The Trend is Still Down…

Wednesday, 6 April, 2016
Albert Park, Australia
By Kris Sayce

  • This ‘crash warning’ signal still relevant today
  • Money Morning Trader

First up, in yesterday’s Port Phillip Insider, we gave you an incorrect link. The link was supposed to go to an interview between me and our options trading expert, Matt Hibbard.

So, to set the record straight, here’s the correct link. While you’re there, you’ll also be able to catch the second video in the series.

Now, on with the show…

Markets

Overnight, the Dow Jones Industrial Average index fell 133 points, or 0.8%.

The S&P 500 index fell 21 points, or 1%.

Earlier, in Europe, the Euro Stoxx 50 index fell 2.4%. The FTSE 100 index fell 1.2%.

Germany’s DAX index dropped 2.6%.

In Asia, markets are heading the other way. The Nikkei 225 index is up 0.3%. The Aussie S&P/ASX 200 index is up 30 points, or 0.6%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$36.84 per barrel. Gold is trading for US$1,229 per ounce.

This ‘crash warning’ signal still relevant today

This isn’t good news for stock lovers. As the Financial Times reports:

Wall Street’s comeback petered out on Tuesday, with the S&P 500 falling by the most in almost a month and several market indicators showing increasing signs of strain.

The S&P 500 stock index fell by 1 per cent on Tuesday — its worst performance since March 8. Meanwhile, certain gauges of the market’s and economy’s health are flashing warning signs that the relative calm that descended over the financial markets in recent weeks could be about to end.

“The fundamental portion or our global growth checklist remains weak, which is a headwind for risk-on factors,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.

That’s not good. If you’ve followed my ‘crash warning’ signals, you’ll know that I watch the US S&P 500 index closely. In particular, I’m watching the trend of actual and forecast earnings (profits).

This latest news from the US is reason enough to revisit the chart we’ve showed you several times. You may get tired looking at it, but we’ll never get tired of showing it to you.

If you recall, this chart shows actual and forecast earnings for companies in the S&P 500 index. The white line to the left of the green line shows actual reported earnings.

The white line to the right of the green line shows forecast earnings.



Source: Bloomberg
click to open in a new window

Actual earnings are in decline, and have been since early last year. I’ve added the red arrow to emphasise the point.

And yet, despite falling earnings, Wall Street analysts still predict a bumper earnings season for US companies over the next three years. You can see the typical step-up pattern.

Interestingly, the FT article references another of our ‘crash warning’ signals:

Meanwhile, the Dow Transportation Average, which is seen as an economic barometer because of its components’ central role in moving goods around the world, has fallen below its 200-day moving average, a support level that is watched by market technicians.

The fall in the Dow Transportation Average below that level could be an ominous sign, given moves in the index sometimes precede the broader market. For instance, the average hit its bottom in January about a month before the broader markets notched their lows of the year.

The relationship between the Dow Industrials and the Dow Transportations is important. It’s known as the ‘Dow Theory’.

The chief proponent of the Dow Theory in recent years was Richard Russell, who passed away late last year.

It’s a hotly debated theory. Mainly because no one is 100% sure about when the Dow Theory is signalling a potential crash or rally.

But one of the key parts of the Dow Theory is the idea of non-confirmation.

That is, if the Industrials hits a new high and the Transportation index doesn’t ‘confirm’ that high by hitting a new high too, it suggests that the strength in the market may not be genuine.

As it happens, we appear to have a non-confirmation situation at the moment, as evidenced by the chart below:



Source: Bloomberg
click to open in a new window

The green line is the Industrials. It recently rebounded up towards the record all-time high. However, the Transportation index (white line) started moving the other way.

That could tell you that investors don’t see the same strength in the earnings potential for transport stocks as they apparently do for industrial stocks.

As the FT article notes, that could be worrying. Even in an online and service economy, there is still the need to shift things around from place to place.

Take Amazon.com Inc [NASDAQ:AMZN] as an example. It has had a huge disruptive influence on retailing by driving a lot of the retail economy online.

Yet, much of what it sells requires goods to be shipped from one place to another. Even though it’s easy to think of transportation stocks, and the relationship to the Dow Industrials as something from the dark and distant past, the reality is that it’s still relevant today.

We’re continuing to watch both of these ‘crash warning’ signs, and we suggest you do too.

Money Morning Trader

How would have liked to have made an average gain of 93.5% across seven stocks (six winners and one loser), while the S&P/ASX 200 index fell 4.4%?

No need to answer. Of course you would.

Those are an example of some of the returns on stocks profiled by Callum Newman and Terence Duffy in our new pay-by-the-month service, Money Morning Trader.

Money Morning Trader is different from most of our other services in that it doesn’t give direct stock recommendations.

Instead, each day, Callum and Terence profile a stock and explain what needs to happen next in order for it to be worth buying.

From then on, it’s over to the individual to follow through with the idea or not.

If you want to think of it this way, Money Morning Trader is a halfway house between complete self-directed trading, and completely relying on the research and advice of others.

It’s a fascinating new advisory concept for our business, and I’m pleased to have launched it. After offering the service exclusively to our Alliance Platinum and Partner members for the past two months, we’re now ready to open the doors to every Port Phillip Publishing paying subscriber.

For details on how you can join Money Morning Trader, go here.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 31 stocks, including APN Outdoor Group Ltd [ASX:APO], Easton Investments Ltd [ASX:EAS], CIMIC Group Ltd [ASX:CIM], Meridian Energy Ltd [ASX:MEZ], and Sigma Pharmaceuticals Ltd [ASX:SIP].

52-week lows: 28 stocks, including Megaport Ltd [ASX:MP1, Pacific Current Group Ltd [ASX:PAC], Regis Healthcare Ltd [ASX:REG], and Yowie Group Ltd [ASX:YOW].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.