Bull Trap or Bullsh*t

September 9, 2018

Weekly Market Outlook

By Keith Schneider

blankExcluding the performance of the Brazilian stock market which rallied almost 3% for the week, global equities including US equities were down, led by the NASDQ 100 at -2.78 %. A failed assassination attempt of a presidential hopeful seemed to be the catalyst for the move in Brazil, bucking the trend of the global markets.

US stocks were down 4 days in a row in this first week of September and this has only happened twice in 1987 and 2001.  A black swan head’s up or just another bear trap?

There is a mixed message regarding interest rates as High Yield Debt (HYG) debt gained versus US Bonds, while both moved into confirmed bear phases this week. Generally, pressure on stocks and a risk off market environment should hit junk debt harder, but that is not what happened this week. Add this into the mix:  The long-term downtrend in interest rates starting in 1982 has already reversed and a massive head and shoulders top is forming, which started in 2015.

Longer term indicators such as very low unemployment data might indicate overheating of the economy and combined with looming trade wars, could be a catalyst for a bigger sell off. Other longer-term metrics such as Corporate buy backs, insider selling, GDP versus stock market valuation, forward looking PE, and Citicorp’s sentiment model are all at extreme bullish levels.

On the other hand, with indicators at bullish extremes is that just the wall of worry that the market needs to continue it 9 ½ year bull trend? Beside the downside move this week and short-term pressure, the weekly and monthly charts show the trends well intact.

So, the question is with this aging bull market amid the crosscurrents of an intact longer-term trends, negative seasonal and short-term price action (don’t forget those frothy long-term metrics) what is one to do? One path is to forget about it and follow Elon’s lead by smoking a blunt and sipping whisky and hoping.  We prefer to put together a specific game plan that entails letting the price action set your course of action by setting protective stops  or using a quant model with planned risk control.  You choose.

The highlights of this week’s market action are the following:

  • IWM, QQQ, SPY and the DIA all closed under their 10 DMA
  • Weekly and Monthly trends for stocks still strongly intact
  • US Long Bonds confirmed bearish market phase
  • High Yield Debt outperformed US Treasuries but closed in a bear phase- a mixed message
  • Market Internals now on a sell signal
  • Semiconductors lost its bullish market phase and lags the S & P 500 since June
  • Risk off sectors Consumer Staples and Utilities reversed and turned bullish
  • Biotech gave up leadership and is sitting on 50 DMA
  • Gold is still floundering and needs to clear 115.30 on weekly basis for bullish short-term play

Please check out this week’s videos for specific risk points.

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