US Stock Market Looking “Toppy” To Me

I’m seeing classic indications of a Major Top in the stock market graphs. The Fed is saying they WILL raise interest rates this year, and you just can not fight the Fed. Arguing against that was the horrible jobs report with 300,000 lost instead of 200,000 gained, so it is remotely possible the Fed will hold off a while until the next jobs report. But I would not count on that. Central Banks around the world are in a Liquidity Trap. Interest rates are near, at, or even below zero and there is no monetary stimulus from that. Keynes warned that this would happen if “easy money” was too much or too long (IIRC he set the upper bound for easing monetary policy at about 3 years… not the 2 decades we’ve had.)

So Central Banks have their “naughty bits” in a mangle. Their choices are keep cranking, or stop and let things stay a bit squashed while they hope for a solution. NO AMOUNT OF ADDITIONAL EASING OR LOWER INTEREST RATES WILL ACCOMPLISH ANYTHING GOOD. Period. Full stop. That’s just the nature of a Liquidity Trap. At the same time RAISING INTEREST RATES WILL CRUSH ECONOMIC GROWTH, right at the time when it is needed the most as folks have been locked down and out of work for 2 years. Rock, meet hard place. So I think the Fed will likely post a nominal 1/8 basis point rise, just to prove they are not as impotent as they are. Perhaps even two of them. Then sit for the rest of the year through the election (The Fed hates raising interest rates during election season when a Democrat is the incumbent…)

But ANY rise will cause a way overheated and overpriced market to take a “correction” and or crash. (Depending on how overpriced and how much rate hike and how moribund the economy. Unfortunately, the market is very over priced, and the global economy is screwed from logistics, labor, and inflation issues right now.)

So that all ought to be reflected in the charts, and I think it is. These are fairly simple charts, not a lot of fancy stuff in them. First up, the 2 year daily for the S&P 500 compared to the NASDAQ (QQQ) and Russel 2000.

S&P 500 vs Nasdaq vs Russel 2000 2 year daily

S&P 500 vs Nasdaq vs Russel 2000 2 year daily

The first thing to look at on this chart is the gold Russel 2000 line. Essentially “flat with a wobble” for almost a year, then falls down in the last 2 months fairly hard. These are the smaller companies of America and they often react first. Trading volume is thinner and float is smaller. They already had a “go flat then roll off”, partly enhanced, IMHO, but the fact that the Covid Crap Rules harmed smaller businesses more. But you can not build an economy on giant companies alone and the canary just stopped singing…

Then that top Nasdaq WonderKinder line. These are the cutting edge best and brightest future of our world leading development, rising fast and higher than anything else. But they also drop faster and further in a downturn and just posted up a BIG “lower low” in that last dip compared to the dip of last October. They are saying “it’s rolled over and we are in the land of lower lows and lower highs” even though we don’t yet have the “lower high”. I’d expect to see that in anywhere from “now” to a couple of weeks from now. Though with easy shorting a thing, and machines doing the deciding, I say “now” more likely than later.

Drop down and look at the S&P 500 line. It’s just a tiny bit “lower low” now than last October. Not enough to be significant as it could just be one day datapoints from some whale trading, but that’s what the QQQ is for. TO make that more visible. Russel 2000 has collapsed below it, so the Little Guys are already getting beat up and the high fliers took a hit. That means S&P 500 and then Dow Industrials are likely next. IIMHO the S&P 500 is already at the starting gate.

Now look at the moving average lines on the S&P 500. Hard to see but at the very far right end, the stack has rolled over. In up runs the faster average rides above the slower, like most of last year. In “corrections”, like the 2 Septembers, the fastest line crosses to the bottom and the other two entwine. In a hard down, the lowest line is on top, then the middle and the fastest line is on the bottom. Hard to see it on this chart, but it is that way on the 6 month chart with better resolution. It could still just be a correction, but given the Fed context and that we just DID a correction and there was no following rally, that’s very much what a top looks like.

Drop down to the Volume+ indicator. The markets are a volume seeking mechanism. Commissions come from volume, not which side of the trade is winning. Note the two “black spots” ( I sometimes call these “2 spooky eyes”) at about last April and Oct/Nov. Volume when “way low” while attempting to make local tops. Volume is not to the upside, it is much bigger on the downsides. At this point, the Whales & Trading houses need to move out their inventory and stake out short positions, so the market wobbles at the top as they do that. Then they work a bear market. Price has returned to the SMA stack from below and touched it. IFF it breaks through to the top side, it’s just a correction, but I expect it will fall away to the downside confirming the top.

Next indicator down is MACD. It is below the zero line, so technically became bearish 2 weeks ago. Now it is clearly in a bearish conformation. Red on top and below zero. But looking for a “below zero crossover” short term with the return to the SMA stack.

And last is DMI / ADX. It called “Be Out” on the 22nd with Red On Top. Red has now crossed under the black line, so “correcting”, but in this case the correction is back to the SMA stack from below. You may have a few days of long side trade gains, but the context longer term is not so good.

Lets look at a long term weekly chart. Shifting our time scope to “long and slow”:

S&P 500 vs Nasdaq vs Russel 2000 5 Year Weekly

S&P 500 vs Nasdaq vs Russel 2000 5 Year Weekly

It, too, has the Nasdaq high fliers way high on top in blue. But also showing “lower lows” so likely to fall faster and harder. In the down spike of 2020 March to April you can see how the plunges can be big and fast. Huge volume spikes. The time to buy is when that happens. The time to sell is those quiet low volume tops. What have we got now? We got a little volume in that last sell off, but the volume was way low a couple of months ago.

Look at the bottom ADX black line. Approaching 10. That says strength is “way low”. That is strength to hold the top. Just not there. Red is “way on top” and has been for weeks. This is a bull market dying. MACD went from “weaving well above zero” steady bull market, to “rolling down red on top” and is now pointing down and headed for a zero crossover in a couple of weeks. That’s a weak market at a top, IMHO.

Now IFF interest rates were 5% and the Fed were talking about rate cuts to stimulate, sure, you could get a “correction” into asset inflation and a longer bull run. But that isn’t the case. The Fed is up against the wall in a Liquidity Trap and rates are already near zero. They can’t bail this out easily.

So my POV on all this is that it is time to put protective puts behind long term market positions, sell out your long trades, and start thinking about how to trade a Bear Market. Especially with 300,000 more folks out of a job and Idiots On Parade in “control” of the government spending $Trillions they borrow from China.

Me? I’m looking a short ETFs, and then ways to hedge the currency risks in massive inflation. It’s coming.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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13 Responses to US Stock Market Looking “Toppy” To Me

  1. H.R. says:

    I am holding dividend paying stocks that I believe will weather any commie storm.

    So, I’m not particularly concerned about those stock’s market value so much as I am that the companies can remain viable and still pay a dividend.

    But… I also believe we are in uncharted territory, and I may be 180 degrees off on my portfolio.

    The Mrs. and I am hoping that Armageddon will hold off long enough that we can buy 20 to 40 acres out in the boonies and weather any storm there.

    We shall see. It’s a race against time and the GEBs.



    P.S. We love our current house and location, and we could pay it off tomorrow, if we wished to do so. No point since there is no savings on interest. It’s the last couple of years and all principal.

    We have considered that we may just have to walk away from our beloved home because of hyper taxes that are needed to cover the township’s hyperinflation. So be it. We have a ‘house’ and a truck. Who gives a rat’s ass at our age?

    Interesting times, eh?

  2. Ossqss says:

    I actually have a zoom meeting with some economists tomorrow at 3 on what’s going on. I will parlay some of this in the Q&A and report back on findings. If interested in attending, I am permitted to share such invite. Contact me via @gmail

  3. another ian says:

    In that area

    “A new threat to the US dollar’s dominance – and the current world economic system?”

    https://bayourenaissanceman.blogspot.com/2022/02/a-new-threat-to-us-dollars-dominance.html

  4. E.M.Smith says:

    @Another Ian:

    Folks can already move money instantly and put it in different currencies. I’ve done it in my trading account. Bigger institutions do it as a matter of course.

    The Digital Currencies are not exactly a real thing. I’d not trust them. That said, many people will. Especially poor folks around the 3rd World with corrupt governments (and maybe in the USA if the Democrats win the midterms via buggery again…)

    Will it have any major impact? I doubt it. Why? Because we already have $Trillions of a half dozen currencies wandering the globe electronically all the time. I bought a small computer from China. Just charged it to my debit card. Somebody else did the currency conversion. Go to Europe on vacation? Stick your card in the terminal and you charge in the local currency, but pay at home in your own. This “digital” Yuan really just eliminates the plastic and makes it an ap on your phone. OH, and captures a facial recognition picture at sign up…. so no, not for me.

    It will be interesting to see what happens the first time it is hacked. I’d guess about year 2.

    @Ossqss:

    I’m happy with your summary. (I.e. I’m not keen on group calls. It’s a struggle some times to follow what with marginal hearing for some voices… and limited tonal range on phones.)

    @H.R.:

    There are ways to hedge the stock holding without selling and without letting go of the dividends. Exchange traded short funds is one example. Over time these fade away and decay as the stock market grows (and as the underlaying is usually a futures or options contract – i.e. wasting asset) but when it looks grim, you can (for example) buy “SH” and it is the same as selling the S&P 500 short. Just don’t hold it for weeks to months… Just a week or two max at any one time. (I.e. more day trader stuff).

    On strategy is to buy put options, then sell them in a month or so (or when the market is done going down…). You still hold your stocks and get the dividends, but have hedged out market decline. (Also hedged out run up profits… so get the direction right). Or just collect dividends and go fishing ;-)

  5. Scissor says:

    UGA is a good way to capture inflation in gasoline prices, beats massive storage tanks.

  6. Ossqss says:

    @EM, it is primarily a presentation with Q&A along the way. It is being done via one of the major players in the market, not some aftermarket thing.

  7. jim2 says:

    There has been so much money handed out by the Fed, the lack of that might well cause the markets to drop.

    If it weren’t for that, in past recoveries, many times the stock market has continued to go up as interest rates were increased. But that probably only works up to a point.

    One fly in the Fed’s soup it energy cost increases – it can’t control those without nuking the entire economy.

  8. E.M.Smith says:

    @Jim2:

    When The Fed drops interest rates to near zero (or worse, zero & below), who can walk into the bank and get an interest free loan of, oh, $Billion? Not you or me. But Goldman Sachs & Blackstone can. So they do.

    Now, do they spend that money on rent or groceries? Cars? A new fridge? Nope.

    It goes into buying up Real Estate and into the Stock Market (remember, zero interest means bonds not paying anything of interest so the Bond Market not so interesting, add a bit of inflation more than the bond coupon rate and it is a money loser net…). This props up the Stock Market and it causes home & land prices to rise (as we have seen for several years now).

    What’s more, GS or other brokerages can re-loan that money to their richest traders, i.e. The Elite, as “margin” so they can buy ever more stock without putting up all of their money. Leveraging it up. As prices rise, their “collateral” also rises so they can then borrow more.

    Now, what happens when The Fed instead starts raising interest rates? GS & Friends have to start paying for all that borrowed money. Bond coupons start to rise,too. At a (fairly low) tipping point, money starts to leave stocks and enter the bond market. Stocks drop some in price, collateral for the fully leveraged margin accounts no longer covers it, and at 2 PM the margin calls go out. Pony up some more cash or the broker sells some of your stocks. Rinse and repeat as the market drops.

    Everyone is happy to buy more shares when the only direction is up and the money is free. When they must pay for the money they borrow and stocks are going down, not so much… and the selling cascade begins.

    There’s another part to this that I’m going to leave out as it is a bit complicated, but it is the Banks. With nearly free money they are happy to take it, then thanks to fractional reserve banking that money is multiplied into more (about 10 to 20 times more depending on the fraction they are required to hold in reserve). Usually The Fed will nudge up reserve requirements if things are a bit dodgy. Like if recession and bank failure look possible. This contracts the money supply as banks stop lending as much to raise reserves. Banks are part of that whole Margin & Stock loans thing…

    So once The Fed is leaving behind “Monetary Easing” and instead going for tightening, several leveraged processes pull the air out of the inflated stock prices… Trying to tune that Just So, so that the balloon does not go flat is rather hard. Poke just enough hole in it to stay steady, and not have it deflate fast enough for anyone to notice… Yeah, that hard.

    And The Fed has said they intend to try that. Soon.

  9. David A Anderson says:

    Difficult decision times. Opinions welcome…
    Will they over “ deflate” and then desperate last harah of free money driving rates down to possibly negative? ( If so will most nations abandon the dollar)
    If they over deflate – and don’t print to the moon, then ? interest rates freeze house buying, car purchasing, even the “blackrocks” stop buying, and supply problems continue in some areas because they broke the invisible hand, will we transition hard in some areas like housing to crash deflation?

    So opportunity to buy a home now at rapidly climbing interest rates ( almost a .5 move in two weeks) very affordable now, will finance but have about 100k above what is owed on the home, plenty of income where 65 percent could go away in a collapse and still pay the bills. ( income from SSI X me and wife, Cal public employees, Cal state teachers, and local Union defined benefit pension.

    The idea, buy now and have the home, add in generator and extra propane tank, buy freezer, finish out 1000 sq! Of 1600 sq partially done lower level, bring 95 year old dad in when independent living place says he must go ( any month) and not worry if housing collapses and two thirds of pension goes away as by paying only about 50 percent down we have adequate savings for a decade or two of mortgage payments and even two more years of saving at current rates moves the 400 k savings to about 550 to max 625 if pops passes away. The home we are looking at has lots of local farms, and would be a peaceful place to ignore the world from. They have agreed to 605 k
    Or wait until housing likely crashes and who knows. ( the bird in the hand is tempting)
    https://www.realtor.com/realestateandhomes-detail/6378-Tyee-Rd_Umpqua_OR_97486_M20369-47081?cid=txt_shares_rdc_ldp

  10. David A says:

    Home has incredible river views, ( watched fishermen eagles and Ospreys while there, saw a very large ? Perhaps steelhead, pulled out right then, prime fishing location) 45 feet above google earth water levels, 64 flood would put 2feet of water in the basement, 08 log home, 2 full rv hook ups, in good times I would buy it in a heartbeat, as the finished lower level would generate 60 k easy as a vacation rental.

  11. H.R. says:

    @David A re the dollar – The GEBs have been actively trying to get the dollar kicked to the curb. Think about the Obama’s monetary policy and think about the things Biden’s puppet masters have been having him do.

    How many times over the past year have you said or heard, “That will make the dollar worthless and useless”?

    The hyperinflation the Uniparty and the Biden Administration have been trying to jumpstart is no from stupidity. It’s planned and is a feature, not a bug.

    Stock up on barter goods.



    Land is a good choice. It is a tough decision whether to buy now or buy later. In times of hyperinflation, the property taxes will be raised so high, so fast that people will have to default on paying taxes, even if they own their house and property outright. Then the property is sold to the GEBs for back taxes. They will own everything. We will own nothing and be happy… or else.

    The Hunger Games was a documentary. Who knew?



    There’s more to be said and discussed about how the GEBs benefit from a trashed and crashed US economy, but I’m past my typing limit for now.

  12. jim2 says:

    It’s funny in a sick kind of way that some in the US want to “compete” with Communist and other countries to run headlong over a cliff.

    As the race against China’s development of its central bank digital currency (CBDC) known as the digital yuan continues, the U.S. Federal Reserve accomplished a feat in testing a design for a U.S. digital dollar that in one of two tests, managed to handle 1.7 million transactions per second. A report released last Thursday provided the initial findings of research conducted as a collaboration between the Boston Fed and the Massachusetts Institute of Technology (MIT). Dubbed ‘Project Hamilton,’ the report describes a theoretical high-performance and resilient transaction processor for a CBDC that was developed using open-source research software called ‘OpenCBDC’.

    https://news.slashdot.org/story/22/02/08/2225205/fed-designs-digital-dollar-that-handles-17-million-transactions-per-second

  13. David A says:

    Thanks for the input HR. A good thing about owing a mortgage is it, the amount owed, can’t inflate. It’s fixed. Now if hyperinflation, or even inflation continues, then having a home is very beneficial on the net wealth perspective. However watching dramatic deflation, very possible, I would say certain for the heroin addicted economy without continued monetary jabs, “boosters” of a different kind if you will, would not be fun. Yet if you love the home, and can pay for it regardless, then one should care not the “assigned” dollar numbers, as the value is in living there, and eventually it is paid off, or you die. (And the homes value is relative, that is to say it is still equal to another home of also equal value.).

    As to taxes, we’ll of course laws are manmade. The particular home I am looking in has state legislated limitation of 3 percent annual increase. The annual tax is currently 2750, so that increase is bearable for the duration. Can that change? Of course, yet the rebellion would be very real. Just as Canada would struggle greatly to move the thousands of protesting trucks, evicting millions of homeowners telling the GEBs to pound sand would be very problematic and quickly plunge clown world into mad max territory. The trucker strike has the GEBs terrified. If the population says go to hell, and United in opposition, they have no real power as, unlike truckers, farmers, builders etc, they produce nothing. Just as property tax is a human construct of agreed on human creation, so is the law a human construct that CANNOT work or function if the humans within say to the GEBs “ Your law is meaningless, you neither clothe shelter or feed me, you are trying to, through law and computers, unclothe, de-shelter, and starve me, you must die. I am not required to hate, I am morally required to stop you and quite possibly, end your existent” So if the GEBs create the mad max world, owning property and a community is vital while Assigned monetary value meaningless, possession then is 90 to 100 percent of the law. Many “will not” be forcefully jabbed or taxed out of their home, their view is that this is the hill some GEB will die on.

    If they create the digital currency Jim’s post above alludes to, they will have total control of monetary numbers, of funny money. One would have zero choice about paying whatever tax they decide. In such a power grab they unknowingly destroy their own system, and barter systems begin to emerge everywhere. Despite all attempts to gaslight the trucker strike, which will have real supply line affects, the public generally supports it. Communication is infinitely better then in the past, and the GEBs are losing the narrative. The argument is so simple, LEAVE ME ALONE, I AM SOVEREIGN OVER MY OWN BODY, the GEBs are bound to lose, yet may destroy a few billion lives in the process.

    I am curious in defining how they benefit from crashing the US, and unavoidable by extension, global economy. I get the idea of the “ great reset” a vast digital system of monetary control from central authority from one world government. And I can see such control as MAYBE possible in a greatly reduced world population scenario. Yet I think they are insanely unwise and ignorant of natural law, as well as GEBs. A single digital currency is incredibly vulnerable to physical destruction. Decades ago at work one worker insisted on playing his crappy radio music loudly. An older Vietnam vet asked him to turn it off. He was ignored. He asked again. He was ignored again. He went to his tool box, grabbed some dikes, and, at the base of the power cords entry into the boom box, snipped the wires producing a short spark, and the desired silence. The younger boom box owner picked up his boom box, staring at the now impossible to plug in boom box, with a comical stunned look, while the veteran just returned to work, completely ignoring the boom box owners impotent protests, as the rest of the crew laughed at the situation.

    I think the above is a fair scenario for what may transpire. Trudeau now is exposed, looking somewhat like the stunned boom box owner.

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