Blame It on Rio?

August 14, 2016

Weekly Market Outlook

By Keith Schneider


Despite calls from market prognosticators such as Marc Faber that a 50% market crash is coming soon to a theater near you, equity markets have refused to retreat. Other bearish pundits are highlighting the massive drop in the volatility (VIX) index, extreme compression of the trading bands, coupled with this being the month of August (part of the sell in May and go away timeframe) and have been way off the mark.

In his monthly newsletter even Faber, the ultimate perma-bear hedged his bet by stating the market may run up another 6% from current levels and by the way, everyone gets it wrong once in a while.

Here in the US, Equities have continued to move to new highs. The S&P 500 closed up this week .2%. In fact, with the exception of the Small Caps, all the major US Equity markets hit new highs at the same time which has not happened in 16 years. Sounds like a happy family indeed in which hedge fund managers should be enjoying some time at the beach after a bumpy start to the year. Maybe even Copacabana, but that’s not the case. Even with the S&P 500 at new all-time highs, 95% of them have failed to beat the indexes and remain woefully under invested. That’s one reason why there is most likely more to the upside.

Speaking of beaches, that brings up Brazil and the Olympics. Considering all the lousy press about Brazil (while ignoring the rising commodities markets which is helpful to Brazil) ranging from a bad recession, corruption encompassing major industrialists and the ruling party, a president on the verge of impeachment, off the charts crime rates, and of course the supposedly inadequate preparation and infrastructure for the Olympics, the Brazilian market is up a scorching 67% YTD. According to our Trend Strength Indicator, Brazil is the highest ranked country in terms of stock market performance as of today. So playing off that theme, if what many would argue the country with some the worst fundamentals is the hottest market how could one be negative anywhere else in virtually any asset class. Even if you like clichés (some occasionally work) and “climbing a wall of worry” is one of them, this wall appeared insurmountable.

Maybe the wall of worry is just an illusion, like the wall proposed by a certain presidential hopeful.

The lesson here is trade the tape and find the reason later. The worse it looks the better the opportunity. Brexit is just a walk in Hyde Park.

Risk On is still in gear overall, but some risk on indicators slipped a bit as Utilities gained ground against the S&P 500. However, the S&P 500 gained on Gold.

Emerging markets (EEM) is a theme undergoing a positive shift, closing Friday with a tradable short term pattern. Even leading Eurozone stocks (VGK) rallied and improved against the S&P 500.

All things considered, although Risk -on is what our fact checking shows, complacency is not an option and a selloff would not surprise me. For critical support levels to watch and other interesting charts check out this week’s video.