Weekend Reading: Is This The Big One?


Some month's back I posted an article entitled "No One Rings A Bell At The Top" wherein I stated:

"The current levels of investor complacency are more usually associated with late-stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer to the investor psychology chart above.

The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the 'ingredients' for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.'

Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst, they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."

Of course, what I didn't realize at the time was that, on Thursday, the markets would plunge like a stone sending investors running for cover and the media scrambling for answers. What caused it? Is this THE correction? What happens now?

This weekend's reading list is a collection of thoughts as to whether the current correction is just a buying opportunity, or whether this is Redd Foxx's "Big One."


Wallace Witkowski penned: "One out of four stocks on the S&P 500 Thursday are firmly in correction territory, or down 20% or more off their 52-week highs. At last count, 133 stocks on the index are bearish, according to FactSet data."

G Shelter retorted: "Well the Bear is just growling so far. He hasn't mauled anyone yet. He's afraid of The Bullard."


1) Tom McClellan Sees Market Decline by Tomi Kilgore via MarketWatch

At the moment, they are telling him to be bullish on the stock market for all of his trading time frames, including those that trade every few days, weeks and months. But bulls should be ready to flee, as soon as this week.

That's because McClellan said his timing models suggest 'THE' top in stocks will be hit some time over the next week. He expects "nothing good for the bulls for the rest of the year," he said in a phone interview with MarketWatch."


Read Also: Great News: Investors Are Dumping US Stocks by Howard Gold via MarketWatch

2) The Bulls Are In Danger Of Turning Into Lemmings by Doug Kass via Kass' Korner

"Though the bullish cabal postulates that serious market tops and corrections can only occur in response to recession, those observers may not be focused on the changing landscape of a flat, networked and interconnected world and could be failing to properly analyze failed or less effective monetary policy.

The current conditions that have presaged a possible developing global economic crisis are sui generis – in a class by itself, unique and served up by a financial culture and orthodoxy that may have never existed before. And, though history rhymes, the outgrowth of malinvestment that has been emitted from current conditions is taking different forms, as it has done in each progressive cycle."


Read Also: Bear Markets & Contractions: Then And Now by Chris Ciovacco via Ciovacco Capital

3) The Tide Has Turned by Thad Beversdorf via Stockman's Contra Corner

"I've been writing for almost a year now about the economic cannibalism that has been feeding earnings growth. I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal. And well we are now seeing the indications that the growth through contraction has now hit its inevitable end. Have a look at the following chart which is really the only chart one needs to study at this point. The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line)."


Read Also: Listen Up-The Do Ring A Bell At The Top by Jim Quinn via Stockman's Contra Corner

4) Big Stocks Are Last Hope For Decaying Market by Michael Kahn via Barron's

"We can add the already falling trend in the small-company Russell 2000 to the mix, but the S&P 500 still rules. Its resilience, thanks to the strength of a limited number of big stocks, hides the fact that market breadth has been falling since April, according to the New York Stock Exchange advance-decline line. More stocks have been falling than rising. And Wednesday afternoon the number of NYSE stocks hitting new 52-week lows soared to 267. That is more than 8% of all issues traded that day, and it is quite ominous."


But Also Read: S&P 500 Ready To Rally? by Tiho via The Short Side Of Long

5) Is High Yield Sending A Warning by Urban Camel via The Fat Pitch Blog

"Spreads on high yield (junk) bonds relative to treasuries have widened. This implies heightened credit risk. The widening and narrowing of spreads is correlated to equity performance over time. Since mid -2014, these have diverged (data from Gavekal Capital).

Are equities setting up for a fall? The short answer is no, at least not based on this measure alone."


Read Also: Junk Is Getting Junkier by Ed Yardeni via Dr. Ed's Blog

Other Reading

The Genius Of Warren Buffett In 23 Quotes by Paul Merriman via MarketWatch

A False Sense Of Security by Ben Carlson via A Wealth Of Common Sense

After 6-Years Of QE - St. Louis Fed Admits QE Was A Mistake by Tyler Durden via ZeroHedge

The Fuss About Market Liquidity by Yves Smith via Naked Capitalism

Debt-Financed Buybacks Has Placed Investors On Margin by Dr. John Hussman via Hussman Funds

"Most Bull Markets Have A Copper Ceiling" - Anthony Gallea

Have a great weekend.

Please, send emails and comments to [email protected] or tweet me.


David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access