetary stimulus: the “Fed Put.”

Wall Street coined the term “Greenspan Put” to describe how former Federal Reserve Chairman Alan Greenspan helped to prop up stocks by lowering interest rates and flooding the financial system with easy credit.

A Put is an options contract that allows a trader to sell a security at a pre-set price.

The “Bernanke Put,” named for Mr. Greenspan’s successor Ben S. Bernanke, was used to describe the Fed’s several rounds of quantitative easing. Those bond-buying programs were intended to help the economy recover from the worst recession in 80 years.

Current Fed Chairwoman Janet Yellen said the central bank is looking to raise interest rates this year, the 1st hike since Y 2006. Back then, the US economy was growing by more than 5% a year, compared with 3.7% currently.

I believe that any Fed rate hike will short-lived and followed by more monetary stimulus.

However, considering the failure of global QE to generate sustainable global growth and inflation, and considering the Fed’s starting point, Y 2016 could be the year when we see negative Fed Funds as a way of getting money velocity moving up rather than down.”

Last week, Goldman Sachs (NYSE:GE) cut its year-end target for the S&P 500 stock index to 2,000 from 2,100, pointing to slower economic growth in the US and China and lower Crude Oil prices.

A lower path of profits is an obvious reason to lower a price target but the risks for the index level and P/E (price-to-earnings) multiple have also increased. Flat is the new up’ will be the Y 2016 investor lexicon.

Stay tuned…

HeffX-LTN

Paul Ebeling

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