The Only Thing You Need to Read This Weekend

This was a bad week for stocks, a very bad week. Over the next 48 hours other sources of market info/analysis will surely parse through this week’s market decline from 14 million different angles and tell you that we are going to fall a lot farther in the coming weeks. My advice would be to not read much current market analysis this weekend and instead focus on reading some timeless wisdom such as Jack Schwager’s classic Market Wizards or Howard Marks’ The Most Important Thing.

My take on this week’s market action is pretty straightforward. This market has been building up energy for an outsized move for much of the year and this week the dam broke. The uptrend which began in late 2012 was snapped with violent force this week:



While this is quite significant in itself, I am much less bearish right now than the majority of market participants I am hearing and reading. We haven’t seen bearish sentiment like this since at least 2011 and perhaps more importantly I can’t recall a large market downturn which began when the vast majority of market participants were bearish, such as they are now.

This afternoon’s selling was characteristic of a selling climax and from my vantage point there are good odds of a 2-3 day bounce early next week. Once we get the bounce the market is likely to take on more a ‘2-way’ trade which technicians like to call a ‘flag’ pattern. Such an oscillation could be the precursor to the next leg lower (bear flag).

Perhaps just as notable as the huge equity sell-off was the rally in gold which suddenly gained tremendous strength seemingly out of no where. The shiny yellow metal was left for dead in late-July and has spent the month of August rallying while nobody was paying attention. The fact that gold managed to end the week above a key confluence level bodes well for the near term:



As is typically the case, futures small speculators continue to be on the wrong side of the gold market. Small specs added to an already hefty net short position during the week ending August 18th; they were holding a nearly $1.3 billion notional net short position as of Tuesday afternoon (just before gold launched $50 higher to finish the week):




Finally, black gold shed another 4.1% on the week to finish lower for the 10th consecutive week!



While the magnitude of the recent decline is certainly not extraordinary by historical standards, the streak of consecutive down weeks is quite impressive. There simply isn’t much buying interest out there right now for oil and other economically sensitive industrial commodities. The $40 level for WTI crude is a sticking point, a break below $40 would offer a dire omen for broader financial markets while putting another nail in the coffin for many oil producing economies (Canada, Mexico, Russia, Venezuela, etc.). Enjoy your weekend, things are just beginning to get interesting.