Can a Market Crash Arrive as Fast as Harvey?

As late as 10 p.m. last Wednesday evening, it didn’t even have a proper name. It was a mere tropical depression. And at 10 a.m. the next day, it was still just one of many tropical storms being tracked.

But as noon approached on Thursday, the storm was christened “Harvey.” It became a Category 1 hurricane and was tracking toward the south coast of Texas. Twelve hours passed, and it evolved into a Category 2, a threat to property but still not a major hurricane by meteorological standards.

Yet, as it drew near the coast 14 hours later, it was upgraded once again. Now it was a major threat—a Category 3 hurricane.

Just four hours later, it jumped to Category 4 status. And that is where it stood when it made landfall northeast of Corpus Christi, Texas, at 9:45 p.m. on Friday night. (For the full timeline and other interesting Hurricane Harvey coverage, go to https://weather.com/storms/hurricane-central/harvey-2017/AL092017).

Hurricane Katrina, which hit in 2005, was a Category 5 while still at sea. It was downgraded to a Category 3 when it slammed into New Orleans, ultimately causing over $108 billion in damage. The previous year, 2004, saw the last Category 4 hurricane, Charley, blast into Florida.

Harvey is expected to be the most devastating hurricane to hit the United States ever. Fortunately, it will not be ranked that high based on loss of life. The Category 4 storm that hit Galveston in 1900 is still considered the deadliest storm, causing nearly 10,000 deaths.

But as Harvey lingers over beleaguered South Texas this week, its nonstop rains are likely to cause the most property damage ever. (By Thursday, it is predicted to return to “tropical depression” status as it travels somewhere over the state of Arkansas.)

The disruption to life in South Texas has been, and likely will be for quite some time to come, enormous. The death toll will climb as we continue in “lifesaving” rather than “recovery” mode.

As Americans, I believe we must all feel a sense of pride as we see Texan watercraft of all types float down flooded boulevards in a veritable armada. These volunteers, navigating the watery city streets of Houston, continue to risk their personal safety to help their fellow citizens escape the more than 9 trillion gallons of water that had fallen on the city by this morning.

When Mother Nature brings down a disaster upon us, Americans always seem to step up to the challenge!

You, too, can help. Direct Relief, a top 10, 100% positively rated charity, has already been helping out in South Texas, making more than $100 million in pre-positioned medical supplies available. You can donate to their relief efforts here.

As you could probably tell from my introduction to this article, I was impressed by the speed at which Hurricane Harvey grew from a simple tropical depression to a Category 4 killer storm. Experts are saying that its 42-hour metamorphosis was the fastest ever!

While the change from a bull to a bear market does not tend to be as fast as Harvey’s speedy transformation, it still happens relatively quickly. The 1987 turnaround is an example.

The S&P 500 had hit an all-time high on August 25 of that year. By October 19, 39 days later, the market had lost 30% of its value.

In 2000, the top occurred on March 24, before a 50%-plus slide that ended in 2003. But it took just 15 days for the first 5% to be lost, and 16 days for the losses to exceed 10%.

The last 50%-plus slide in the S&P 500 began in October 2007 and ended in 2009. In just 21 trading days, the Index fell its first 5%—by day 62, it had lost more than 10%.

What signaled each of these precipitous declines? A failure to set yet another new high occurred relatively quickly in each case.

In 1987, an attempt was made just 29 trading days after the new high. It fell eight points short (0.25%) of doing so.

In 2000, the assault on a new high occurred 11 trading days after reaching these heights. It failed by 11 points (0.73%).

And in 2007, the unsuccessful attempt consumed just 16 days. It had but 13 points to go (0.84%).

Hence, most financial professionals are focused on whether the current market can recover and set a new market high. Each time it does delays the coming of the inevitable decline that follows every bull market.

If we look at the last three bull market tops, the failure to make a new high has come within 11 to 29 trading days. The last all-time high was hit by the S&P on July 27. Four trading days later, the market sought to make another new high but fell just two points short (0.10%). It has now been 22 trading days since the last new index high was made.

Still, in the last three major market tops, a 5% loss had been incurred within nine (1987) to 21 (2007) trading days. We’re at 22 days—and we began today just 1.6% below the July 27 high. The lowest low since then registered a 2.31% decline. No 5% decline yet.

So while the jury is still out, we don’t seem to be following the pattern of past market tops. Although we might be experiencing “the big one” in hurricane terms, it appears that there is still a good chance that more new highs may be in our future before “the big one” returns to the financial markets.

The market indexes seemed to be signaling this last week: All of them were up, both foreign and domestic. Bonds and gold also were positive. However, while the latter two have also been up for the whole month of August, only the Dow Jones Industrial Index has gained for all of August among U.S. stock indexes. International stocks have been much stronger.

We did not have any major news last week, as the Yellen and Draghi announcement on Friday were benign. Economic reports were about as expected, with seven below expectations and six above. While the housing numbers were weak, the Service sector continues to soar, and non-seasonally-adjusted unemployment claim filings hit the lowest level since 1969.

But there was reason for caution as the hurricane blew in to Texas. Houston is the U.S.’s fourth-biggest city. If it were a country, it would be ranked 25th based on GDP.

Having Houston out of circulation for an indeterminate amount of time has got to be a negative. This is also the case with its oil-refining capacity, the loss of which is sure to add at least 20 cents onto the price of a gallon of gas. Both of these are likely to slow the economic recovery that still hungers for the stimulus of a tax cut.

The S&P’s turnaround last week, like the hurricane’s quick return to sea on Saturday, did not improve the immediate prospects. The short-term technical condition of the market continues to come under assault: The number of new highs has been low, and the S&P remains below its 50-day moving average for the third straight Friday, its longest period underwater since before the 2016 election.

While Harvey was quick in forming, like the past three market tops, historical research on the markets does bring some good news. I looked at the last 87 years of daily prices (over 20,000) and found that, on average, the worst days in the market were not right after a new high. Rather, the massive declines that define a true bear market tend to occur deep into the downturn.

On average, a 5% down day has not occurred until 222 trading days after the last high-water mark, giving investors plenty of time to evacuate and mitigate losses. Or does it? Unfortunately, the range in occurrences is two to 724 trading days! Maybe using time-tested, quantitative strategies to get out of town is a better way to go.

Best wishes to the residents of Texas. Please say a prayer for them and their neighbors in these dark and stormy times.

Weekly Edge: Amazon and Whole Foods Challenge the Food Industry

Amazon’s innovation and game-changing supply-chain model have definitely produced dividends for the company. With its recent acquisition of Whole Foods, it has set its sights on the food industry. Shares of major food chains such as Kroger and Sprouts Farmers Market have been trading lower since June as a result.

Other hits to the Food sector can be seen in the falling stock prices of food giants such as Kraft Heinz, Post, and Kellogg, as well as the recent downtrend experienced by major packaged-food companies, which are also suffering due to lack of innovation. According to Zacks Equity Research, these companies have also been combating declining sales as they try to keep up with consumers’ shifting focus toward healthier and more cost-effective food options.

Now that Amazon is being added to this worrisome mix, these companies will be facing tougher battles both in brick-and-mortar locations and online. Steep price cuts to Whole Foods products will also add to Amazon’s arsenal.

Sectors: The leading Sector Benchmark ETFs exhibited relatively minor shifts over the past week. Utilities and Telecom rose, and Consumer Staples fell significantly. Momentum scores of most sectors increased for the week. The exceptions were Consumer Staples, Financials, and Discretionary. Consumer Staples fell into the red. The spread between the highest and lowest decreased from 54 to 48. In terms of ranking organization, there appears to be no general trend between cyclicals and defensive sectors. Technology (a highly cyclical sector) performed as well as Utilities (a typically defensive sector). Real Estate and Telecom were the only sectors to change from negative to positive for the week. Coupled with a mostly positive increase in momentum for most sectors suggests the potential for a market increase.

Utilities, Technology, Health Care, and several other sectors increased their momentum last week, while Energy and Discretionary are at the bottom of the sector rankings. The full effect of Hurricane Harvey will be shown in the coming weeks.

There are some specific concerns for certain sectors that may be affecting their rank. The overall demand of oil has affected the Energy sector, which has increased from -33 to -25.

Factors: The leading Factor Benchmark ETFs had mostly positive results for the week. Momentum and Low Volatility continued to be the top-ranked factors, and High Beta and Small Size are still at the bottom. Risk-off factors such as Quality and Yield are concentrated in the center of the rankings, but Low Volatility has continued to stay up. The overall momentum ranking for all factors increased last week, with the average momentum score changing from 0.6 to 2.3. The spread lowered from 29 to 25.

Global: Rankings in the leading Global Benchmark ETFs are also less clear about the sentiment of the market. China, Emerging Markets, and Latin America still lead the rankings, and their momentum scores have risen for the week. China’s momentum score rose from 42 to 44, while more developed markets such as the UK, which rose from -1 to 3, still are at the bottom. The average momentum score globally increased from 15.5 to 17.5. The US and the UK were at the bottom in terms of absolute rank. In developed markets, Japan decreased from 8 to 7.

Two Week Edge Chart

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