New bear signal confirmed as stocks move back down to end August

Monday, August 31, 2015 -

Stocks moved back to the downside on Monday to end the month of August following only two nice rally sessions after the recent sell-off, though today’s losses were well contained and may suggest a limited selling spree before we see some final gains in the sell-off rebound.

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Despite the strongest 2-day rally in history last week, Wall Street ended lower on Monday, wrapping up the worst month since the 2012 correction. As we mentioned over the weekend, today’s volatile and choppy trading was a confused market from comments by Fed President Stanley Fischer that inflation would likely rebound and open the door for the Fed to gradually raise interest rates.

Investor mood continues to be driven mostly by the Federal Reserve jawbone and approaching rate hikes rather than current economic data.

The major indexes ended Monday’s session firmly in negative territory but off the lows of the day. The Dow dropped 115 points (-0.7%) to 16,528, the Nasdaq slid 52 points (-1.1%) to 4,777 and the S&P 500 fell 17 points (-0.8%) to 1,972. The NYSE finished at -0.64% and the small cap Russell 2000 at -0.30%.

Though today’s declines were contained compared to the recent sell-off, it was enough to confirm a new long-term bear signal as you will note in our chart below of the S&P 500, finishing the month of August well below its 10-month exponential moving average – traditionally a reliable bull/bear indicator.

In overseas trading, stock markets across the Asia-Pacific region also moved mostly lower during trading on Monday. Japan’s Nikkei 225 Index tumbled by 1.3 percent, while China’s Shanghai Composite Index fell by 0.8 percent.

The major European markets also moved to the downside on the day. While the German DAX Index fell by 0.4 percent, the French CAC 40 Index dropped by 0.5 percent. The markets in the U.K. were closed for a holiday.

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China’s Intervention to Soften

While the Fed statements of potential interest rate hikes soured traders, additional weakness on Wall Street could be attributed to renewed concerns about the Chinese economy after a report from the Financial Times said the government has decided to abandon attempts to boost the stock market through large-scale share purchases.

If you remember, China has recently taken unprecedented steps to try and stabilize their falling stock market, including such measures as threatening to arrest short sellers after instituting a ban on short selling, pumping Fed QE levels of cash into their financial systems with strict order to use the money for buying stocks in a crashing market, and halting trading numerous times to avoid embarrassing sell-off routs.

None of these efforts have worked to stabilize the falling stock market or the confirmed weak economy in China. To the contrary, it seems that China’s intervention efforts have only served to encourage their citizens to sell on any minor rally as an attempt to get out from under margin risk – most public investors in China have borrowed money to buy stocks under encouragement from the government only to be left with stock losses and loans being called due.

Senior regulatory officials told the Financial Times China’s leaders feel they have mishandled their efforts to rescue the stock market. Sometimes, too much transparency backfires. Everyone knew what China was doing and took advantage of the excessive measures and massive liquidity infusions.

While the Chinese government resumed large-scale stock buying late in the trading day last Thursday to help the Shanghai Composite Index close sharply higher, Chinese officials now say that the government will refrain from further large-scale buying of equities.

Expect China’s financial woes to be felt throughout the world.

New Bear Signal Confirmed!

It is official – our most reliable bull/bear market signal confirmed on today’s close that the US stock market is now under a new bear market environment. We use the long-term 10-month exponential moving average of the S&P 500 to help differentiate between bull markets and bear markets.

Here is a chart showing the reliability of this long-term indicator over more than 15 years:

50831LongTermHistory

And now here is a close up look at how August, 2015 went down with a strong confirmed signal of a new bear market:

50831LongTermSignal

This month’s confirmation of a new bear market was not by the skin of your teeth, either. It was a firm break of S&P 500 prices well below the 10-month exponential moving average.

We are likely to see this short-lived rebound from the sell-off continue sometime this week in an attempt to get prices back above this measure, but the die has been set, and by the end of September we are likely to see prices even lower as the sell-off lows are tested once again in mid to late September – following the jobs report this coming Friday.

I suspect this Friday’s jobs report will be manipulated to look at least decent and that the Fed will comment that the labor and inflation data suggest the economy could sustain a move toward normalcy with regard to interest rates. After all, they are barely going to raise rates and they need to show that nothing untoward is going to happen following the initial rate hike.

So, after all, the Fed may indeed use the limited good economic data to justify a very tiny move toward rising interest rates – the thinking being that Q3 and Q4 GDP may be much worse than the rigged Q2 GDP and that they should move while they can.

Looking Ahead

Meanwhile, energy stocks bucked today’s downtrend with a sharp increase in the price of crude oil. Crude for October delivery jumped $3.98 to $49.20 a barrel, reaching its highest levels in over a month.

This may bode well in the short-term for stock prices, particularly for the NYSE, which holds a lot of energy related shares. But I still say we have a moderate A-B-C bounce from the sell-off that will eventually disappear as the sell-off lows are retested.

The monthly jobs report due on Friday may be the highlight of the week, but traders are also likely to keep an eye on reports on manufacturing and service sector activity, construction spending, and international trade as well as the Federal Reserve’s Beige Book.

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