Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning August 10

 

Indicator	Weekly Level / Change	Implication for S & P 500	Implication for Nifty*
S & P 500	3351, 2.45%	Bullish	Bullish
Nifty	11214, 1.27%	Neutral **	Bullish
China Shanghai Index	3354, 1.33%	Bullish	Bullish
Gold	2036, 3.15%	Bullish	Bullish
WTIC Crude	41.56, 3.20%	Bullish	Bullish
Copper	2.79, -2.70%	Bearish	Bearish
Baltic Dry Index	1500, 11.11%	Bullish	Bullish
Euro	1.1788, 0.10%	Neutral	Neutral
Dollar/Yen	105.93, 0.02%	Neutral	Neutral
Dow Transports	10576, 5.82%	Bullish	Bullish
High Yield (Bond ETF)	105.88, -0.21%	Neutral	Neutral
US 10 year Bond Yield	0.57%, 6.17%	Bearish	Bearish
Nyse Summation Index	798, 9.55%	Bullish	Bullish
US Vix	22.21, -9.20%	Bullish	Bullish
Skew	140	Bearish	Bearish
20 DMA, S and P 500	3256, Above	Bullish	Neutral
50 DMA, S and P 500	3171, Above	Bullish	Neutral
200 DMA, S and P 500	3057, Above	Bullish	Neutral
20 DMA, Nifty	11036, Above	Neutral	Bullish
50 DMA, Nifty	10574, Above	Neutral	Bullish
200 DMA, Nifty	10851, Above	Neutral	Bullish
S & P 500 P/E	28.81	Bearish	Neutral
Nifty P/E	30.72	Neutral	Bearish
India Vix	22.58, -6.68%	Neutral	Bullish
Dollar/Rupee	75.03, 0.14%	Neutral	Neutral
Overall	S & P 500	Nifty
Bullish Indications	11	12
Bearish Indications	4	4
Outlook	Bullish	Bullish
Observation	The S and P and the Nifty were up last week. Indicators are bullish for the week. The markets have begun a great depression style collapse. Watch those stops.
On the Horizon	US – PPI, CPI, UK – Employment data, GDP
*Nifty	India’s Benchmark Stock Market Index
Raw Data	Courtesy Stock charts, investing.com, multpl.com, NSE
**Neutral	Changes less than 0.5% are considered neutral

The S and P 500 and the Nifty rallied last week. Indicators are bullish for the coming week. The recent rally to the prior highs is on borrowed time as we experience one of the worst earnings decline period in stock market history with extremely high valuations amid a lot of bearish divergences. We rallied 46% right after the great depressions (1930’s) first collapse and we have rallied over 46% in our most recent rally of the lows. After extreme euphoria for the indices a highly probable selloff to the 2700 area is emerging on the S and P, and 9000 should arrive on the Nifty in short order. The FED is repeating the Japan experiment and the lost 3 decades in Japan (1989-2019) is set to repeat across the globe. SPX 1500 and lower by year end and we stay there till 2050, scary? The markets are very close to an epic melt down and the SPX is headed way lower. The markets are overvalued, overbought and out of touch with economic realities. Long term, the epic meltdown is set to continue resulting in a 5 year plus bear market with lot lower levels maybe as low as 800 on the S and P. QE forever from the FED is about to trigger the deflationary collapse of the century and we have made a major top in global equity markets. The market is looking like the short of a life time with non-conformations from the transports, other global indices and commodities. High valuations continue. The breakdown in Crude and the Euro is a precursor to yet another massive drop in the S and P 500. The recent global virus epidemic (black swan) is likely to dent global GDP significantly and usher in a depression much faster than most think. The trend has changed from bullish to bearish and the markets are getting smashed by a strong dollar. Looking for significant under performance in the Nifty going forward on rapidly deteriorating macros. A 5 year deflationary wave has started in key asset classes like the Euro, stocks and commodities amidst a number of bearish divergences and over stretched valuations. We are entering a multi-year great depression. The markets are still trading well over 3 standard deviations above their long term averages from which corrections usually result. Tail risk has been very high off late as the yield curve inverts into a recession. The critical levels to watch for the week are 3365 (up) and 3340 (down) on the S & P 500 and 11300 (up) and 11150 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets. You can check out last week’s report for a comparison. Love your thoughts and feedback. 

 

Is a Recession Imminent?

Definition of a Recession:

The textbook definition of a recession is two quarters of negative GDP growth. Some examples of recessions include the great depression of the 1930’s, the dotcom crash of 2000 and the great recession of 2008.

Causes of a Recession:

Recessions are caused by several factors. These include:
Hyper Inflation
Deflation
Prolonged Fall in Exchange Rates
Credit Crunches
Collapsing Consumer Confidence
Collapsing Asset Prices
Collapsing Global Trade
Bust following Excessive Speculation – e.g., Property Market in Japan -1989

Evidence so far:

1) Collapsing Commodity Prices:
Recessions caused by deflation see massive collapses in asset prices. There has been a well over 50% plunge in the prices of industrial commodities such as copper and oil:

            

              

            2) Collapse in Global Trade:

Freight rates as measured by the Baltic dry index have collapsed over 95% from their highs set in 2008. While temporary dislocations can cause the index to fluctuate quite a bit, the well over 95% collapse in the index is an indication that all is not well with the global economy as far as trading activity is concerned.

                                                        source: INVESTMENTTOOLS

            3) Collapsing Stock Markets:

Stock Markets across the world have been collapsing despite record low interest rates globally.

Emerging markets are down significantly from their recent highs:

            China Stock Market - Shanghai Composite Index
         

             The US S&P 500 is all set to break down from a massive multi year megaphone top:
           Macrotrends
         

         4) Dollar Strength:The Dollar  strengthened against virtually every other currency during the             recession of 2008 and is about to do it yet again post the termination of QE from the FED:

5) Excessive Speculation & Risk Taking:

We are all familiar with the excessive speculation in the housing market that led to the great recession of 2008 following the collapse of Bear Sterns and Lehman Brothers. Fast forward to 2016 and the risk exposures at some big banks are reaching alarming levels as is the case with Deutsche Bank:Is Deutsche Bank AG (USA) The Next Lehman?

Additionally speculation has erupted in alternate asset classes like bitcoin which are commanding ridiculous valuations much like other asset bubbles that occurred prior to earlier recessions in 2000 and 2008 :

6) The velocity of Money is below Great depression levels:

As forecaster Martin Armstrong points out the velocity of money is currently below that observed in the great depression of the 1930’s. This implies that despite multiple rounds of quantitative easing by global central banks the attempt to circulate money throughout the global economy has failed and money has reached only a few pockets. The velocity of money typically declines during recessions and is probably forecasting one ahead:

VELOCITY of Money Below Great Depression Levels | Armstrong Economics

7) Kondratieff Winter Wave Suggests a Collapse Ahead:

Finally looking at long term economic cycles we are entering a traditionally weak period for risk assets which tend to make lows every 8 years or so marked by economic troughs. We recently had major economic downswings in 1992, 2000 and 2008 and are due one in 2016. Other than this we have entered a kondratieff winter wave in 2000 and are set to emerge out of it only in 2020. The last few years of the winter wave could produced the most pronounced down swing in economic activity much like the last winter wave that was characterized by the Great Depression of the 1930’s:

            

              8) Finally a massive amount of curve flattening has happened globally and to the US yield                      curve which is often a precursor to an inverted yield curve and ultimately a recession:

Conclusion:

In conclusion several hall marks of a recession such as collapsing commodities, stock markets and collapsing currencies have already started to play out as we enter 2016 and deflationary forces seem to be taking control. Flight to quality in safe haven assets such as the Dollar and Yen suggest risk appetite is rapidly declining. The massive fall in shipping activity is also providing evidence that a massive slow down is at hand. Excessive speculation as evidenced by the risk exposures of prominent global financial institutions is also a major concern. Additionally the velocity of money has collapsed suggesting that the circulation of money through the economy is simply not occurring despite record low interest rates. Economic cycles also are suggesting that the upcoming recession could last at least till 2020 and the final effects of this major down cycle are yet to be felt and a massive amount of curve flattening further confirms that a recession is on its way.