U.S. Stocks Sink as Oil Slumps to 4-Year Low; Gold Gains
Comment of the Day

October 13 2014

Commentary by David Fuller

U.S. Stocks Sink as Oil Slumps to 4-Year Low; Gold Gains

Here is the opening of this market summary from Bloomberg:

The Standard & Poor’s 500 Index capped its worst three-day loss since 2011 as airlines sank on Ebola concerns and energy shares plunged as Brent dropped to the lowest in almost four years. The dollar slid and gold climbed.

The S&P 500 (SPX) fell 1.6 percent to 1,874.82 at 4 p.m. in New York, the lowest since May and closing below its 200-day moving average for the first time since 2012. The Dow Jones Industrial Average lost 1.4 percent to a six-month low. The Bloomberg U.S. Airlines Index plunged 6.2 percent, the most in two years. Brent crude tumbled 1.5 percent after sliding into a bear market last week. The dollar weakened against most of its 16 major counterparts. Gold gained 0.7 percent.

Today’s selloff extended a rout that wiped $1.5 trillion from global equities last week amid concern about weakening economic growth. Federal Reserve Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. Confirmation that a Dallas health-care worker is infected after treating an Ebola patient who died has put a new focus on risks the virus will spread.

“There has been weakness all day and there’s no leadership so when you get this exogenous thing, whether it’s caused by Ebola or not, and airlines are getting decimated, it’s hurting everything else,” Michael Block, chief equity strategist at Rhino Trading Partners LLC, said by phone.

David Fuller's view

What is causing this selloff on Wall Street?  Well, subscribers who have monitored this service’s Comments of the Day and listened to the Audios over at least the last two to three weeks are not surprised.  The first, early warning came from deteriorating market breadth, revealed by the Russell 2000 Index of smaller companies – the canary in the coalmine - which had been developing a large top formation all year, before breaking downwards last week.  The second warning came from overextended rallies which reached psychological reassessment points, notably 2000 for the S&P 500 Index.

Worryingly, those gains were fuelled in part by the increasing use of leverage (NYSE Margin Debt), which exceeded previous highs in March 2000 and July 2007.  Wall Street’s new issue flotations reached their highest level for over a decade by October, with a huge increase in supply from the giant Alibaba float.  Meanwhile, some geopolitical events were becoming an expensive headwind for struggling GDP growth, from reciprocal sanctions against Russia, to the war against ‘Islamic State’, and most recently, the spread of Ebola which has been reducing airline travel. 

As of today, Wall Street indices, in addition to the Russell 2000 and S&P 500 shown above, have broken their long progressions of higher reaction lows, some of which extend back to 2012, by closing beneath the early August floors.  Further examples are the Nasdaq Composite, Nasdaq 100, DJ Transport and Dow Jones Industrial Average.  Most of these indices have also broken their 200-day moving averages which show signs of turning downwards.

Despite a short-term oversold condition, these are ingredients for a significant correction before stock markets regain an upward bias against the background of generally very favourable monetary conditions - stimulative lower energy costs - cheaper prices for most other commodities - lower valuations for equities - improving corporate profits, thanks to technological innovation and the rapidly growing middle classes in developing economies.  

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