MorningWord 9/28/15: The Investment Landscape Is Moving Beneath Our Feet

by Dan September 28, 2015 9:30 am • Commentary

There seems to be a growing chorus of market participants and pundits (including moi) that the S&P 500 (SPX) will not only soon break the August 24th panic low of 1867, but also retest the October 15th, 2014 intra-day low of 1820, down about 6% from Friday’s close. If it were in fact do so, it would be the first time since the start of the bull market (that began in early 2009) that the SPX retested a significant low from the prior year:

SPX since Jan 1, 2009 from Bloomberg
SPX since Jan 1, 2009 from Bloomberg

As my friend and chartist extraordinaire Carter Worth from Cornerstone Research (and CNBC Faast Money & Options Action) likes to say, “draw the lines anyway you like, but this is the way I see them…..”,

The way I see them is that if the SPX were to break the October 2014 low, the uptrend that has been in place since the 2009 bottom will be broken. And at that point all bets are off, and we are unlikely to see new highs anytime soon.

The first breakdown below the prior year’s V bottom low will be an important technical event, as it would represent a very clear topping formation, setting up for a break back to 1600, which would be a 25% decline from the May highs. Nothing scientific there, and I am NOT a chartist, but to my plain eye I don’t see any real support until 1600, And if things got really ugly and the markets crashed, maybe 1400. Just saying.

But where is the evidence that the U.S. stock market (the last bastion of equity strength) is on the precipice of a mighty decline?  As we have documented on a near daily basis in 2015, the crash (volatility) in commodities and emerging market credit, equity and currencies just started to hit developed markets like Japan and Europe, and in August finally hit ours.

The devastation in Biotech stocks last week started with a single Tweet. And that would be easy to dismiss as political season stuff, but the technical damage done in one of the poster-children of  ZIRP driven mania is real. Regular readers will recognize the pattern in the XBI (S&P Biotech etf). It just exited the “Triangle of Death”:

XBI 1yr chart from Bloomberg
XBI 1yr chart from Bloomberg

Some would say that Biotech’s pain was others gain, like the XLF (Financial Select etf) closing up 50 bps on the week vs the SPX down 1.4%. But the XLF is down 11% from its 52 week highs and down 6.5% on the year. And it’s  an obvious place to park some cash if the FOMC does in fact raise rates this year, resulting in a steeper yield curve.

Also look at the bid in defensive sectors last week, like XLU (Utilities Select etf) up 1.25%, and the XLP (Consumer Staples etf), up 65 bps. That does not exactly point to a bullish near term for equities.

The XBI’s 25% decline in two months from its July 20th all time highs started as a healthy sell off, but has now turned into a full on liquidation. And that action is nothing new in the markets. We have seen this sort of selling over the last 18 months in commodities. And then it moved on from there. And it  hasn’t stopped. IT’s swallowed almost every asset class in emerging markets. And now the Euro and European equities. The DAX was once up 25% on the year but is now down 2.5% and at the 2015 lows.

The investment landscape is moving beneath our feet. It’s about time we recognize it.