There is no other way to describe this week than ugly. The Dow fell another 545 points on Thursday, closing below its 200-day moving average after plunging 831 points on Wednesday. Friday saw a bounce-back, but it fell far short of recouping losses.
It was just as ugly with the S&P 500, which closed well below its primary support at the 200-day moving average going into Friday's earnings reports in aggressive selling waves.
This is the way bears work: fast and ugly. The market has coughed off five months of gains in merely five days.
The earnings season started Friday, so perhaps there may be something that might spark a rebound, but if we see more disappointment, get ready for margin calls, given that major support has been broken for all the major indexes.
Bonds rallied on Thursday and yields backed off the highs, but buyers were still nowhere to be found until we get some earnings reports.
We went into the earnings season deeply oversold, though, suggesting that if we are not locked in a crash mode, the stock market should see a meaningful rebound soon.
Institutions appear to be repricing, or anticipating a "slowing of earnings" going forward, which should become more apparent in the next few weeks, combined with the Fed's tapering of its balance sheets, which has unsettled the markets going into the midterm elections. We've been warning of this for months.
The stock market is simply confirming now what has been apparent for some time. We've already seen a peak in the earnings cycle, as you were warned months ago.
It was only eight trading days ago, when the S&P 500 index was testing its "all-time highs," that we warned it was illusory. Market breadth was breaking down in a big way. Just look at the number of the S&P 500 components now in a bear market prior to Thursday's sell-off.
And it is a lot worse after the selling. Risk happens fast, especially in these days of program trading.
The central bank and investment banks have the power to crash the market right before the midterm elections to influence voting. I have seen this pattern repeated with both Ronald Reagan and George Bush, and we could be seeing it repeating once again for Donald Trump. The Fed and its dealer banks battle against Republican administrations, especially when they hold both houses of Congress, too.
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Since President Trump was elected, I have warned investors that the Federal Reserve would successively tighten monetary policy, and it seems on each "Trump win," the Fed has unloaded Treasury bonds from its balance sheet (effectively dampening the win). The Fed is still unloading some $50 billion in tapering its balance sheet in October.
As government bonds plunge, yields have climbed. Mortgage rates have now topped 5%, putting home buying more and more out of the reach of average people. The homebuilders are now in a bear market, a clear warning we are approaching a similar situation to late 2007.
This has investors edgy about this quarter, and for very good reason, with the Fed threatening to raise interest rates at least three more times before mid-2019, all but assuring a deep recession on the horizon.
Each quarter is likely to worsen, as rates continue to rise and bite deeper as the Fed unloads more and more assets from its balance sheet.
To your wealth,
Dennis SlothowerEditor, Stealth Stocks Daily Alert and Wall Street's Underground Profits
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.