“Dear David and Eoin hope you are fine and have a nice weekend i have three subjects i would like you both to have a look at. first and most important is the Dow Industrial index. i feel its need more attention because of its leading role in the stock market. The heavyweights decide really the direction of this index, not Intel or Pfizer. they could correct 20 pct or more but the influence on the index would be small. if Visa or 3m or IBM or GS would correct 20 pct we would notice that. if you use the overlay in the Chart library i noticed something interesting. some shares like Visa/3M//Caterpillar and IBM move in the same direction as the Dow. if you look at Exxon and Chevron they corrected all ready a lot even when the Dow reached the highest point in september so the august rally till mid sept was caused by the other shares . then all shares went down till last week. if Exxon and Chevron would rally from here based on maybe higher brent/wti prices or because like Eoin writes about their low p/e and high dividend yields this market could go higher then expected. in your friday audio you are looking or expecting a lower high and that sounds logical to me. a typical technical rally but the point i am trying to make is we are to my opinion in a extremely dangerous market where high leverage and HFT are causing extreme swings and that scares the ... out of me. the analysis of the heavyweights in the Dow could give us maybe more insight in the direction of the Dow. would appreciate your thoughts. if Ebola is contained and no other black swans appear on the horizon" we could even see a new high for the Dow. so maybe the low we saw this week was just a shot before the bow and we will see the endgame in a few weeks or months time. or will this market 10-20 pct or more correction be here this coming week?. this is the most dangerous stock market since 2008" was an article i read written by Michael Sincere . this dangerous market needs your full attention and focus i think. the long term picture has to be on the background to my opinion. i would also like your opinion on the European banks on their valuations and prospects and technical situation. i don,t like them anyway not their arrogance and high salaries and high bonuses and culture ( sorry for that) the last thing on my mind is how strong are even autonomies like Unilever/Nestle and PG. i notice weakness in companies like Ahold/ Carrefour or Wall-mart. are their margins despite lower raw material costs shrinking because or lower margins caused by Western consumers who all have less to spend? also L'oreal for instance is heading lower despite the growth prospects in EM countries. are they like the oil majors the next group to decline? dear David i enjoy and appreciate the Fuller Treacy Money Service for the excellent service and your knowledge and overview all ready for many years best regards, and sorry for this very long email and so many questions.”

David Fuller's view

Many thanks for your important questions, likely to be of interest to many subscribers, and also for your thoughtful greetings.  I had a restful weekend with the family, which was most welcome after last week’s market dramas, and I believe Eoin did as well. 

I feel subscribers were forewarned in recent weeks of this volatility and corrective phase, although that does not necessarily make it any easier to deal with when it occurs.  Volatile gyrations are stressful for everyone, and I attribute them mainly to the high levels of leverage (margin trading) on Wall Street, which this service has documented with the help of Doug Short. 

Hedge funds and investment banks will increase their use of leverage when the market is trending.  Moreover, this short to medium-term influence actually increases the consistency and persistence of a trend, at least for a while.  Eventually and inevitably, something changes the self-feeding trend.  It could become overbought and clearly overextended relative to its 200-day moving average, and it could be near psychological resistance levels.  A trend can also lose its consistency because investors become concerned about GDP growth and corporate profits, as a monetary policy such as QE is ending.  They might be unnerved by the appearance of black swans such as Isil, Russia’s aggression leading to sanctions, or Ebola.  In fact, all of these factors have been apparent recently, and they have weighed on sentiment, eventually leading to the churning chaos that we saw last week.   

The Dow Jones Industrial Average does indeed have an influential role, although given the size of its components I regard it as more of a confirming rather than leading indicator.  I pointed out last week that the Dow and other US indices had lost many of their uptrend consistency characteristics of the last two years, by experiencing somewhat bigger reactions, breaking their progressions of higher reaction lows, and also moving beneath their MAs. 

A short-term oversold technical rally commenced on Friday and it will be important to see how far this carries.  It certainly lifted Asia today, although Europe was mostly easier, partly due to softness on Wall Street this morning.  This was influenced by disappointing earnings from IBM which fell sharply.  Given the recent loss of uptrend consistency by the Dow and other US indices, there is an increased risk that this rally will end in lower highs, although that would not be confirmed until last week’s lows were broken.  A lower high and lower low for the US indices would define a downtrend of at least short-term duration.  I think this is likely but it is by no means a certainty because monetary policy is still extremely accommodative, despite the probable ending of QE.  Monetary policy is almost always the most influential indicator, in my opinion.  Therefore I await the market’s verdict. 

Re European banks, they are in far better shape than a couple of years ago, mainly thanks to Mario Draghi who took over many of the bad debts.  However, EU banks still face a disinflationary if not outright deflationary environment.  So it is still difficult for them to make money in Socialist Europe, where negative interest rates currently apply. 

The email above also mentions several Autonomies.  These are a superior, internationally diversified asset class.  Nevertheless, no stock market sector is bullet proof.  We have seen a great run in many Autonomies since the 2008-2009 lows.  However, the better performers among them became somewhat expensive, as this service pointed out.  One can ride out a setback in Autonomies, because of their long-term potential, but I would be cautious about adding to positions unless or until they are clearly oversold and reasonably valued.