Market fear and loathing

February 11, 2016 02:25 PM

And retail makes three

Therefore in this case the industrial overcapacity combined with the lack of desire to shutter unprofitable businesses (due to the employment implications) gives us two of our three factors. The final one is the weakness of old line, mainstream retail operations. Just as everyone is so confident in the stronger services sector in the US and elsewhere, there is reason to be worried about that area as well.

According to the Challenger Layoffs report, job losses were up 218% to 75,114. Of course, it is easy to note that January layoffs are especially typical in the retail trades after the holiday season. However, Challenger pointed out that retail layoffs were 42% higher than in January 2015, and were at the highest levels seen since January 2009.

There are a lot of old-line retailers under pressure from Amazon and others who are rightfully shifting to more digital presence that does not require old low level retail clerks. Whether or not that revives their overall fortunes is yet to be seen. Yet we can be sure that there will be less front-line retail shop employment in future. So we can add that retail employment weakness to the overcapacity and maintaining unprofitable businesses for our Rule of Three factors that will weigh on equities.

Bear within a bull?

The additional major point on the likelihood equities have entered a bear market is the importance of the ultra-long term trend perspective within our very negative view for the first half of 2016. It must be allowed that there can be major bearish phases within the long-term secular bull market in equities. That is partially due to the basic fundamentals whereby corporate managers must always find a way in the long run to create profitability. There is a reason it is axiomatic that the companies which survive significant economic downturns are the ones that will thrive in the ensuing economic recovery.

The striking technical condition

So the question classically becomes, “How low is low?” As a way to put the current, potentially significant equities selloff in context, it is instructive to review how previous bear markets ended up being corrections within the mega-trend remaining up overall.

In that regard the only long-term trend evolution that was suitable for reviewing the 2008-2009 crisis selloff was in the longest data history available: the Dow Jones Industrial Average. Our data vendor is enlightened enough to provide that data all the way back to January, 1900. Of course the most relevant aspect of it is the trend up from the lows set during the Great Depression.

Using the ultra-long term trend channel from the 405 July 1932 low (and running the topping line across the 14,198 October 2007 high), the long term channel support in March 2009 was actually all the way down at 5,685. Yet the ultimate trading low was 6,470 that month. In other words, as bad as the equities looked, the DJIA actually missed getting down to the broadest up trend support by 785 points.

A bear from this far down?

The first thing to keep in mind on the current technical condition of the markets is a key aspect if the front month S&P 500 future is as bearish as we believe it might be. In that case, it is only just breaking the broadest major trend channel support from the 666 March 2009 major cycle low.

The front month S&P 500 future monthly chart major channel support was in the 1,865-60 area three weeks ago. That means that it spiked below it on January 20th prior to recovering into January 21st anticipation of more accommodative perspective from Mario Draghi at the ECB press conference.

That means it has been ‘cleaning out’ back above the DOWN Break for the past couple of weeks prior to gapping below 1,865-60 area on the opening this week. That gap lower is very important, and is reminiscent of the gap back below 2,020-10 on the first trading day of the year. That is what is so important about the market response to whatever Janet Yellen has to say on Wednesday and Thursday. If a rationale for pushing back above the 1,865-60 area is not forthcoming, then the further weakness is almost assured.

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About the Author

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.