Summertime Blues (GS)
OK, so it was the Fourth of July, and a lot of folk took leave from the markets, but does that really explain it?
We’re talking about a significant decline in trading volume that occurred at the end of last week amidst a market rise that now, on second glance, is looking wafer thin.
Yes, a great number of the leaders advanced, including the FAANG crowd and their associated partners in crime, Microsoft, Nvidia, Qualcomm and Cisco, among others – and Facebook even logged an all-time closing high. But as mentioned, it looks more and more like those big names are churning, with a number moving straight sideways on diminishing activity.
Have a look –
So what’s it all mean?
Time will tell, of course, but it appears we’re preparing for a summertime doldrum to set in before earnings season, a kind of “sell in July before we head to the sky” phenomenon.
So there’s more “bull” to come?
Yes, we haven’t given up on the bull market yet. We hold that there’s a ways to climb before sentiment levels are truly slap-happy, and the majority of the country actually believes that America has been Made Great Again. Until then, hubris levels remain in check, doubts abound and the market will continue its climb.
Have a look –
According to the latest Ma and Pa polling numbers from the American Association of Individual Investors (AAII), bullish sentiment remains at the low end of average for the last decade, while the bears are becoming more robust. This, too, is recipe for continued equity strength over the long term.
But what about now?
In the near term, as mentioned, it’s harder to tell, but there’s no doubt the ride is about to get rockier. With rates rising, politics burning, war seemingly on the verge of breaking out everywhere and European and Emerging Market finances toppling, one can only wonder how much time it’ll take for a volatility tsunami to wash up on our shores.
When, not if.
Our present concern, however, extends beyond a few, simple days of limited volume. We also note that on an increasing basis it’s corporate purchases of stock that are accounting for gains in equities. Put bluntly, no one else is stepping up.
Have a look here –
This is data collected from Bank of America’s Brokerage arm, Merrill Lynch, whose clients include a great number of corporate giants who run their buyback programs through Merrill’s ‘Private Client’ desk.
And as you can see, outside of the Industrial sector, Merrill’s clients have been steadfast sellers of single stock equities. Purchases of stocks across the board have been attributable exclusively to corporations repurchasing their own shares!
And that is phenomenal.
“But,” you may say, “that’s just BofAML’s ‘private client’ desk. Surely the brokerage’s institutional buyers and hedge funds have been purchasing the techies and others hand-over-fist – why, how else could the market remain so strong?”
And so we thought, too.
But it’s not the case.
Take a gander –
The chart shows both these groups dumping stocks in the latest data.
Institutional investors selling. Hedgies selling. Private clients selling. Corporations buying.
But there’s more…
We also see a Chinese market on the ropes. Whether that’s due to the latest trade skirmish or is more a function of internal economic scarring is of little consequence. China is feeling the heat on all fronts, and its market is reeling. The following chart shows just how dangerous the situation has become –
This is six months’ worth of the iShares China Large Cap ETF (NYSE:FXI), and it clearly shows a market on the rocks.
Down nearly fifteen percent in a month, with RSI and MACD both sub-waterline and price now unhinged from all her salient moving averages, the stock appears headed for further losses.
Our feeling is that the weekly support line at 39 (not shown here) will catch the latest decline, but for how long, and to what end, we can’t say. The weekly chart also shows both RSI and MACD presently dipping below their respective waterlines, an ominous sign.
And that affects the entire global equity complex.
None of the world’s major markets can remain insulated from continued weakness in Shanghai.
And that also sets us up for this week’s trade.
A declining market is plain bad for the brokers. Even an extended sideways move can have the same chilling effect on their profits. When folks stop buying stocks, the financials always suffer.
Since January, the movement of the major banker/brokerages has been sideways to down, and they’re all nearing a tipping point that could send the whole lot to an intermediate term slipknot.
Let’s have a look at just a couple of representative issues.
The first is Goldman Sachs (NYSE:GS), amongst Wall Street’s heaviest of heavyweights.
The chart is the graphic equivalent of the ash heaps of Sodom, the result of a slow burning fire and blistering brimstone that’s now on the verge of being swept away by the wind.
Here we see a dire technical situation, with support at 220 barely holding (in black). Should that line give way, there’s no immediate support in view, as price has disengaged from all her salient moving averages. According to the weekly chart (not shown here), there could be a stop at 210, but again, for how long and to where thereafter, no one can say at present.
Add to that RSI and MACD readings that are bearish, and you have the makings of an open downside in the making.
Look now at two other financial power-outhouses power-houses, Morgan Stanley (NYSE:MS) and JP Morgan (NYSE:JPM).
Both these issues are poised to fall like Goldman should overall market weakness persist.
That’s why we’re taking the following action.
We’re writing a ratio spread on GS expiring next June. And the details are as follows –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you purchase the GS June 21st 210 PUT for $12.65 and sell three (3) GS June 21st 180 PUTs for $4.75 each. Total credit on the trade is $1.60.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew