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Friday, May 16, 2014

HAS THE BEAR RETURNED? MAYBE...

Following up on my last article it does look like stocks have begun to move down into the yearly cycle low that I was expecting.

The failed breakout was a big warning sign. After a month and a half consolidation there was no reason for the breakout to fail. By the second test of the 1900 level stocks should have built up enough energy to break through and hold at that point. 


Even more concerning is the ease with which the S&P sliced through that 1880 support yesterday. If the market just needed to build a little more energy then support would have held and another thrust higher would develop from that point. 


On a cyclical basis the S&P has now broken it's daily cycle trend line, which is the first confirmation that the daily cycle has topped and begun moving down into it's daily cycle low. Considering that trough isn't due until around the June employment report there is a lot of time for the market to drop yet. (About 15-20 trading days.) 


Even more of a concern is that with so much time still left in the daily cycle, the odds are high that the intermediate trend line will also be broken in the near future. When that happens it will confirm that the next larger intermediate degree cycle is also in decline.


On an even larger cyclical basis the yearly cycle trend line is only about 50 points away. A break of that would confirm that the largest degree yearly cycle decline is also in progress. And a yearly cycle decline is the most extreme selling event of the year.


Now here is where things start to get interesting. The Nasdaq and Russell have both printed failed intermediate cycles. When intermediate cycles start making lower lows this late in a bull market it almost always indicates a bear market has begun.


If the S&P follows and moves below the Feb. low over the next 3-4 weeks that would be a big warning sign that this QE driven bull market is finally coming to an end. 


I was originally looking for stocks to generate one last bubble phase before the bear began but when the hostilities broke out in the Ukraine that scenario probably got taken off the table. Since it's unlikely that situation is going to be resolved anytime soon I expect a final bubble phase is now unlikely, and the bull has probably begun the topping process. I will have a better idea when we see how far down the market drops into this yearly cycle low over the next 3-4 weeks, but based on what is happening in the tech and small cap sector it's not looking too promising.

The last two times the Fed tried to end their QE programs the market tanked. Did they really think this time would be any different? The process has been slower as they didn't go cold turkey this time like the last two, but the end result will almost certainly be the same. The unpleasant realization that this bloated market simply can't stand on it's own without constant infusions of liquidity. 

Turing off the liquidity this late in the cycle will probably kill the bull, and if Yellen panics and tries to restart QE it's likely to flow into the commodity markets instead of stocks, and that will kill the economy. 

21 comments:

  1. Comments have been reopened.

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  2. Very clearly presented analysis...................thank you Gary

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  3. The bull market not going to die easily.. IMHO..haha

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    1. No it won't. Not after rallying this long it will fight tooth and nail to stay alive and the fed will do everything in their power to keep it alive.

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  4. "The last two times the Fed tried to end their QE programs the market tanked."

    what happened to gold market last 2 times?

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    1. To be fair , I do think Gold 2014 chart look like SPX 2003 (rsi, macd)..

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    2. Gold suffered a yearly cycle low in 2010 and began it's cyclical bear market in 2011 when the fed tried to end QE the last two times.

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  5. Added some rather cheap June SDS calls as insurance for a few OT positions. Short HD, GME and IYR as well via puts.

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  6. Hey gary, isnt the 3 yr dollar cycle low coming soon? Therefore gold, commodites lower? Thanks

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    1. I'm expecting it later this fall. So I'm looking for a sharp spike higher in gold and commodities during the second half of the year.

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  7. Gary, the 10 year Treasuries are now down to 2.5%. At this level, people have to look for alternatives to find yield above the "real CPI." Don't you think many will continue to invest in the SMs, thus preventing a huge drop?

    Also, why do you think the Treasury rates have moved so low, especially with all the background noise that the US Dollar is getting closer to losing its reserve currency status? Thanks.

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    1. Interest rates are moving down into their YCL. Once complete I expect a move up to 4% over the next year.

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    2. Gary, understood but why do you think they are so low?

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    3. Interest rates have been artificially depressed by the Fed's QE programs.

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  8. BTW, an edit feature on the blog comments would come in handy, especially for those of us that comment using a cell phone. Thanks.

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    1. I'll ask the developer if they can add that feature.

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  9. bubble is here http://stockcharts.com/h-sc/ui?s=YELP&p=W&yr=3&mn=0&dy=0&id=p33885167523

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    1. New tech and social media companies are nothing more than information aggregators driven by advertising that have been insanely overpriced.

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    2. No doubt about it. We have the same kind of nonsense going on in parts of tech as we did in 2000. Companies with no chance of every making any money selling for insane prices.

      When will we ever learn?

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  10. Regarding the 10-yr yield down to 2.5%, there are all kinds of speculation. Here is my take FWIW.
    In "normal" time, money seeks yield, but we have not been in a "normal" time, so there have been an additional force at working, which is the risk-on and risk-off effect, the bond yield and stock going in the same direction. This will change and go back to "normal" once investors are no longer nervous. In the meantime, a lot of people predicted ~3.5% by the year end and a lot of money sold the bond. But things have not changed as dramatically as predicted, it's still a slow growth environment, rates won't rise quickly. Some of the money bought back. So here we are. That said, long term investors should focus on the fundamental, in this case the "money seeking yield" correlation, because over time the fundamental will prevail, and the take advantage of, not panic out of, any sentiment-driven counter-trend. If the yield drops to 2% as Bill Gross implied, I'll love it.

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