Dow 30K? Yes, But….

Major Indexes Continue Record Surge

The Nasdaq closed higher for the 10th straight week last Friday, the longest such streak in 20 years.  During that time, it gained 21%.  The panic and freefall during December are replaced by complacency and greed.  It’s an Alfred E. Neuman type of market.  “What, me worry?”  Every major index is now within a few percent of making all time highs.

The Dow, last Friday, closed less than 3% below last summer’s highs and the Nasdaq 100 (NDX) 7%.  Every other key equity index is within 10%.

Both indexes, above, are bumping up against some very strong resistance, at a level preventing prior rallies from continuing.  If they can close decisively ABOVE these levels, new all-time highs are very likely in 2019.  In the near term, however, the likelihood of a continued, uninterrupted advance is quite small.

Major lows, as well as major tops are typically a PROCESS, rather than a singular event.  Bungee chord type reversals are the result of very sharp and sudden shifts in market factors such as liquidity.  The Federal Reserve provided exactly that.  Despite telegraphing monetary tightening for months, investors now have a true benefactor in Chairman Jerome Powell.  “Federal Reserve To The Rescue?”. (https://markonomics101.com/2019/01/31/federal-reserve-to-the-rescue/).

Market volatility has completely collapsed.  In February, the Dow moved more than 1% daily only twice, compared to 6 times in January and 12 times in December.

The Federal Reserve pledged to exercise “patience” and to be “data dependent” in formulating its monetary policy.  Said differently, and in plain English, the new Federal Reserve Policy is to defend market prices.  Investors can reasonably expect that any further substantial weakness will be resisted by either rate cuts or an even sooner termination of the Balance Sheet reduction.

Is History Repeating?

The “Everything” Bubble increasingly looks like the “Dot Com” Bubble of 1996-2000.

The sharp 20% drop in the major stock indexes, which occurred in the 4th Quarter of 2018, is not without precedent.  Almost exactly two decades ago, stocks endured a very similar move lower.  The Dow, pictured on the left, fell 21% and Nasdaq 100 fell 30% in a short time frame.

The 1998 decline occurred WITHIN the context of an ongoing Bull Market.  Once the panic was terminated by aggressive Federal Reserve rescue, the Dot Com Bubble continued on for two more years.

The backdrop for the decline was from the “Financial Crisis” of 1998. The crisis was set off by the devaluation of the Russian Ruble and the default on Moscow’s sovereign debt. (https://en.wikipedia.org/wiki/1998_Russian_financial_crisis).

Several financial institutions were overexposed to Russian debt, including Deutsche Bank and a Gigantic hedge fund, called “Long Term Capital Management” (LTCM).  The fund was not only HUGE with assets of $126 Billion, but highly leveraged.  It was the first truly “too big to fail” financial institution.  As markets fell in reaction to the Russian default, LTCM found itself quickly underwater.  The sheer size of LTCM and numerous counterparties in the Global Financial System led to a Federal Reserve Bailout of LTCM to avoid a systemic collapse.

Federal Reserve rescue operations included an intraday EMERGENCY interest rate cut of 75 basis points.  The cut was not anticipated and aimed directly at reversing a cascading stock market. The Federal Reserve “Put” was born and the markets shot to new all time highs.

Dow 30K?

Long time readers of Markonomics may remember that we noted a rare, but useful, chart pattern called the “Reverse Wave” or Megaphone last summer.  This pattern consists of a series of HIGHER HIGHS and LOWER LOWS.  The result is a widening of price movement, and typically greater volatility.

The Reverse Wave did a pretty good job of revealing the peak in several major market indexes last summer.  “Another October Stock Market Crash?” (https://markonomics101.com/2018/10/11/another-october-stock-market-crash/).

With the overt support of the Federal Reserve, is it hard to imagine that the “Everything” Bubble is headed to new all-time highs?  If so, the Dow and other indexes will form a HUGE Reverse Wave as shown above.  This suggests that while prices will head higher, the final peak of this decade-long Bull Market will be a MAJOR LONG TERM HIGH.

The economic news is not good.  Auto sales have hit an 18 month low while more vehicle loans are 90 days delinquent or more since the 2008 financial crisis. (https://www.zerohedge.com/news/2019-03-02/us-auto-sales-tumble-18-month-low-suv-demand-hits-brick-wall).  In addition, retail store closures continue unabated as another nearly 500 stores announced closing in just the last weekend. (http://fortune.com/2019/03/01/malls-take-48-hour-beating/).

Earnings news is not good, either.  The Financial Media reported that about 70% of the Standard & Poor’s 500 “beat” earnings estimates for the 4th Quarter. Of course, it is rarely mentioned that Companies repeatedly lowered estimates until they COULD be beat.  A most egregious example is chipmaker Nvidia, which dropped revenue forecasts by a mind-numbing 20% but then went on to “BEAT” those lowered estimates.

For the most part, companies have been given nearly a complete pass for 2019. Even then, the bar has been lowered so much that “beating” earnings is virtually assured, but meaningless.

“Four Horsemen” Poised to Push Nasdaq Higher

Markets are pushing higher despite minimal participation from the “Four Horseman”.  Comprised of Apple, Amazon, Microsoft, and Alphabet (Google), these are the 4 largest Mega Capitalization stocks providing key market leadership through the October 2018 Highs.  “The Four Horseman Of The Nasdaq Collapse”. (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/).

Of the four, only Microsoft has actually turned its chart pattern BULLISH.  Apple, Alphabet, and Amazon are within close striking range.  This is significant.  It means that the leadership of the Nasdaq 100 has broadened substantially to include more issues, a sign of health and an indication that more upside is in the cards. Participation from the Horseman would be a very BULLISH sign for higher highs.

A Slide Show of the “Four Horseman” is Below.  Some key takeaways are as follows:

  1. Microsoft, now the highest valued of the four, is within striking distance of new highs and has completed a very BULLISH ROUNDED Bottom.  MSFT is both a Dow component and Nasdaq 100 component.  Its strength bodes well for both indexes.
  2. Amazon, Apple, and Google are right up against resistance and COMPLETING very BULLISH set ups.  The track record of these patterns is very strong.  If these Horsemen join the party, the Nasdaq 100 may still have a lot of upside left.

But, Be Careful the Ides Of March

There is no doubt the markets are WAY overextended and due for a sharp pullback BEFORE ascending higher.  Specifically, investor sentiment is characterized by not only extreme GREED but without any regard to risk.  Investor psychology is critical.  Markets move higher as Panic turns to Greed and lower as Greed is replaced by Panic. For a good refresher, see “The Psychology of Investing”. (https://markonomics101.com/2018/10/08/the-psychology-of-investing/).

Weekly polls taken to assess how investors feel about the markets show very extreme levels of BULLISHNESS.  In general, the more positive people are, the more likely they are to be invested.  As a result, the pool of potential new buyers will be too low to push prices higher.  Who’s left to buy?

Investors Intelligence (https://www.investorsintelligence.com/) conducts a weekly survey of advisors such as newsletter writers.  Their most recent poll finds that those calling themselves BULLISH outnumber BEARS by a lopsided 52% to 20%.  Another well-known survey conducted by the American Association of Individual Investors shows 42% BULLS to 20% BEARS (https://www.aaii.com/sentimentsurvey).

Each of these surveys are at or close to historical extremes typically seen at market tops, although not necessarily MAJOR tops.  Sentiment can remain extreme for weeks or months, so it is not often useful for precision timing.  However, for the markets to advance, in the interim, a pullback to at least the support zones identified above (Dow 25,000 and NDX 6,600) would be healthy.

Markets Remain Grossly Overvalued

As first discussed last summer in these pages, the overvaluation of equities is historic.  With earnings forecasts moving lower and stock prices moving higher, the long term investment merits of most stocks remains absent.  Barring an unexpected upside surprise in corporate earnings, long term investors are bound to be sorely disappointed.  “The Long Term Equity Valuation Cycle”. (https://markonomics101.com/2018/07/12/inflection-point-part-1-the-long-term-equity-valuation-cycle/).

Opportunities DO abound, nonetheless, but they cluster around short term trades or those that are “off the run”.  Recently, we reviewed the trading opportunities in Semiconductors.  “Chipmakers Poised To Lead Nasdaq Higher”. (https://markonomics101.com/2019/02/06/chipmakers-poised-to-lead-nasdaq-higher-chart-of-the-day-13/).

There are also opportunities in sectors whose market sensitivity is low and not largely affected by market levels such as Cannabis. “Are Pot Stocks Too High?”. (https://markonomics101.com/2019/01/21/are-pot-stocks-too-high-chart-of-the-day-11/).

There will be many more that we will bring to you, especially in this terminal phase of the “Everything” Bubble.  The best investment of course is information.  That’s our job.  Keep tuning in and we’ll keep informing.

Be Informed, Not Misled!
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