Week In Review – December 7

Summary

• Another fugly week for stocks.  It’s really shaping up to be a Trapper John year — full of bull and bear traps making it difficult for traders to make money.  The ‘bots have won, folks
• Transports down over 8 percent for the week, which has only happened, 21 weeks in the past 70 years, of which 16 has occurred in the new century.   The last time was during the European Debt Crisis in 2011
• Yields are starting to come in over worries of the economy.  We think the Fed’s cave to the president’s pounding was a mistake, sent a bad message and confused the markets.  The funds rate is negative in real terms.  Let’s see how inflation comes in.
• The flattening yield curve, which is highly distorted by past monetary action and the Treasury front loading new issuance, may cause a self-fulfilling prophecy as so many in the market still, mistakenly use it, as a signal as the economic health of the nation.   Viable economies usually don’t “fall out of the sky”
• U.S credit continues to have a horrendous Q4
• The Dollar index a tad weaker.  EM currencies still adjusting to their wild summer of volatility
• G5 stock markets led the equities lower last week
• Crude stabilizing.  Iron Ore pounded last week

Commentary:  Feels like the S&P has traveled a million miles 621,371 kilometers this year.  Two 10 percent corrections this year and don’t yet count out another.  The S&P sits at a critical level after testing the 2621-23 on Thursday and Friday.    If that level doesn’t hold, and we don’t expect it to, the Q4 correction low at 2603 is a 90 percent probability, which, if breaks,  brings the 2018 low at 2532, about 4 percent lower, in play.

You knew this type of price action in 2018 was coming.  Going into Q1, the S&P500 had delivered positive returns for 16 consecutive quarters or four straight years. The chart illustrates how rare the streak has been over the past half-century.

Our Global Risk Monitor illustrates that 2 of the 4 quarters in 2018 will deliver negative returns.

What to watch:  Aside from key S&P levels, the BREXIT vote on Tuesday,  U.S. inflation mid-week, Super Mario and the ECB on Thursday, which is big as QE is set to end in Europe, and Deutsche Bank stock making new lows.  We expect the term “Counter-Party Risk” to become the rage of the all the market experts into year-end.

Sounds like German government preparing for a bailout for DB.  Merging two weak banks will require a significant injection of capital.  Who will, if any, will be bailed in?

Upshot:  Don’t like it here.  Think we are in a bear market.  Bears markets do bounce hard.   Capital preservation folks.  Scalpers and traders can have this market.

DB Stock Making New Lows and CDS Blowing out – Counter-Party Risk