by Ian Harvey
August 24, 2015
Introduction to Market Outlook for the Week Ahead
The market outlook for the week ahead definitely encompasses some varying viewpoints. Is the market nearing a bottom or is there something more sinister behind the scenes?
Many analysts and strategists, based on past experiences, believe that the worst is behind us! They see the market bottoming-out, after last Friday’s dramatic capitulation suffered by the DOW, and as early as some time during the week ahead.
They have seen this scenario many times before, and are advising investors to relax, not to panic and let the “fear factor” take over, and get back to normal trading. There doesn’t appear to any major technical damage to the market uptrend, caused by the effects of the China downfall, and other emerging markets on the edge of further downward legs, Fed rate rise uncertainty and an oil price drop.
Why the Fallout?
To better understand the market outlook it is necessary to figure out what has preceded the drop in the market. There are a number of factors which have occurred over the past few months that has contributed to the present market downturn:-
1. The major catalyst for the breakdown has come via the economic slowdown in the developing world – particularly China, followed by Brazil, Russia and Turkey. This has been exacerbated by the “over-the-top” policies being adopted by emerging market governments to try and stabilize their domestic finances and limit further damage to their economies – such as China topping up their share market.
2. Also, there is a continued economic torpidity in Europe and Japan, which seems to be slowly becoming better.
3. A thinly traded market -- low volume means that many investors have forsaken the fact that the U.S. economic data outlook is improving on an overall basis.
4. Too much attention to the “fear” factor – the CBOE Volatility Index (VIX) – which normally has a reading below 1.0 on the CBOE Equity Put/Call ratio – at the moment this has increased dramatically. Throw in the fact that there are plenty of “doom and gloom” predictors and writers available within the media outlets and it is no wonder that investors are running “scared”.
5. Commodity supplies have therefore suffered which will then have adverse effects on companies that basically rely on this – one in particular is oil, and the extent observed by the plunge in price.
6. “Buy-on-the-dips” theory has come unraveled due to technical deterioration – for example, lower oil prices should have helped transport stock but this seems to be the reverse. Technical erosion has recently accelerated – many great companies have now struggled with their price dips -- among the S&P 500, nearly 30% of the index is now down 20% or more from respective 52- week highs, and 57% of stocks are down 10% or more – take for instance the number of reports recently supplied and then the fall of the stock price after that – Disney as an example and Footlocker just recently.
7. Loss of confidence in Central Banks – such as the latest release of very ineffectual minutes from last Wednesday’s meeting of the Federal Reserve – stating that economic fundamentals and stock prices have become too reliant on the Central Bank policies.
8. Bull market complacency set in and bullish sentiment became moderated.
Market Outlook - The Optimistic Viewpoint
• The pullback has just created a lot more opportunities – time to relax and let the mood of the market settle before the next climb upwards -- the bad news – Greece, China, etc., has been absorbed and categorized and the pull back has occurred!
• The final phase may be underway for the decline in Industrials and Cyclicals – based on what has been classed as a small global recession and maybe recovering.
• China still has plenty of tricks-up-their-sleeve to help counter the economic situation they find themselves in, and some good news may be out after the past weekend. In regard to Europe, they seem to be getting a handle on the situation and have some degree of control as to how to move forward and rein in further disasters.
• Analysts, economic forecasters, strategists, etc., have now started to adjust their expectations down to what can be considered a reasonable level of acceptance – which will help investors pay less for stock as the stock growth is becoming adjusted.
• Profit margins and profits may benefit from lower rates and lower commodity prices – which will, in turn, provide fuel for further improvement in the economy.
• Investors are starting to recognize that the reliance on the Fed is not accomplishing a great standard of trading practice – and concern over when the rate rise will occur has continued to mar the market growth and has instead provided a range-bound stock market. By-way-of-interest, with the situation as it stands, a December rate-hike is more likely now.
• Corporations are stepping in to back up the slack generated by the muted market enthusiasm, through buybacks – which gives market support and encouragement for an improved market outlook.
Market Outlook - The Pessimistic Viewpoint
• Further decline is inevitable according to the “doomsayers” – and at some point in the life of the stock market they will be proved correct!
• China has devalued its currency which means their economy is in trouble – meaning that their demand for oil, coal and other commodities, will result in many industries and companies around the world suffering due loss of income, jobs and drop in share prices – in other word a global downturn.
• European growth is stagnant, and despite the fact that many counter-measures are put into play – central bank stimulus, cheaper oil, and good currency rates – the markets are not making progress.
• A September rate hike is still on the cards – which will stymie companies expanding at a lower cost and also cause a problem with stock prices due to less expansion of businesses.
• Now that the downturn has occurred it will take time for charts that have suffered to build a base, which will mean more volatility expected.
• And this leads to the fact that investor “fear” has come to the fore when looking at the CBOE Volatility Index (VIX) rapid climb – complacency is now being attacked – and further capitulation can be expected. •
Conclusion to Market Outlook 24 August 2015
So where does that leave us – what path should an investor take?
When experts have mixed opinions on the future market outlook, where does that leave the majority of traders and investors?
As already mentioned – many say not to panic and not to worry over-much – that this situation is quite normal and that at some point a “correction” was inevitable, particularly after experiencing the longest bull-run is U.S. stock market history.
The August drop in the stock market underwent a typical “sawtooth” pattern – where stock prices zigzagged up and down, in this case more down than up.
The majority view seems to be that there are plenty of buying opportunities available – buy shares at the low prices before they begin to climb again and then sell at a sensible upstage price – this is a typical good option trading time – calls on the up, puts on the down! Market downturns, and plenty of volatility is one of the best opportunities to buy stock and also trade options.