Busy week could provide preview to coming storm

Correction due but fall will be main event

This is the busiest week of the summer. We have the rest of earnings which by the way Facebook has now come in 100X earnings.

In addition to jobs reporting Friday this is a Fed week and while it certainly is not rare to have so many numbers coming at us, because it is the middle of the summer does, it feel strange.

Yes, Facebook came in at 100X earnings. So I was not under the influence of anything when I came out and told you last week I believe this is going to end badly. If anything, since I wrote last week’s column, I am more convinced we will have some kind of event. The reaction I got was strange. It’s usual for me to get some kind of feedback when I challenge you. However, this time the feedback was scant. I have to wonder if that’s a symptom of the problem. Let’s try a test, right now. I want you to monitor your FIRST feelings based on the following statement:

The stock market is going to crash.

This is not pass or fail. Whatever feeling you have is acceptable. If you think it’s a crazy notion then you are part of the majority. If you agree with the statement you are in the extreme minority. You’ll also find out what kind of a contrarian you are. I’ll tell you this; most people think it’s a crazy notion right now. If you agree with the statement rest assured there aren’t many who feel that way. I had lunch with a guy yesterday who believes in the ‘conventional wisdom.’ When it comes to financial markets there is no such thing as conventional wisdom. This same person was looking to develop a program himself concerning algorithms. See what I mean? Nowadays lots of folks want to get involved.  They all believe that all you need is a computer program and with it a chance to be right all the time.

As I told you last week there’s nothing inherently wrong, the market has had program trading for years. It’s the attitude that’s wrong and the programmers have a bona fide shot at doing great damage to these markets just like Long Term Capital Management did all those years ago.

Enough of that. As the week came to a conclusion there were a few sectors that started looking pretty bad. One of them was the SOX (page 2) and the other was the HGX for housing (see charts below). For those of you who haven’t seen housing lately you ought to take a look. It recently put in a secondary high and now finds itself 103 days off its high. In fact it’s one of the few sectors that lay down and stayed down in our first quarter time window season. On Thursday they put in a big red candle that might be difficult to recapture. The second chart is the SOX which broke the 50 again on Friday. Some of the names in the sector look worse. Here’s what it means. If the market is getting in serious trouble this year, like 2007, there will be areas that peak early. For a major top to form there needs to be some kind of bearish divergence that forms. When you are under the hood, this time you have two fairly important sectors to the overall market health that either are in trouble or close to being in trouble.

My view is such that as we hit 618 weeks off the Internet bubble bottom in 2002 in the middle of August that we could get hit in the period from the middle of July onward. That was the scenario in 2007 as the market peaked in the 261-week window that October. You’ll remember that four-week period was brutal. But by October the euphoria was back and we topped for good. I’m not looking for much. All I’m looking for is a shake of the trees that lasts a couple of weeks. Perhaps in this market environment that is asking for a lot.
 

 

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