Thursday, October 16, 2014

YTD Gains in the Stock Market are Gone; How You Could Have Seen It Coming

Through end of day trading, October 15,2014/

What could have caused the sudden reversal? Could it have been a slowdown in money growth?

I thought so. This is what I have been writing in the EPJ Daily Alert:

On July 7, I wrote just before the first break in the market:


The latest money supply numbers released by the Federal Reserve now show money supply growth at 4.9%. This is still very strong growth but it is significantly below the peak money growth of 9.0% at the start of the year. I have written here in the ALERT that I would get more cautious about the stock market if money growth broke below 5% and, indeed, I am.

I am  now advising that the SPDR S&P 500   (Symbol: SPY), that has done very well for us, be sold from the WEALTH PROTECTION BALANCED PORTFOLIO and the proceeds be maintained as cash (That is in money markets)

I am also advising that in the RISK TOLERANT AGGRESSIVE PORTFOLIO the SPDR Homebuilders ETF  (Symbol XHB) position be liquidated and the funds be put into cash.

On August 1, I wrote:

Money supply growth has now broken below 3.0%. The method I use to calculate money growth (see below) shows M2 4 month money supply growth at 2.9% on an annualized basis. This is now the 11th straight week of declining money supply growth.

There is no magic meaning to the break of the 3% money growth level or the near 3 month straight decline in money growth. It simply shows the extent of the decline from peak growth in terms of an absolute change in the growth rate and the time period of the decline.

Given this decline, I am now officially advising that all US stock positions, outside of positions in stocks that will benefit from accelerating price inflation, be liquidated...

Given these conditions, traders should continue to trade from the short side and short upticks. If the money slowdown continues I will be adding short positions over coming days and weeks to the  RISK TOLERANT AGGRESSIVE PORTFOLIO.

In the meantime, all investors should maintain very high cash levels of around 50% and should continue to accumulate positions in gold and silver.

What about the occasional one day strong up moves we have seen in the stock market? Here's what I wrote on October 2:


U.S. stocks are down again (Though bouncing back as I write). The Standard & Poor’s 500 will experience its first four-day decline of the year, if it ends up in negative territory.

The S&P 500 Index dropped yesterday by 1.3 percent.  There will be short rebounds from these type declines.

The Russell 2000t closed yesterday more than 10 percent lower than its record in March. The S&P 500 is down 3.2 percent from an all-time high reached Sept. 18.

More significant is that market volume has been collapsing and fewer and fewer companies are participating in any rallies. Both of these are clear signs of a top forming. Nearly half of the stocks on the NASDAQ are down over 20% from their recent peaks.

This looks like a classic early stage market break to me. It could go on for a significant time and fall into crash mode at any time.  There will, however be "one day upside wonders," but don't try to position yourself to trade for them. Downside action can be prolonged during this phase of a a bear market. What should be done? "One day wonders" should be shorted by aggressive traders when they develop.

Since, it looks more and more likely that this will end with a major crash, it is time to start thinking about what action to take during a crash. If a crash develops...
On October 9, I wrote:


I expect one day wonders and occasional rallies off of Fed minutes,
but that sure was something yesterday. The S&P 500 advanced 1.8
percent yesterday, the biggest jump since October 2013. That said.
there simply is not enough money around to support and extend these
one day wonders. As I have pointed out, these advances must be
shorted.  Indeed, as I write this morning, the entire super one day
wonder is being reversed today. This is stunning volatility.

Yesterday's rally, of course, began after the Fed released its
minutes. It was clear in the minutes that Fed officials have become
more concerned about weak growth overseas and the impact of a
strengthening U.S. dollar on the domestic economy The minutes of the
Sept. 16-17 policy meeting showed that officials were particularly
concerned that disappointing growth in Europe, Japan and China could
crimp U.S. exports. The markets interpreted this to mean that that
interest rates will stay near zero amid concerns of the slowdown in
global growth.

That the Fed will be slow in raising interest rates should come as no
surprise to ALERT readers. But more significant is that this keeps the
ball off of the main driver of stock market and economic activity,
money supply growth. And given current views on what drives the
economy, we are virtually alone in watching this chief driver.
Positive reactions to Fed minutes, when money growth has slowed is
just an opportunity for us. If the money isn't flowing the rallies
won't last and the rallies need to be shorted.

And that, folks, is how you trade a bear market. Now, in the ALERT, I am mostly discussing some surprising advice on what to do if a full-fledged stock market crash occurs.

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