It’s “Make or Break” for the Market

This week is “make or break” for the stock market, says strategist Charlie McElligott.

If Monday provided an indication, “break” is more likely.

Like a proud but aging heavyweight, stocks answered the opening bell with the best blood they could summon… and a chip on their shoulder.

The Dow Jones was soon up and away, 352 points higher.

But in later rounds stocks began to wobble… and stagger.

By the closing bell they were on the canvas, flat, wrecked beyond hope.

The Dow finally ended the day down 245 points.

The S&P was down 16… and closed on the threshold of its second correction of the year.

The Nasdaq, already suffering correction, took another walloping Monday — down 117.

What blindsiding blow turned the early promise of victory into a late knockout defeat?

An uppercut from the trade war…

Bloomberg reported yesterday afternoon that Trump is prepared to declare tariffs on all Chinese imports if next month’s talks with China’s Xi Jinping fail.

Trade-sensitive Boeing led the way lower, down over 6% on the day.

Boeing alone accounted for 163 points of the Dow’s 245-point pasting yesterday, according to MarketWatch.

“If we continue to travel lower at this rate of speed,” warns “the Fly,” founder of financial news site iBankCoin…

“I’m afraid it could portend a truly brutal dislocation in markets that would make you regret the day you opened up a brokerage account.”

All the while, some 40% of U.S. stocks now limp along in bear market territory — meaning they are down 20% or more from their recent highs.

The market found its legs this morning — and its fight. The three major indexes were all solid green today.

But one day does not a rally make. It is often the bounce of a dead cat off the roadway, as Investor’s Business Daily reminds us:

One good day does not confirm a market bottom. Most of history’s best one-day percentage gains in the Dow Jones and other averages have come in stock market corrections or bear markets. 

Meantime, the stock market is about to absorb another hefty clout…

Tomorrow, the Federal Reserve is scheduled to hack $33.2 billion from its balance sheet — its largest single reduction to date.

That is, more market-supporting liquidity is coming off duty.

The European Central Bank (ECB) is also in the process of halving its own bond-buying program. The Bank of Japan (BOJ) is slowing down as well.

We should therefore not be surprised when Bloomberg informs us that global financial conditions are the tightest since June 2016.

Might these tighter financial conditions — more than trade wars or earnings or what have you — most account for the recent show?

Tighter financial conditions are why the aforesaid Charlie McElligott predicted a “financial conditions tightening tantrum” toward the end of October.

Perhaps that is what we are enduring — a financial conditions tightening tantrum.

It is not merely the U.S. stock market that goes on wobbly legs.

As explains JPMorgan analyst John Normand, on only two previous occasions have so few asset classes yielded positive returns for the year:

The percentage of asset classes that have generated positive returns this year is only 20%, a share that has never been so low outside of 1970s stagflation episodes and the global financial crisis.

Poor company to keep, we must say.

But are stocks about to receive a fresh burst of energy?

We recently explained that many corporations were under “blackout” conditions ahead of the earnings season that commenced earlier this month.

Businesses are forbidden to conduct stock buybacks during this blackout period — lest they stand accused of trading on inside information.

Buybacks account for a healthy — or unhealthy — portion of this year’s market gains.

Corporations, in fact, represent the largest source of demand for U.S. stocks.

Now businesses are beginning to emerge from their blackouts. Forty-eight percent of S&P companies, for example, are passing into light.

They will then be free to purchase their own stocks until blue in the face.

According to Deutsche Bank, companies with $50 billion of quarterly buybacks emerge from blackout this week. That number leaps to $110 billion by the close of next week… and $145 billion the week after.

Overall, UBS estimates $170 billion will become available for buyback duty over the month ahead.

Pretty handsome.

And so, a point of light at the end of a darkened tunnel.

One word of caution, however…

If stocks fail to recover once buybacks resume in force, we suggest you run the other way — fast.

The point of light now entering view will have been the headlight of an onrushing locomotive…

Regards,

Brian Maher
for The Daily Reckoning