The Carnage Continues - Middle East Stock Markets Are Bloodbath-ing

Following Friday's US weakness and UAE's hint that $40 oil is coming next, the crude carnage continues as Middle East markets are crashing. As WSJ reports, the bearish direction of oil prices again spooked investors in Dubai where the DFM General Index finished down 7.6%, extending Thursday’s 7.4% rout. The bloodbath extended across the entire region with Abu Dhabi down 3.6%, Qatar slid 5.9%, Kuwait fell 2.9%, and Saudi Arabia’s market, the largest bourse in the region, retreated 3.3%.

Bloodbath-ing...

As one analyst warned:

"the severity of this decline could very well be explained by investors covering margin calls as leverage was used on the way up over the past year."

And shows no signs of stopping...

Charts: Bloomberg

The Crude Crash Comes To Wall Street: Counterparty Risks Rear Their Ugly Heads Again

In late 2006, default rates on lower-rate subprime private MBS began to rise considerably. Though not a very transparent market to the mainstream media-watching world, bankers knew trouble was brewing as this had not happened before in such a benign house price decline. Banks, knowing what they had on their books, what they had sold to others, and what that meant for risk, began quietly buying protection on other banks as counterparty risk became a daily worry for desks across Wall Street.

The stocks of US financials continued to rise amid "contained" and "no problem" comments from the status quo but credit spreads for the major US banks kept leaking wider even as stocks rallied... then reality dawned on stocks and the rest is history.

Today, US financial credit spreads (wider) have decoupled once again from stocks (higher) and that divergence began as oil prices started to slump.

Are banks hedging counterparty risk once more 'knowing' what loans and exposures they have to the massively levered US oil industry? Or is it different this time?

The Only Two Charts You Need To Understand The S&P 500

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher. 

Why is the S&P 500 rising, even as valuations are getting stretched, profit growth is declining and sales are stagnant? Two charts explain it all. Here is a chart showing the S&P 500 companies that have been buying back their own stocks (often by borrowing cheap money to do so) and companies that haven't bought back hundreds of billions of dollars in their own stock.
 

The unmanipulated sector rose a bit, while the stock buyback crowd soared:

Here is the S&P 500, with red lines marking its recent lows:
 

Here is the Japanese yen ETF FXY, with red lines marking its recent highs. The correlation is near-perfect: when the yen drops, the SPX rises.
 

This is a function of the carry trade, in which speculators borrow money in near-zero interest-rate yen and buy U.S. stocks with the cash. The financiers make money in two ways: the buying pushes the U.S. stocks up and the decline of the yen means they can pay back their loan in cheaper yen.
 

But the correlation isn't caused by just the carry trade: it's also a function of trading computers keying on the carry trade for momentum and direction.
 

The correlation is also visible in two ratio charts: SPX-FXY, and FXY-SPX:
 

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher. If either of these drivers fades or reverses, the rally in SPX will reverse, too.

Sourced From Charles Hugh-Smith of OfTwoMinds blog

Put/Call Ratio Surges To Highest Since May 2012

The various interpretations of put/call ratios are as diverse as the number of traders who view them. Typically they are used contrarian-wise, a high Put/Call ratio signals an over-cautious investor universe and thus is bullish (and vice versa) but in recent years that has been much less evident. Currently, the index-based put/call ratio is at 1.80 - the highest since May 2012, having been notably above 1 (i.e. more puts than calls) for most of the days since the Bullard lows.

Put/call ratio (rebased around 1 for clarity) is at its highest since May 2012...

Of course, there is one difference now... no QE (in the USA)

Chart: Bloomberg

The Longest Streak In Stock Market History... Is Over

For 29 days - off the Bullard lows - the S&P 500 closed above its 5-day moving average. As MKM's Jonathan Krinsky noted last week, this is the longest streak of sustained equity momentum higher in the history of US markets (surpassing the previous record 27 days from 1928). Today (well techncially Friday's early close) saw that streak come to an abrupt end...

The outcome post a reversal is mixed:

Intresting Study on S&P500

The last few weeks have been the strongest and most consistent rallies in US equity market history. US equity markets have traded above their 5-day moving average for 27 days – the longest such streak since March 1928  and all amid  GDP downgrades, missed PMIs, and downward earnings outlook revisions. Given the holiday week, it is hardly surprising volume was weak today.

27 days and counting for the S&P… an 86 year record… (within a year of this exuberance stocks had doubled and then halved from low)

This is what happened the last time the market did that…

S&P 500 "Most Overbought" Since Feb 2012

The explosive surge in US equity markets off the 'Bullard' lows have swung the Relative Strength Index (RSI) from its most oversold in 24 months to the most overbought in 33 months in a record amount of time. The last time the market was this 'overbought', the S&P 500 fell almost 11% in the following few weeks...

Here Is Your "Global Recovery" In 24 Charts

No, this is not a joke: this is, sadly, the big picture of the "global economic and profitability recovery."

Source: JPM

BofA Is "Growing Concerned", Options Are Signalling A Stock Market Correction Looms

"We are growing concerned about the potential for a pause or near term correction in the S&P500," warns BofAML's MacNeil Curry, as the options market flashes a warning to US equity bulls.

S&P500 volatility warns of complacency

We are bullish stocks, with the S&P500 targeting 2080/2100 into year end. However, in the near term, equity volatility warns of complacency and the POTENTIAL for a correction. Specifically, the VXV/VIX ratio (VXV is the BBG ticker for 3m SP500 Volatility) has reached levels that have often led to a market pause/correction.

While such a pullback would ultimately be corrective, BE ALERT.

 Source: BofAML

S&P 392 Weeks

About That "S&P 500 Will Be 2,150 By Christmas" Call...

So this megaphone playing out again is just plain crazy.

Back on October 13, when the stock market was in free-fall, I prepared this chart showing a potential megaphone pattern. With major indicators (such as the MACD and stochastics) looking decidedly bearish, the idea that a rally would soon return the S&P 500 to the 2,030 area seemed crazy:
 

Three weeks later--ding-ding, we have a winner! The SPX has touched the top line of the megaphone drawn back in mid-October.

Now here's another crazy idea: the megaphone pattern continues to play out, and the SPX reverses here and crashes 200 points down to the 1,800 level. I marked up this chart last weekend (chart is dated 10-31-14).

At this moment, this megaphone projection looks as crazy as the projection for a massive rally back to 2,030 did in mid-October. Right now, many pundits are projecting SPX 2,150 by Christmas as a done deal. Heck, why not say 2,300? Just extend the rally line a few more weeks.

The euphoria is palpable: sentiment is pegged to the top of the charts, expectations of central bank easing are pegged to the top of the charts, profit expectations are pegged to the top of the charts, complacency is pegged to the top of the charts, the expectations of further declines in the yen are pegged to the top of the charts, and so on.
 

There is literally nothing standing in the Bulls' path at this point--everything is going the Bulls' way.Just like it was going all the Bears' way in mid-October.

That spot of bother is now being written off as Ebola-inspired nonsense, never to be repeated. Perhaps.
 

But there is still a substantial list of things that could disrupt profits, capital flows, volatility, sentiment and central bank omnipotence.
 

Back on October 13, I discussed the notion that the Fed (and its central bank cronies) would not let the stock market crash before an election: Will the Fed Let the Stock Market Crash Before an Election?
 

Voila. That script played out rather well.
 

Yes, the Bank of Japan had to step in and do the heavy lifting, and Mario Draghi had to repeat his now-tiresome stand-up routine of the ECB will do whatever it takes to blah, blah, blah, save central banking from itself, restore the imploding remnants of European Imperial glory, or whatever. But the idea that central banks coordinate their stick-saves and we're gonna-save-the-world-yet-again media spew is not exactly new.
 

So this megaphone playing out again is just plain crazy. No way can the market retrace its well-deserved rocket-launch to 2,030 and change. That is impossible.
 

Glad we got that settled: the pundits all agree: don't just buy the dip, buy the new all-time high and everything in between.
 

Note: this stew of conjecture and sarcasm is not a recommendation to do anything but laugh heartily at the insanity of "rational" markets.

Sourced from Charles Hugh-Smith of OfTwoMinds blog,

Chart Of The Day: US Decouples From The Rest Of The World... And From The US Itself

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, as Nouriel Roubini tells The Guardian, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom). AsRoubini continues, the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.But it's not just the rest of the world that is decoupling from US growth... as the following uncomfortable chart shows, so is a crucial pillar of monetary policy transmission, consumer wealth perception, and economic stability - the US housing market itself.

The decoupling... globally (China, Europe, and Japan all seeing GDP estinmates slashed)

For the moment, at least, Barclays notes it appears that the momentum of the U.S. and the rest of the world will continue to move in different directions.

 The end of QE could create risks for credit, but the divergence in growth suggests that those risks are likely to be experienced more keenly outside of the U.S.

But as Roubini concludes, serious challenges lie ahead,

Private and public debts in advanced economies are still high and rising – and are potentially unsustainable, especially in the eurozone and Japan. Rising inequality is redistributing income to those with a high propensity to save (the rich and corporations), and is exacerbated by capital-intensive, labor-saving technological innovation.

This combination of high debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement.If anything, the rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labour migration, which could further weaken global growth.

Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich – the main beneficiaries of asset reflation. But now reflation may be creating asset-price bubbles, and the hope that macro-prudential policies will prevent them from bursting is so far just that – a leap of faith.

Fortunately, rising geopolitical risks – a Middle East on fire, the Russia-Ukraine conflict, Hong Kong’s turmoil, and China’s territorial disputes with its neighbors – together with geo-economic threats from, say, Ebola and global climate change, have not yet led to financial contagion. Nonetheless, they are slowing down capital spending and consumption, given the option value of waiting during uncertain times.

So the global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. If only there were emergency crews on the ground.

*  *  *

Which leaves us with The Chart of the Day...

But now the decoupling from reality is happening domestically! (real Fixed Private Residential Investment dropped 1.1% YoY... GDP didn't)

Completely destroying the 'US is strong' meme...and, as The Global Macro Investors' Raoul Paul pointedly remarks, this is starting to smell as if a shit-storm is brewing...

The meme of US economic strength and decoupling from the world has consequences...

At some point very soon the dollar is going to break out and EVERYTHING you know is going to change. Everything you’ve understood to be normal and stable in your investment portfolio is going to be as risky as hell. All of your core assumptions are going to be tested and thrown out as false assumptions. Yield trades, once the safe haven, are going to kill you. Anything that has any carry element or any exposure to currency moves will create huge losses.

Why am I so damned alarmist? Well because as ever, we’ve seen it all before.

The reason it is going to happen rapidly and maybe in a disorderly fashion is because if the dollar moves much higher, we will begin to see an unwind or THE unwind of the biggest carry trade in history. This is the flip side to all that QE. This is the flip side to the China miracle too. Multiple trillions of dollars are going to need to be bought or extinguished in this unwind, and that is going to create complete chaos.

...

Sadly, there is no such thing as free money in the real world. There is always a price to be paid. Self-reinforcing virtual circles eventually become the spiral of doom.

I think we find ourselves at the tipping point of the spiral of doom.

*  *  *

zerohedge

"It's Not About Earnings" Edition

During the month of October, three things happened that destroy any credibility that 'believers' had about the stock 'market' being an efficient discounter of fundamental earnings. Stocks began the month weak on geopolitical fears, concerns about the end of QE, and falling earnings; then Bullard unleashed his "but but but we might do QE4" words and stocks exploded higher. But a funny third thing happened as this malarkey occurred... analysts kept on slashing EPS estimates - in fact they slashed them by more than double the average EPS downgrade of any quarter in the last 10 years... So, if earnings are the mother's milk of the market, central bank promises are the Human Growth Hormone, EPO, Steroid cycle of all-time highs.

Fundamentals or Central Bank liquidity!

As Factset reports,

During the month of October, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 2.7% (to $30.96 from $31.82) during the month. How significant is a 2.7% decline in the bottom-up EPS estimate during the first month of the quarter? How does this  decrease compare to recent quarters?

During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first  month of the quarter has been 1.3%. During the past five years (20 quarters), the average decline in the  bottom-up EPS estimate during the first month of the quarter has been 0.6%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 1.8%. Thus, the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was higher than the 1-year, 5-year, and 10-year averages.

However, most of the reductions to earnings estimates have occurred in the commodity-based sectors. As noted in last week’s report, the Energy sector (-10.8%) has recorded the largest decline of all ten sectors in terms of bottom-up EPS, followed by the Materials sector (-7.5%). No other sector has recorded a decrease in bottom-up EPS of greater than 3.3% through the first month of the quarter.

In terms of price, the value of the S&P 500 has increased by 1.1% (to 1994.65 from 1972.29) during the month of October. This marks the 7th time in the past 12 quarters that the bottom-up EPS estimate has  decreased while the price of the index has increased during the first month of the quarter.

Stocks Now Most Overbought In A Year

Just two words - "Volumeless" and "Overbought" - but when has that mattered...

Spot The Rally (using the lower pane only)

 McClellan Oscillator at a notable extreme...

 and the Relative Strength Indicator is once again signaling a trend change...

Market Uncertainty Has Never Been Higher

The CBOE's VVIX Index, "an indicator of the expected volatility of the 30-day forward price of the VIX"reached extreme levels this week. While all eyes are firmly focused on the to-ing and fro-ing of VIX (the so-called 'fear' indicator), it is the uncertainty of that fear (or greed) that is exploding as VVIX measures. Simply put, the chance of VIX doubling, or tripling, in the next 30 days (which include the final POMO and Fed 'end of QE' meeting), has never been higher.

Chart: Bloomberg

Happy 27th Anniversary Black Monday

"It could never happen again... right?"

And if you think this time is different - just take a look at the 'tricks' they used 27 years ago to stop the fall - A Fed statement and borken/halted exchanges...

Charts: Bloomberg and Yahoo

*  *  *

Bonus Clip - as we noted previously,

"This is a market that has been seriously overvalued for some time," exclaims Paul Tudor Jones,"and what we are seeing today is the piercing of the bubble..." adding that "Wall Street was uniformly unprepared for this kind of a drop."

Of course Bill Griffeth asks should we buy this dip... Tudor Jones replies - so ironically -

"we should see massive Federal Reserve and Government intervention in the FX and debt markets to stem what has unquestionably been a panic."

But Tudor-Jones cautions:

"prudent investors should use any rally to scale back into short-term Treasuries."

The legendary trader goes on to explain he is trading fear as investors fear deflation and disinflation and warns

"every American needs to get their house in order, needs to be conservative in their investments, the next few years will be about capital preservation."

Wise words for record highs...

Dow Drops 1500 Points In 3 Weeks, Nasdaq Enters 'Correction' As VIX Breaks 30

From 17,350 intraday highs "proving the recovery is here," we are 1500 points down just 3 weeks later. The Nasdaq just fell 10.5% from its highs, officially in correction. VIX broke above 30. Perhaps, just perhaps, the gap to fundamentals is finally about to be filled...

Dow ugly...

Nasdaq in correction...

VIX breaks above 30..

S&P to find short term support at 1830 - 1840

On QE99, Gold, & Global Growth Concerns - The Chart That Explains Marc Faber's Fears

While The IMF recognizes the gaping chasm between collapsing global growth expectations and market exuberance, they remain confident that US growth will save the world. This, Marc Faber explains to a wise Bloomberg TV panel, is why stocks around the world (and now in the US) are starting to weaken, "the recognition that global growth is not accelerating," as the narrative would like us all to believe, "but is slowing." Central Bank money-printing has enabled deficit-heavy fiscal policy and, Faber simplifies, "the larger the government, the less growth there will be from a less dynamic economy." Policy-makers have only one tool - money-printing, and QE99 is coming.

In true Keynesian hockey-stick style, each time a current year's growth expectations slide, the following year's expectations are ratcheted higher... and if stocks weaken into that 'ratcheting' then the central banks unleash more QE... As the following chart shows, the gap between the 'efficient' market and fundamental reality has never been wider and  - as Faber implies - policy makers simply cannot allow that gap to be filled (and all that created wealth to once again evaporate)... with QE4EVA coming to an end,the market is forcing "someone"'s invisible hand to act - demanding moar money-printing or the Keynesians will once again be proved entirely wrong.

With all that hot money having flooded into stocks, art, and real estate; this week's record high inflows into bonds suggest commission-takers' worst nightmare "great rotation" is about to happen... or The Fed, ECB, BoJ, PBOC will re-open the spigots and print (defending their actions on the back of global growth slowing - a new mandate it would appear) - and up goes gold.

Marc Faber discusses global growth, gold, money printing, China, and inflation in this interview...

Schizo Market Has Biggest Plunge In 6 Months Following Most Euphoric Surge Since 2011

Yesterday's panic buying vertical ramp in stocks - decoupling from everything but the trusty partners VIX and AUDJPY - has been entirely unwound as The Dow drops over 300 points (nearly unchanged for 2014), Trannies tumble and Small Caps slump. Stocks all closed significantly lower - despite a late-day effort to lift - ending the day down from pre-FOMC Minutes. Treasuries closed 0-2bps higher in yield but had ignored equity exuberance and provided the reality check by the close. Real trading volatility ranges are surging in the major indices which historically has not been a good sign. The USD retarced some of the FOMC losses as Draghi chatter pushed EUR higher. Oil prices cratered under $85 as gold and silver rose (despite USD strength). Following yesterday's biggest intrday swing since Nov 2011, the Russell 2000 saw its worst day in 6 months.

Today was the 4th most active (in terms of quotes/trades) ever.

The last 2 days in US equity markets...

Even Bob Pisani knows by now that the European Close seems to create a trend-reversal moment intraday that few machines (and even fewer humans) are willing to fight. Whether this is remnants of short-term cycles found due to POMO or just a drop in liquidity is unclear; but what is clear, it happens, and all too regularly... except today. After a notably weak start to the day, the machines were just getting revved up for the 1130ET reversal to kick in and lift the market back to VWAP when a curious thing happened... "someone" canceled-and-replaced orders for 666 contracts 26 times in the 1130ET to 1200ET period... and selling accelerated lower, no reversal, to close at the lows on heavy volume.