Market Top – Correction or Drop TBD

I use a long duration (5 to 10 year) weekly interval chart to determine market status as “bull”, “bear”, or “correction”. At present, this chart says it is at minimum a “market top”, and next we find out if it is “just a correction” or a “year or two bear market”.

Here’s the graph:

S&P 500 Graph from 25 Feb 2022.  5 Year weekly chart.

S&P 500 Graph from 25 Feb 2022. 5 Year weekly chart.

Things to note.

1) The Nasdaq (qqq) is in bubblicious territory and dropping fast. In a strong Bull Run it diverges above the S&P 500. In a bear market it diverges downward faster. Similarly, in inverse, the DIA Dow Industrials reacts far less. You are in a confirmed bear market when they cross over (and a few other things happen). So the DIA blue line is a lot less volatile than the qqq gold line. Nasdaq is already making “lower lows” and “lower highs”. Note that it is already down about as far as during the last “correction”. IF this is another correction, it will start shooting up first.

2) The S&P 500 is THE best investment in America without active management, and most active managers can not beat it. Why? Because “Size Matters” and shrinking companies leave the index while growing ones enter it. The indicators on the S&P 500 are saying “be out”. It looks to be headed for a cross over of the DIA “soon”, as a confirming indicator of a bear market.

3) Volume spiked huge on the “correction” a year ago. Volume is to the downside. Often after that, the major trading houses try to blow a bit of a bubble to unload their long (ownership) positions preparatory to going short (selling your shares in their name before you have a chance to do it; buying them from you later at much lower prices). That’s what this looks like to me.

4) It is complicated by all the War Hysteria, but I believe that will pass.

5) Volume slows at tops, and spikes at bottoms. About a month ago (maybe 2) volume got very low. Even now, the down spikes do not cause huge volume (look at the volume spike a year ago in the “correction”). This is saying “Top happened, bottom not yet”.

6) The next indicator down, MACD, has a wide open “mouth” where red is on top. That’s bad. It also is dropping from around a +15 to a crossover below zero. That says Bear Market. Looking at the black lines (divergence) they are below zero as of a month ago (when I first said it was looking bearish). That’s bad. Once the Red and Blue lines are below zero, it is bad. See the correction a year ago. Watch for the crossover to blue on top for the end of the “correction” (or not for a continued bear market).

7) Looking at ADX / DMI (the next indicator): DMI+ (blue line) dead on the bottom, DMI- (red line) on top. ADX (“strength” black line) rising saying the strength of the decline is increasing. Again look at the correction a year ago. It ends about when red (DMI-) crosses black (ADX) and both are heading down. Until that happens, stay out of stocks.

8) Now, back up at the price bars. Note that the little red PSAR dots are above the price track. That’s a “be out / sell” signal. Be in when the red dots cross to below the price bars. It is a bit hard to see, but the SMA Stack (Simple Moving Average – 3 lines of 9, 18, and 27 weeks) is in the process of inverting. Going from 27 on the bottom to 27 on the top. In a bear market prices return to and “kiss” these moving averages from the bottom. In a bull market, from the top. In a “correction” the price diverges far below them, then rushes back up to punch through them to the upside.

9) It is not yet clear if this is a correction or entry into a new bear market. That will be shown by a return to the SMA stack and punch through (correction) or fall away to the downside (confirming bear market).

10) The Fed is raising interest rates and claims it will do more. That argues for “Assume Bear Market until proven otherwise”.

11) I’m 100% in cash.

12) I can’t hold cash long term as The Fed and The Government is trashing the Dollar so I’m going on a hunt for alternatives. Watch this space later…

13) A V.P. at my broker called me up to “offer advice” about what stocks to buy with all the cash that is “idle” in my account. That means they are trying to find some rubes to take the long side of the trades as they dump their shares and short. (BTW, anyone above Noob at a broker or bank tends to be a V.P. so don’t get excited…) This is an indicator of very bad.

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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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4 Responses to Market Top – Correction or Drop TBD

  1. erl happ says:

    Thanks for the analysis. Trashing the dollar is a suicidal act and the issue is whether the nation will metamorphize or whether the same crew that run the show will hang on and drive it further into the ground.
    End of the day its the productivity of the nation that matters. Others are now setting the pace.

  2. p.g.sharrow says:

    @EMSmith thanks for your evaluation of market conditions An overpriced market seems to be ahead of the inflation presently expected, but the future of inflation makes real pricing questionable. If expected inflation is realized present prices will look cheap. My guess is a price blow off will happen soon and result in opportunity as inflation becomes more obvious.

  3. E.M.Smith says:

    @P.G.:

    Inflationary markets tend to be absolutely brutal to Bonds, and only slightly pissy at stocks. For stocks, it is a race condition between the inflationary damage to profits (rising input costs, harder to raise sales at higher prices) and the fact they are a real asset so the basic asset value is increasing in $ terms.

    What tends to win is “multiple compression”. So a stock selling at 10 x earnings drops to, say, 7 x earnings as folks demand more return of more worthless $ for the waiting. This tends to offset the increased value of inventory and property owned. (Of course this varies by company a lot too: So a company owning $2 Billion of “gold ore in the ground” does better than a High Tech with a 40:1 ratio and a great inventory of promises “someday”… So more “consumer staples” and “materials” and less High Fliers.

    You can short bonds, but that’s a bit exotic for the average person. I find it easier to play the other end: Once interest rates are up at things like 15% and The Fed is FINALLY pushing it to the wall to stop inflation, buy a “ladder” of “strips”. I did, and turned about $10k into over $40k in a couple of years. (Strips are the interest on a bond separated from the bond). Finding an instrument for the other side is a bit harder.
    https://www.investopedia.com/terms/s/stripbond.asp

    There are ETFs that short bonds (via options) but they are complicated by the fact that options evaporate over time. Such ETFs are good for short term trades, but over years to decades erode toward zero from the option decay function. For Strips (actual bond residue or interest package) it’s a real instrument with real money payments and no time value erosion.

    FWIW, I’m working on this question of “what instrument” (but slowly due to packing and moving and such). I’m hoping to have an answer “soon”.

    One of THE biggest problems is finding a Country that has not endorsed “Print & Spend”. The EU and UK are about as bad as the USA. What countries you do find are either dinky little nowheres that are hard to invest in their currency, or places like Russia with high “Political Risk”. My usual alternates of Canada and Australia have gone Progressive Socialist Nuts so are out of the basket.

    Maybe India… Sigh.

    Beware Gold. It is HIGHLY emotionally driven. I’d rather look to Silver, Copper, or Platinum. Palladium is historically a good choice, but the value is strongly driven by car Cat Convertors, and with the e-Car push, not sure how that’s going to work out.

    Generally speaking, owning the miners works better than metal ETFs.

  4. H.R. says:

    @erl happ – Don’t sink your money into any country where everyone is a barber, and they all give each other haircuts. 😁

    (Great advice and worth every penny you paid for it 😜)

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