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“For those who believe, no proof is necessary. For those who disbelieve, no amount of proof is sufficient.” – Ignatius of Loyola

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As the market declines this month, the number of ‘believers’ is starting to shrink, and while they haven’t necessarily turned bearish yet, former bulls are looking over their shoulders.  The prospect of a government shutdown is just one of many concerns weighing on investors this week, and based on the intransigence of both parties, making a deal before the deadline looks increasingly difficult.  The quote above from Ignatius of Loyola may be over 500 years old, but it’s just as applicable today as it was back then.  With each side of the aisle increasingly locked into their tribal ideology, no amount of ‘proof’ is enough to get the other to see ‘the light’.

Futures have been trending higher all morning as the market looks to regroup from yesterday’s beating.  The only data on the economic calendar this morning was Durable Goods orders which came in higher than expected for August (+0.2% vs. -0.5%), but July’s reading was revised down to -5.6% from -5.2%.

With the S&P 500 falling to its most extreme oversold levels of the year yesterday, it should come as no surprise that most of them are also at what we would classify as ‘extreme’ oversold levels.  The only sector even above its 50-day moving average is Energy.  Declines have been broad-based during the sell-off of the last week. Real Estate and Consumer Discretionary are both down 5.81% followed by Technology, Utilities, and Financials which are all down over 4%.  Just to illustrate how bad a week it has been, the two best-performing sectors – Health Care and Energy – are down well over 1%.

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“Humankind cannot bear very much reality.” – T.S. Eliot

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Rising yields and oil prices have been two major headwinds to equity prices over the last two months, but this morning both are lower, and equity futures still don’t care.  After some sizable losses overnight in Asia and Europe this morning, investors see little incentive to step up and buy.  Especially when the CEO of the country’s largest bank says that the market may not be ready for 7% interest rates. Other drivers of the weakness in Asia were news that Chinese real estate developer Evergrande missed an interest payment, higher-than-expected inflation data out of Japan, and a much weaker-than-expected report on Industrial Production out of Singapore.  On the docket this morning in the US, we’ll get July home price data at 9 AM and then New Home Sales and Consumer Confidence at 10 AM.

We’ve talked about the weakening breadth of the US equity market frequently since the summer peak, but things have also been weakening on an international level as the declines from the summer highs start to get real.  For example, we’ve seen a winnowing of the number of major international equity benchmarks trading above the 200-day moving averages.  The chart below shows the current price versus the 200-DMA spread of the benchmark equity indices of the world’s 25 largest economies.  At 3.4% above its 200-DMA, the US ranks relatively well trailing only Brazil, India, Japan, Russia, Turkey, and Argentina.  While the double-digit percentage spreads of Argentina and Turkey look impressive, keep in mind that inflation in these two countries is in the range of 60% to 130% on a y/y basis.  On the downside, China is the only country trading more than 5% below its 200-DMA, but Belgium and the Netherlands are getting close.

Overall, just over half of the 25 countries shown above are trading above their 200-DMAs which is down from over 100% in late July.  Interestingly, while there have been plenty of times when every index was trading above its 200-DMA, there hasn’t been a period since 2000 when all of them were trading below their respective 200-DMAs.  Again, though, that’s partially a reflection of the fact that when you have some countries dealing with near triple-digit inflation, it’s hard not to have a rising stock market, unless the country is completely imploding.

What’s notable about the current level of indices trading above their 200-DMAs is that we have now gone 218 trading days with more than half of all indices above each of theirs.  As shown in the chart below, since 2000, there have only been seven other periods where the percentage was above 50% for even longer.  Unless global markets turn higher in the next couple of days, it’s highly likely that we’ll drop below 50% at some point soon.  That probably wouldn’t be looked at as a positive development, but sometimes you need the market to break a little bit before it can get back on track.

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