The Market Looks Unstable

The market looks unstable and extraordinarily weak right now. As I’m typing we are about to see the 8th down day in a row in the S&P 500. Trump is gaining in the swing state polls. The jobless claims have been shooting higher. Finally, Facebook had a bad earnings report which is sending it and the NASDAQ lower. I was fooled in February of this year into thinking that would be the moment of a crash However, the central banks came to the rescue and saved the day. Just because I am certain the market is in for a terrible performance over the next few years, doesn’t mean shorting is easy. It takes correct timing to hit big homeruns. However, I am at least protected against the big downdrafts compared to those who are fully invested in the market.

Even the most experienced investors can’t time when the market will finally crash. The great investor Carl Icahn has had a tough year shorting the market because he came in too early. However, he seems to have maintained his position because he knew from the beginning that he wouldn’t be accurate in his timing. Therefore, I think it makes sense to hold excess cash in a retirement portfolio and recognize that your timing may be wrong with your shorts in your trading account. These are my caveats as I get into some of the near-term negativity in the market.

Yesterday the market extended its losing streak to 7 days in a row. The chart below shows the 3 other times this has occurred in the past 20 years. The other streaks have been associated with major market crashes. The longest streak ever was the 8 day decline in October of 2008 which also included the worst week in history. Even if this current streak beats that one, it won’t be close to having the same declines. It is ominous that the market has had such a long losing streak, but it may be a statistical anomaly because of how shallow the daily declines have been in this current streak. Those involved with technical analysis may have a gloomier perspective on this streak.

7days

While Trump’s momentum in the national polls has stalled, this isn’t important because the swing states have almost all moved in his direction. Ohio, New Hampshire, Nevada, Virginia, North Carolina, Colorado, and Pennsylvania are moving his direction while only Florida is moving in Hillary’s direction. The past two polls have Trump leading in New Hampshire. If he wins there and all the other polls are accurate, then the Electoral College will be tied 269-269. This Trump momentum is clearly the main reason for the market’s 7 day decline. Trump causing the market’s decline creates a feedback loop which helps him do better in the polls as voters worry about financial instability and blame it on the incumbent party.

As I mentioned in a previous article, the jobless claims tend to increase along with market declines. Right on cue with this possible 8 day decline in the S&P 500 we have the jobless claims increasing. Today jobless claims rose to 265,000 which was higher than the 258,000 expected. It is at the highest level since August signaling the trend lower is over. The 4 week average increased 4,750 to 257,750. The BLS non-farm payrolls data tomorrow won’t include this week’s report. I would normally expect it to be weak because of the weak ADP report, but because the election next week, I am anticipating a beat. The market has rallied on good and bad numbers, so that may not effect Friday’s trading.

jobless

The final problem the market is facing is Facebook stock is down over 5% after it released its earnings report. It beat EPS estimates by 12% which less than the 16% it usually beats. It lowered revenue growth guidance for the calendar year by 5% from 45%-50% to 40%-45%. It also said ad-load would stop growing next year and that 2017 would be an investment year. The problem for the market is Facebook has represented a substantial part of the recent gains, so when one of the leader is hurt, the market loses momentum. Now that Amazon and Facebook have both been disappointments, it’s tough for the market to make new highs.

Facebook’s report wasn’t that bad. It had already stated in the past that ad-load growth would end in 2017. The fact that Facebook stock fell is a function of the tone of the market just as much as it is about Facebook. This becomes a virtuous cycle which reinforces itself lower, just as it was in the opposite direction in the past few years.

Conclusion

            The stock market is in a bubble, but timing the pop is tough. Now looks like a possible beginning to the crash given the leadership of the market has been taken out (Amazon & Facebook). Oil prices have been falling as OPEC can’t come to an agreement. Jobless claims are rising. Donald Trump has been rising in the swing state polls which means his chances of being president are close to reaching even with Hillary.

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