Equity Markets Avoid A Crash, But A Severe Bear Market Looms Ahead
Previously, we had observed that many of the necessary ingredients, but possibly not all the sufficient ones, were in place for the ultra-rare event known as a “Market Crash” (http://markonomics101.com/2018/03/19/stock-market-crash-odds-grow-much-higher-it-may-be-imminent/). That analysis and the criteria it relied on, did not accurately anticipate that the bottoms seen in the late March/early April period which saw a stabilization in prices. The rally of the lows remained weak, with the Dow Jones Industrial Average only bouncing very slightly off its lows while the Nasdaq has since made higher highs but have lacked the type of conviction normally seen off of major lows.
By early April, the “Historical Stock Market Crash Pattern” was off the table being negated by both time and price. For a rundown of these factors, please revisit (http://markonomics101.com/2018/03/13/stock-markets-remain-on-crash-alert-new-highs-in-nasdaq-are-a-fake-out-not-a-break-out/) or (http://markonomics101.com/2018/03/15/hindenburg-omen-all-over-the-financial-press/). These articles set forth some of the unique factors that are present just before, during and after Market Crashes. In any event, they, like any other market indicator, are not, as Archie Bunker would say, “inflammable”.
While the equity markets did indeed seem to dodge a bullet earlier this year, if there is one thing that is ALWAYS true it’s this: “Markets will do what is necessary to fool the most number of participants the most often”. Whenever the market’s future direction seems obvious, it is, in reality, anything but. Another recent piece (http://markonomics101.com/2018/03/25/wrong-way-corrigans-of-wall-street-come-out-in-droves-to-yell-stock-market-crash/) examined how market “sentiment” was useful as a CONTRARY indicator and wondered whether too many people were expecting a crash for one to actually occur. That one was right.
So, how is sentiment today, after the sideways action in the Dow and nominal new high on the Nasdaq indexes? Our friends at Investors Intelligence (https://www.investorsintelligence.com/x/free_chart.html?r=101l), who perform a weekly survey of investment advisors continue to measure a lopsided preponderance of bullish advisors, currently in excess of 60% as illustrated in chart below:
The highest reading ever recorded, a near 80% bulls, coincided precisely with the early January peak in the equity markets. But subsequent readings have not nearly fallen far enough to suggest that any type of long term low has taken place. History tells us that readings of 20% to 30% are required before the pessimism is sufficient to spark a sustained advance. These types of reading usually take months of poor trading action before enough investors “throw in the towel” and become bears.
The 3 market index charts below tell an interesting story: The first chart on the left is of the Nasdaq 100 (NDX) for the last year. Having broken out to new highs, one must view this as a BULLISH sign, at least in the short term. However, this needs to be tempered by the ASCENDING WEDGE which is normally a topping sign.
Compare that to the chart in the middle of the NDX over a 5 year period. Notice the very BEARISH Accelerating Up Trend Line in RED coupled with the series of tops in GREEN. This forms a rather rare pattern which we’ll call an “Accelerating Wedge”. This is indicative not only of market exhaustion, but the 5 year duration means that the inevitable BREAK DOWN will be both violent and long lasting. It might not be in the form of a Stock Market Crash, but instead could be a Waterfall Decline. The different between the two is one of timing: Market Crashes occur in one or two days, Waterfalls can last weeks or months.
The graph on the right is the Dow Jones Industrial Average for the last year. It has barely rallied after holding the 23,500 level, but hasn’t managed to either reach its all time highs nor even the 25,800 level needed to even turn slightly Bullish. It remains NEUTRAL but is tracing out a short term ascending wedge, which is nearly always BEARISH.
From a timing standpoint, the equity markets can continue to compress as they lolly gag about for weeks or months and, if necessary will do so to keep investors leaning the wrong way. Don’t be fooled. The BEAR may have faked us out in March/April, but eventually Mr. Market will find just the right time to pick investors’ pockets. Just like the HOUSE in Las Vegas, Mr. Market always wins.