8-20-17 Market Commentary

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Market Breadth: With this past week’s market decline, our Bull/Bear Point and Figure Ratio at 0.88 rose slightly from 0.72 fell last week, yet continues in bearish territory. The total count of securities in bullish or bearish patterns decreased 9% to 2842. The count of bearish stocks decreased 16%, while the count of stocks in bullish patterns increased 2%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now two weeks in bearish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.

The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) fell 162 points for the seventh decline in seventeen weeks. At a negative 257.50 points, it continues below the six tops above +100, has fallen below the April 217 bottom, and it continues above all three remaining bottoms below -100 in the last 3 years. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in neither Accumulation nor Distribution mode with average daily volume lower than the prior week. In the last two weeks the NASDAQ had one (1) Accumulation day and four (4) Distribution days. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week the NASDAQ ended in neither Accumulation nor Distribution mode on lower average daily volume.

Momentum: On Wednesday 8/16, the CCI(20) had 6 days below zero to begin a Woodie’s Down trend. The CCI(20) daily is now at -194.46, up from -225.46 last week. Also at Wednesday 8/16 close, the CCI(20) daily within the +/-50 range formed a ZLR (Zero Line Reject) pivot with the Short entry signal next day, Thursday 8/17 close. We will continue following this trade simulation in next week’s commentary.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend sixty-eight weeks ago, while the Daily CCI(20) began a Woodie’s down trend this past week.
The CCI(20) weekly has fallen to +54.42, down from +77.64 last week. We await the return of the CCI(20) weekly to the +/-50 range for another CCI(20) ZLR weekly trade.
Industry Rotation the last two weeks: Three of the top five industries are  positive and all of the bottom five are negative. Summary: Some Tech and Gold & Silver on top; Oil Services, Oil, S&P Retail, and Brokers on the bottom. Bullish: Disk Drives continues in the top five. Oil Services continues to leads the bottom five. Oil has entered the bottom five. Computer Hardware has left the bottom five. Bearish: Brokers and S&P Retail have entered the bottom five. Gold & Silver PHLX leads the top five. CompTech has left the top five.
Focus this week: From www.zerohedge.com David Stockman Warns “Don’t Forget About The Red Swan“. The follwoing are some key points and charts.

 
Given the anti-Trump feeding frenzy, we continue to believe that a Swan is on its way bearing Orange. But if that’s not enough to dissuade the dip buyers, perhaps the impending arrival of the Red Swan will at least give them pause.

The chart below comprises a picture worth thousands of words. It puts the lie to the latest Wall Street belief that the global economy is accelerating and that surging corporate profits justify the market’s latest manic rip.

What is actually going on is a short-lived global credit/growth impulse emanating from China. Beijing panicked early last year and opened up the capital expenditure (CapEx) spigots at the state-owned enterprises (SOEs) out of fear that China’s great machine was heading for stall speed at exactly the wrong time.

The 19th national communist party Congress scheduled for late fall of 2017. This every five year event is the single most important happening in the Red Ponzi. This time the event is slated to be the coronation of Xi Jinping as the second coming of Mao.

Beijing was not about to risk an economy fizzling toward a flat line before the Congress. Yet that threat was clearly on the horizon as evident from the dark green line in the chart below which represents total fixed asset investment.

The latter is the spring-wheel of China’s booming economy, but it had dropped from 22% per annum growth rate when Mr. Xi took the helm in 2012 to 10% by early 2016.

There was an eruption as dramatized in the chart. CapEx growth suddenly more than doubled in the one-third of China’s economy that is already saturated in excess capacity.  The state owned enterprises (SOE) in steel, aluminum, autos, shipbuilding, chemicals, building equipment and supplies, railway and highway construction etc boomed.

It was as if a switch had been flicked on by Mr. Xi himself, SOE CapEx soared back toward the 25% year-over-year rate by mid-2016, keeping total CapEx hugging the 10% growth line.

However, you cannot grow an economy indefinitely by building pyramids or any other kind of low-return/no return investment – even if the initial growth spurt lasts for years as China’s had.

Ultimately, the illusion of Keynesian spending gets exposed and the deadweight costs of malinvestments and excess capacity exact a heavy toll.

If the investment boom that was financed with reckless credit expansion is not enough, as was the case in China where debt grew from $1 trillion in 1995 to $35 trillion today, the morning-after toll is especially severe and disruptive.  This used to be called a “depression.”

China Fixed Asset Investment

China’s propagated spurt in global trade and commodities was artificial and short-term. It was done to flatter China’s rulers at the 19th party congress.

Now that a favorable GDP glide path has been assured, China’s planners and bureaucracy are already back at it trying to find some way to reel in its runaway credit growth and bloated economy before it collapses.

Downside Surprises in China Are Virtually Baked In

What is coming down the pike is the great China Debt Retrenchment.  Expect a global braking motion that will get underway once Mr. Xi dramatically consolidates his power at the 19th party congress.

China Total Social Financing

This has the potential to drastically weaken the global economy – and the impact on corporate profits should not be underestimated.

The Red Swan Has Now Gone Berserk

Half of the world’s GDP growth since the 2008 crisis has been in China, and that, in turn, was purchased by the greatest credit eruption in recorded history.

As China’s nominal GDP was more than doubling from $4.6 trillion in 2008 to $11.2 trillion in 2016, its national leverage ratio soared from 175% of GDP to 300% in less than a decade.

There’s reason to seriously doubt that Beijing can bring the Red Ponzi to a soft landing.  It cannot and will not permit the nation’s debt load to quadruple again during the next eight years, meaning that China’s days as the world’s ultimate stimulus machine are over.

China Red Ponzi Debt to GDP Ratio 2017

In sum, during the last 19 months the Red Ponzi propagated a false upturn in the global economy that is already decisively reversing. This comes at the same time that central banks of the major developed world economies are finally bringing their printing presses to a halt.

The major central bankers have finally recognized that at $22 trillion on central bank balance sheets have become egregiously extended.  China is the epicenter of the world’s two decade plunge into central bank monetary fraud and credit explosion.  They have deformed and destabilized the very warp and woof of the global economy.

So, yes, even as the Orange Swan stumbles toward the Donald’s White House, there is a Red Swan following closely behind.

–Donald Pirl www.s2pmarketsignal.com


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