Credit Stress Sparks Correction

My usual early morning flick through major market movements overnight came to an abrupt halt at US regional banks.

They were down 6%.

What the..?

Upon further investigation it became clear a couple of regional banks had fessed up to major losses and the whole sector was copping a beating.

We saw two auto loan companies in the US implode recently with billions in losses dished out.

Jamie Dimon, JP Morgan’s CEO made a classic comment that may go down in history as the moment the market woke up to the underlying credit stress in the economy.

He said, ‘I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this.’

The chart of regional banks in the US looks precarious based on my model, so perhaps we are about to see more selling unfold.

2-year bonds reacted to the news and promptly fell 10bps to 3.40%, breaking beneath major support at 3.50%.

I sent out a Chart of the Day during the week that focused on US 2-year bonds, saying that I thought a sharp fall in yields was about to unfold.

Now we have the catalyst with the evolving credit issues.

The S&P 500 has also tipped over into a daily downtrend and volume has been elevated all week, since the huge fall that occurred last Friday.

The S&P 500 has been in a daily uptrend since April, so a correction of some sort may be on the cards soon.

It is still early days. The next sign I need to see to become more bearish is a weekly close in the S&P 500 below 6,540 (currently 6,656).

That would confirm a weekly sell pivot and failure below the 10-week EMA. If that occurs, I reckon it is odds on we see more downside in the short term.

Oil is also looking dangerous as I have been pointing out regularly. A failure in Brent crude below US$59.00 could ignite a wave of selling with a target of US$45.00.

I reckon it will be a fabulous opportunity to load up on beaten up oil stocks down there if it happens.

Gold continues to go vertical and all the analysts calling for a correction remain on the wrong side of the trade.

When a market is trending like gold is, it’s best to get out of your own way and allow the trend to play out. Hopefully with you on it and cheering it on.

The rise in gold could be the sign of something ominous going on beneath the surface.

I think China’s announcement about trying to control the use of its rare earths around the world is a frightening prospect.

America has reacted forcefully, and this game is far from over.

So, there are a few things building on the horizon that could upset the current goldilocks market environment.

After a great year it may be time to ring the cash register on some positions to ensure your Christmas break is a happy one rather than trying too hard and blowing yourself up.

Charlie and I cover a lot of ground in today’s Closing Bell video discussing the issues mentioned above and considering whether markets are about to take a breather.

Be sure to give us a ‘like’ if we haven’t bored your pants off and added some value to your day.