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The Dow has Plunged Over 1000 Points and There Have Been Several High Profile Devaluations That are Questioning the Strength of the Global Economies and Commodities. What Now?

Early last week I opined the status quo was on the verge of major change.  Little did I know how prophetic my words would have become?  Since that statement; the Dow has plunged over 1000 points, there have been several high profile devaluations that are questioning the strength of the global economies and commodities – more specifically oil has been crushed, falling another 7.5%.

Because of the utter implosion of crude, down $20/barrel or 33% since June and eight consecutive weeks, the narrative is rising about the potential financial implosion of OPEC nations that could lead to even more anarchy in this already chaotic region.  Until last Thursday there was little verbiage about the potential impact upon OPEC.

Many times I have commented about the narrowness of the market.  Bloomberg has coined the term “The Fab Five” for the five companies that have given the NASDAQ and S & P any return up to last Tuesday.  The “Fab Five” are now imploding down anywhere from 12% to 22% in about a month. Ouch!

I have also commented about the velocity of change and how the markets are dominated by technology-based trading, trading that is correlated back to some news event, an event that may cause an outsized reaction.

Last week there were two statistics in the oil industry that I think generated a gross over reaction; perhaps the result of correlated technology based trading.  First, oil inventories rose because of unexpected refinery outages.  Second, the rig count rose by 2, the fifth consecutive weekly increase.  The rig count is down about 60% from a year ago and in the last 5 weeks 12 rigs have been added.

I think most will agree that a 7.5% drop in crude is perhaps overdone based on the above news.

What will happen if there is unexpected oil positive event?  Will crude gap 10% higher?

The accepted reason for Friday’s plunge was an unexpected decline in a manufacturing index in China, a decline most economists attribute to the port explosion, an explanation that escaped the equity bearish narrative.  In my view this is another example of shoot first, then ask questions.

I also think ETF selling, option expiration and technical based trading (i.e.  greater violation of moving average lines) contributed to the selling.

I rhetorically ask will the heightened Korean pressures impact trading?  What about the headlines that ISIS used mustard gas against the Kurds, mustard gas believed to be obtained from Syria?

Some have opined today’s environment is the most uncertain in many years.  I do not agree with this comment.  But what I will write the variables causing today’s uncertainty is different than the last period of uncertainty.

What will happen this week?  I think given the recent volatility the odds of a September rate hike are greatly diminished.  The economic calendar includes several housing statistics, manufacturing data, a confidence survey, personal spending and inflation data and weekly jobless claims.

Last night the foreign markets were sharply lower.  London was down 3.43%, Paris down 3.78% and Frankfurt down 3.48%.  Japan was down 4.61%and Hang Sang down 5.17%.

The Dow should open sharply lower as Chinese shares fell by the most since 2007.  Commodities are at a 16 year low.

Equities are now vastly oversold but the hallmark of the market is extremes, extremes in velocity and in some valuations, I believe partially the result of ETFs and momentum driven trading.   The 10-year is 14/32 to yield 1.97%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.