March 13, 2017

We may be approaching a Market correction

In the main, it remains my strong view that financial asset prices have decoupled from fundamentals in 2017. 

First-quarter GDP estimates predictably have moved lower relative to previous consensus forecasts.

Meanwhile, despite obvious legislative, executive branch organizational and other headwinds, second-half consensus profit and economic forecasts remain unrealistic. (The same may apply to 2018).

Malls in crisis
"About one-third of malls in the U.S. will shut their doors in the coming years, retail analyst Jan Kniffen told CNBC Thursday. His prediction comes in the wake of Macy's reporting its worst consecutive same-store sales decline since the financial crisis.

Macy's and its fellow retailers in American malls are challenged by an oversupply of retail space as customers migrate toward online shopping, as well as fast fashion retailers like H&M and off-price stores such as T.J. Maxx. As a result, about 400 of the country's 1,100 enclosed malls will fail in the upcoming years. Of those that remain, he predicts that about 250 will thrive and the rest will continue to struggle." --Time Magazine

Housing is peaking and so are automobile sales.

And in retail land we are seeing the bust of all busts; I have seen estimates that as many as one-third of the country's malls will be closed in the next several years (see quote above).

The number of distressed retailers is at an all-time high. HHGregg (HGGG) is about to file bankruptcy, BCBG Max Azria filed for bankruptcy last week, a financially and operationally crippled Sears Holdings (SHLD) limps along and there are major store closures at Macy's (M) , JC Penney (JCP) and others. The demise of the U.S. mall lays ahead, and with it more economic dislocations.

But, that's opinion (mine) and here are the facts that lead me to the conclusion that the character of the market is changing:

-    The VIX has decoupled from the averages.
-    The Russell Index is lower four days in a row, its longest streak in three months.
-    The S&P Index has declined over the last four trading days for the first time since November.
-    Strength in transports, heralded by the bulls as recently as last week, is also rolling over.
-    The S&P Index has had its first back-to-back loss in five trading weeks.
-    The Nasdaq is lower over the last trading week.
-    The Russell Index is underperforming the senior averages and testing key technical support.

Emerging markets began to roll over a week ago. The Stoxx 600 is on pace for its fifth consecutive decline and the ninth drop in the last 11 days.

Dr. Copper is falling under the weight of slowing growth and rising inventories.

The high-yield bond market is beginning to show topping signposts, with iShares iBoxx High Yield Corporate Bond ETF (HYG) down $0.57 and SPDR Barclays High Yield Bond ETF (JNK) down $0.22 yesterday.

Taxable bonds are making new lows. The 10-year U.S. note yield has risen for eight days in a row -- the longest streak in five years. Sovereign bond yields in Europe are following suit. With both stocks and bonds moving in the same direction (lower), risk-parity quant funds are getting hit. Remember my thesis -- buyers live higher and sellers live lower; this could exaggerate a decline.

Bottom Line

I believe we rapidly are approaching a market correction of some consequence.