WHEN WILL THE SELLING STOP??!!!

It is getting really ugly. Equities opened higher again only to decline. Yesterday the Dow fell about 2.2% while the momentum driven NASDAQ was off over 3.4%. For the year, the Dow is now off about 7.3% and NASDAQ down over 9.6%.
The selling was broad based as the S & P 500 posted 108 new lows and the NASDAQ posted 510 new lows according to Reuters. In other words, over 20% of the companies in the major indices hit a 365 day low yesterday. Ouch! CNBC reports that this is the worst start of trading for a new year since 1929 or 1897 depending upon the metrics utilized.
Commenting about other indices, the Russell 2000 officially entered into bear market territory as it is now 22% lower than it was in June, a two and half year low. Most thought this index, myself included, would be insulated from the “strong dollar induced selloff”, but obviously this thought was unfounded.
The formerly high flying NASDAQ Biotech index is now down 17.2% YTD and over 30% from its summer peak. The Transports are off over 10.5% YTD and almost 28% since its peak. One does not have to comment about oil.
The momentum issues are also dyeing a sudden and horrific death as many are off over 30%. Some of the “must own companies” are down over 15% YTD.
I can go further but why bother.
When I entered the industry about 30 years ago I asked a seasoned veteran when one knows selling has finished. His remark—we don’t and we will only know six month after it has occurred. What he also said is that prices fall longer and further than most expect as fear is more powerful than greed.
In my view today is reminiscent to 2000. In that era the “Nifty Fifty” dominated trading at the expense of all other companies. The “Nifty Fifty” died a horrific death as about 25 companies are no longer around and the other 25 are still 50% below their 2000 peak. Some of these companies include household names such as GE, Microsoft, Dell, Intel, Cisco, Yahoo, etc.
After the 60%-70% implosion of the Nifty Fifty, the typical stock greatly outperformed for the next 3-4 years given the considerable undervaluation.
Today, the markets are/were dominated by approximately 10 names, all of which as noted above are now coming under pressure. Will history repeat itself and if so when??!!
Perhaps the only concrete comment to make we are closer to a bottom today than yesterday.
I think the catalyst for a transition will be greater than expected growth. Many are suggesting fourth quarter growth will contain a “one handle,” the result of inventory destocking and trade.
I would like to comment about inventories. I have always viewed inventory destocking as positive for it means stores will have to be replenished in the following 2 quarters. As all may recall first quarter growth stalled the previous four years. Is corporate America preparing for a poor first quarter believing history will repeat itself?
Yesterday the Beige Book was released or the statistical compilation utilized at the upcoming FOMC meeting. It indicated the economy expanded modesty during the past six weeks even as the jobs market showed strength, strength however that is not igniting overall wage pressures.
In my view the Beige Book is not indicating the economy is going to the proverbial basket.
And then there is China. Several years ago I opined many times China is not as strong as suggested given its banking problems, the yuan would fall if permitted to trade, and the data generally could not be trusted.
I received considerable publicity about these views, publicity that was something along the lines and this guy in Richmond VA thinks… I guess I was used for “journalist integrity.”
Today my view on China has changed, defined as the slowdown is over amped and conditions are not as bad as the markets are suggesting.
In my view a combination of sustained growth in the US and the realization that China has indeed stabilized may be the catalyst for a 2002-05 type advance.
All must remember “things are never different, there are just different people.”
Last night the foreign markets were down. London was down 1.66%, Paris down 2.58% and Frankfurt down 2.54%. China was up 3.81% Japan down 2.68%and Hang Sang down 0.59%.
The Dow should open little changed as the markets are vastly oversold. The 10-year is up 4/32 to yield 2.87%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.