Important Market TOP Forming?
The charts have turned VERY ugly even as the news remains relatively benign. It’s tempting to blame the recent market volatility on the ups and downs of the prospects for a US/China trade deal. The timing of the sudden market plunge points the finger squarely at Trade Tensions. “Trade Tensions Topple Markets”. (https://markonomics101.com/2019/05/08/trade-tensions-topple-markets/).
The re-election fortunes of Donald Trump are heavily tied to the performance of the stock market. Perhaps, more so than any President in history. “Charts, Markets and Presidential Elections”. (https://markonomics101.com/2019/02/16/charts-markets-and-the-presidential-elections/). Investors are VERY aware of the President’s obsession with the Dow Jones Industrials and rightfully assume that any setback is likely to be temporary.
Just as suddenly as a Trade deal can be “OFF”, it can also be back “ON”. In addition, any adverse impact on the US, thus far is minor. Gross Domestic Product for the first Quarter was a strong 3.2%. Unless the Trade War is expanded to Europe, it should remain so.
Out of $2.5 Trillion in total annual exports, only about $120 Billion, or 5%, go to China. If the ENTIRE amount fell to ZERO, the impact on GDP would be less than 0.5%. On the contrary, China sells $540 Billion worth of Goods to the United States, equal to 5% of its ENTIRE ECONOMY.
The charts are showing that possibly, something much more serious is happening. We noted recently that the longer term picture switched to ominous as the major domestic equity indexes formed Triple Tops and Double Tops, both reliable reversal patterns. “Triple Peaks For Stocks”. (https://markonomics101.com/2019/05/13/triple-peaks-for-stocks/).
And Now The Rounded Tops
The Slide Show below is worth spending some time examining. It suggests the major Domestic equity indexes are preparing to “Roll Over” in ROUNDED TOP patterns. These are the key takeaways:
- While the S & P 500 and Nasdaq 100 made marginal new highs, they FAILED to stay above those highs. This suggests that the recent highs were actually “Double Tops”. The Dow Industrials FAILED to exceed its old highs and also has formed a BEARISH Double Top.
- The Dow Transportation Index has made a LOWER Double Top, FAILING to exceed or even approach last years highs. The Transports are considered highly indicative of economic health. The fact this sector has lagged the Industrials suggests a possible sign of a weaker than believed, or weakening, economy.
- The Russell 2000 Small Cap index also FAILED to approach its 2018 highs. The relative weakness in Smaller Capitalization companies is generally a BEARISH sign for the markets. In most healthy markets, small capitalization companies outperform their blue chip cousins.
- All 5 of the major equity indexes appear to be forming VERY BEARISH ROUNDED TOP patterns. This would be indicative of at least a short term top. The individual patterns do NOT necessarily preclude HIGHER HIGHS in the future, but for the moment, it’s prudent to view the equity markets as turning from a BULL to BEAR phase if support levels start getting violated.
- If the indexes violate “Next Support”, the case for a new BEAR MARKET becomes quite high.
Rounded Tops Among the Troops, Too
The Second Slide Show illustrates 5 of the 30 Dow Industrials which are individually tracing out their own ROUNDED TOPS. Some of these may be candidates for traders who engage in short selling or put options. None has yet broken resistance to confirm NEW DOWNTRENDS, but these all appear to have some downside potential. A few key takeaways are the following:
- The patterns of all 5 Dow Components are remarkably similar. They each feature a FAILURE to make new highs, a completing ROUNDED TOP, and reasonably well defined resistance levels.
- For all 5 companies, a breach of initial resistance is likely to carry lower at LEAST to “NEXT SUPPORT”. IBM, in particular, looks like an interesting trade set up should it break below resistance at $132.
- Goldman Sachs, which we’ve featured in recent articles, has FAILED to break resistance and instead threatens to break Support. Such a break, along with other financials, would be very BEARISH. “Big Bank Theory: Financials Lead Stocks Higher” (https://markonomics101.com/2019/04/13/big-bank-theory-financials-lead-stocks-higher/).
- Only one of the 5 does substantial business with China, Nike.
More is going on than just the trade talks with China. Whether or not a deal of some sort is worked out, the equity markets are poised to fall.
Is The Bull Market of 2019 Over?
All we can say at the moment is that the Bull Market of 2019 appears to be setting up for a decline. The decline may be a “correction” in the Bull Market of 2019, OR it could be a MAJOR, MAJOR Top. Treasury Rates are now at the lowest levels since LATE 2017 on their way possibly to join the Global Negative Interest Rate Party. US Treasury Bonds remain competitive even at 10 YEAR yields BELOW 2.4%. By comparison, a full $11 Trillion of Sovereign Debt has NEGATIVE YIELDS.
The Treasury Yield Curve has remained INVERTED for the last month or so. As we’ve chronicled in the past, inverted yield curves are accurate predictors of recessions from 6 months to 18 months in the future. One has to wonder whether the market is actually discounting a future recession which may be made WORSE by Trade Wars. The recession may take place whether a Trade Deal is finally consummated or not. “The Federal Reserve Stokes Another Asset Bubble”. (https://markonomics101.com/2019/03/22/federal-reserve-stokes-another-asset-bubble/).
The opportunities, for the time being, will be tilted toward the downside. For now, reduction of risk is the way to go. For those that care to make money on the downside, some interesting opportunities are setting up.
Be Informed, Not Misled!