Tipping Point or Tripping Point? Equities Surge To New Highs.
While there may be a million reasons to come to a certain conclusion with regard to analyzing prospective market trends, the ultimate arbiter is market action. In today’s trading, Mr. Market stuck out his tongue at our case for equities , “Inflection Point (Part 1): The Long Term Equity Valuation Cycle” (https://markonomics101.com/2018/07/12/inflection-point-part-1-the-long-term-equity-valuation-cycle/) as several key indexes broke out into Short Term BULLISH patterns while others are poised to follow.
This is now the longest bull market in history in terms of duration, although not in terms of percentage gain. Using the Standard & Poor’s 500 as a benchmark, the Bull Market that culminated in the Internet Bubble had a larger appreciation, 417%, versus 321% for the Geriatric Bull, which is still apparently running https://www.zerohedge.com/news/2018-08-21/markets-record-bull-run-5-charts.
Despite some nice looking chart patterns, the nature of the rally over the past few weeks has lacked the magnitude of conviction that is typically present during a real “Break Out”. Today’s advance was fairly feeble with only the Russell 2000 showing a gain exceeding 1%. The Larger Capitalization indexes (Dow Jones Industrial Average, Standard & Poor’s 500, and Nasdaq 100) failed to gain even 0.5%. Perhaps more significantly, the equity indexes were DOWN in after-hours trading and all gains had been wiped out. This set of circumstances suggest a sizable possibility that traders find themselves on the wrong end of a “Tripping Point”, which occurs when an index closes ABOVE a key resistance level followed by an opening BELOW that level. Tripping Points cause investors to Buy High and Sell Low, possibly several times in succession. At “Tripping Points”, pundits swing from BULLISH to BEARISH to BULLISH…
Market newsletter writer Robert McHugh (https://www.technicalindicatorindex.com/) recently reported the existence of a confirmed “Hindenburg Omen” (HO). The HO is significant because it is only triggered when massive crosscurrents generate a substantial number of both NEW HIGHS and NEW LOWS simultaneously. A refresher course on the Omen can be found here: (https://markonomics101.com/2018/03/15/hindenburg-omen-all-over-the-financial-press/). Hindenburg Omens tend to occur prior to market tops and often precede stock market crashes, but McHugh is not calling for one.
The Mega Cap leadership of the Geriatric Bull was noticeably missing today. The Nasdaq 100 remains in a VERY BEARISH ascending Wedge pattern and has lagged the others substantially. The Dow Jones Industrial Average, which just surpassed near term resistance, has traced out a 7 point and 5 point “Reverse Wave” (RW) pattern, a series of higher highs and lower lows simultaneously. The Blue Ellipse surrounds the 7 pointer while a second, and more recent, 5 point Reverse Wave is contained within the Brown Ellipse.
Reverse Waves are not all that common, and thus tend to be significant when they do appear. They are shaped like a megaphone, resulting from a series of violent and progressively larger reversals in direction. They indicate the presence of strong crosscurrents, which one would expect during or near Inflection Points or Tipping Points as the series of established Trends gives way to the new and emerging ones. The sharp, “whipsaw” type action is punitive to traders.
Markets in a Reverse Wave are more likely to create “Fake-Outs” or “Shake-Outs” just after marginal new highs are made. Mr. Market LOVES Reverse Waves because of the financial damage they inflict on the greatest number of market participants. Tipping Point or Tripping Point? Maybe both and maybe neither. Either way, it pays to sit on the sidelines and watch the game unfold.