There Is a Potential Dangerous Situation Brewing in the Stock Market, Doug Kass Reveals –

Doug Kass fills his blog on RealMoney every day with his up-to-the-minute reactions to what’s happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:

  • How Thursday’s decline matters.
  • How some of Kass’ favorite shorts are doing.

Visit here for information on RealMoney, where you can see all the blogs, including Doug Kass’–and reader comments–in real time.

Thursday’s Decline Is an Important Signal

The market closed near its day’s low.

The decline was broad based with few sectors being spared.
The Russell Index was a leader to the downside — rarely a good sign post.
As I recently wrote, I am fearful that both bonds and stocks are vulnerable.
No one, I mean no one (!) is fearful of a meaningful market downturn — especially the confident talking heads and glib commentators that parade in the business media daily. (Memories are short and a number of the aforementioned who led the lambs to slaughter in the last cycle — they might be repeating history once again).
However (though I might be wrong), based on my calculus (which I will present next week) equities may have approximately 3-4x downside to upside.
Importantly remember that the dominant investors are passive (ETFs, risk parity, volatility trending, etc.) — and they are all on the same side of the boat. They are agnostic to balance sheets, income statements and private market values.
This is potentially a dangerous situation. After all, when the machines sell, who is left to buy? (See my eight questions from my opener)
Regardless, listen to everyone and do your own homework and always operate within the confines of your timeframes and risk appetite.
I will stick with my view expressed in this morning’s opening missive — Sell In July Before It Gets Ugly as I believe the triangle of fundamentals, valuation and sentiment all argue for more weakness.