Stock Market: Three Reasons Why It’s About to Get a Whole Lot Worse
The downside momentum in the U.S. stock market is gaining traction. And unless the Federal Reserve does a complete about-face and launches QE4, the sell-off in stocks that started in mid-May of this year will accelerate.
Today, I present three very strong arguments for lower stock prices.
First, looking at the chart below, you will see the Dow Jones Industrial Average has been trading below its 50-week moving average for two consecutive weeks now. This is the first time since 2011 that this has happened. Furthermore, the market’s momentum indicator, the MACD, has been trending lower since mid-2014—another negative for the technical health of the market.
Chart Courtesy of www.StockCharts.com
Next, I’d like to introduce my readers to another important chart courtesy of my very good friend Anthony Jasansky, P. Eng., from Market Insider Bulletin. The chart plots the price of S&P 500, the yield on the 10-year U.S. Treasury Note, and the yield on the Dow Jones Industrial Average.
Source: Market Insider Bulletin
As of now, the yield on the Dow Jones Industrial Average is higher than the yield on the 10-year U.S. Treasury Note. This rarely happens. It means investors can get a better dividend yield on big-cap stocks that they can get on 10-year U.S. Treasuries. This has only happened a handful of times since 1981. And when it has happened, we’ve usually had big market swings.
Fundamentals Screaming Equities Are in Trouble
Thirdly, the fundamentals of the stock market are in deep trouble.
As of August 6, 436 of the S&P 500 companies have reported their financial results for the second quarter of 2015. At present, these companies have experienced a one percent decline in earnings—the first decline in profits since the third quarter of 2012. (Source: FactSet, August 6, 2015.) But that’s not the biggest problem on the fundamentals.
The S&P 500 companies are reporting a massive decline in revenue to the tune of 3.3% in the second quarter. Considering revenues declined for corporate America in the first quarter of 2015 too, this is the first time since 2009 when sales for the S&P 500 declined for two back-to-back consecutive quarters!
As it gets worse; stock analysts expect corporate earnings to decline 3.6% in the third quarter and 2.4% in the fourth quarter of this year.
Stocks Losing Their Charm
In late 2014, I started predicting 2015 would be a terrible year for stocks. And that’s exactly how it’s been. While I’m actually surprised it hasn’t been a worse year for stocks, the next few months could be devastating for them; unless, as I said at the opening of this article, the Fed goes for QE4 instead of its pledge to raise interest rates.