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.
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”:
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.