BullBear Trading: Stock and Financial Market Technical Analysis

Shift Happens: Very Long Term Secular Shifts in US and Global Financial Markets and Economies in Progress

Here's the introduction to the latest BullBear Market Report, Shift Happens: Very Long Term Secular Shifts in US and Global Financial Markets and Economies in Progress

Over the course of the last few BullBear Market Reports, I have been exploring the potential for a long term secular shift in the financial markets.  Analysis has suggested strongly that trends in force going back to 2011 and 1980 and 1949 and the underlying structures supporting them are in process of being reversed and supplanted.  Continued developments since the last report in July have tended to confirm this analysis.  Such shifts are akin to the gradual turning of a large craft such as an ocean liner or aircraft carrier.  It's a process that takes time even after the rudder has been turned.  Evidence is continuing to surface that the change of direction is forthcoming but not imminent. Here are some key snippets from the March 2018 BullBear Market Report, "Evaluating the Potential for a Secular Market Shift":

Since the closing of the gold window by Nixon there have been prominent and persistent voices which warned that fundamentally flawed financial system conditions would lead to long term catastrophe for the US and global economy.  Those voices reached a crescendo during the serial market crises of 2000-2011.  Now, after a 9 year rise in US stock markets, such cautionary narratives are difficult to find.  Fears of debt bubble collapse scenarios have given way to complacency and the blanket assumption that central banker machinations have all the angles covered.

Experienced market participants know that when all fear (or conversely, optimism) has been extinguished it is time to take a hard look at the contrarian view. In this report we will study the long term technical view of markets and set aside any assumptions about the future.  Technical analysis is both a science and an art, and applying appropriate measures of each, let's tune into the message of the markets with an open mind.

Is a significant secular shift possible at this juncture?  Is it time to consider the possibility that the existing financial, economic and policy paradigm is no longer sustainable and due for dislocation and reversal?  Has the epoch of central banking Financialism run its course?

This study tends to support the general notion that now is the time for investors to be asking questions about the viability of the long term trend.  It also supports the analysis that the bull market started in the 2011 time frame. It shows us consistently that it is the trend from 2011 that traders need to keep a watchful eye upon as well as the 50 week EMA.  From a trading point of view, it's quite helpful to have some clear criteria for recognizing the end of a trend.  In that light, while there is likely to be a rally in the primary indices, when that comes it is likely that some key sectors will not participate or will participate marginally.  The same underperforming sectors are likely to break down first, giving advanced warning that the general market will be soon to follow.

In the subsequent report published for subscribers in July, "Final Bull Market Wave Begins As Long Term Market Top Approaches", these themes were fleshed out further in the context of expectations for a rally to new highs in the major indices:

In the last BullBear Market Report we took an in depth look at the very long term index charts and considered the possibility that a secular market shift could be approaching.  This examination was prompted by the parabolic action in the major US market indices, Dow Jones 30 and S&P 500, from November 2016 through January 2018.  During that parabolic run, upper trendline resistance was continually broken while lower trendlines increased their angles of ascent following each minor pullback.  On the Dow monthly and quarterly charts, the major long term trend channels going back to the  1932 or 1949 market price lows were either breached to the upside or nearly approached from below, depending on the charting of the channel.  Investor expectations ran hot in anticipation of the tax reform bill and even hotter after it was enacted.  The Dow ran nearly 50% higher and SPX leapt almost 40% in that time and was followed, as parabolic runs always are, with a dramatic collapse in February of this year.    Since all of this occurred in the context of a very long term Elliott Wave (V) count (the fifth wave of a move considered to be its final), it seemed appropriate to crack open the discussion on the potential for an eventual (though not immediate) epic bear market turn. Price and technical action since that time has continued to beg the question, and a current consideration of the technical evidence would, on balance, lead to the conclusion that the current bull market is in its latter stages.  Given that the setup is for an either long term bear market (correcting the bull market that began in 2011) or very long term bear market (correcting the entire secular period from 1949), it's more likely that the topping process has only just begun and that the bull wave has yet to fully complete.  Having said that, the probability is that upside will be relatively limited and that any further rallies will be subjected to selling distribution on an ongoing basis.  The charts tend to suggest that bull market conditions may drag out another 10-24 months before shifting into a bear market. Supporting these conclusions are significant developments in other areas of the financial markets and the domestic and global economies, including:
  • Bond markets moving towards yield curve inversion
  • Central banks withdrawing liquidity
  • Ex-US global equities markets decoupling to the downside
We have seen the following bearish technical indications emerge:
  • Large performance decoupling between US and ex-US equities markets
  • Elliott Wave 5th waves from 2011 and 1949 in process of completion
  • Bearish technical divergences on Monthly and Weekly price charts of US indices making new highs
  • Non-confirmation of new highs in certain sectors and indices by the major indices
  • Key sectors leading downside action
  • Panicky rotation into risky micro, small and midcap issues
  • Signs of volume distribution into and near the high
  • Stock market overvalued
This is definitely enough to put out the yellow caution flag, but given the long term and potentially VERY long term nature of the top under consideration, the proven ability of the Financialist system to keep the game afloat and the lack of any cracks in the economic data yet, it's likely that there will be a substantial period of time during which an extensive topping process unfolds. The primary bullish technical takeaways:
  • Basic trendlines remain intact on major indices and most sectors on multiple time frames
  • Current formations appear to be triangles that will lead to an upside continuation as Wave 5 of V continues to complete
  • There's no good Elliott Wave count to fully complete the pattern from either 1949 or 2011 yet
  • There's a good chance that when the current wave from 2011 completes, it may represent only the Wave 1 of V, with many years of upside action to follow after the ensuing correction
  • While cracks in the technical picture have emerged, there is ample room for further deterioration before an actual price high
  • Valuations are likely very high, but they can still go higher
After 10 years of low rates and Fed "money printing", there is still no real new growth engine in the economy.  What dynamic new sector can we point to that is leading or will lead the growth of the future?  We can't count on any sector that is reliant on easy money, since that is ending (barring emergency circumstances).  It's rather concerning that in spite of a decade of free money, we have not seen any real dynamic economic growth.  And now that central bank largesse is being withdrawn, we have to hope that corporate CapEx will take over the reins and a dynamic, organic new cycle of investment and expansion will take hold.  For this reason, the CapEx figures in upcoming earnings reports will be in focus. Takeaways on Fundamentals:
  • The entirety of the low economic growth seen since the last recession has been funded by rising debt levels and central bank intervention
  • Central banks are peeling back monetary support in hopes that organic economic growth can take over going forward
  • The Trump tax cuts have shown a positive impact on corporate activity in the first quarter but strong follow through needs to be seen in the upcoming Q2 earnings reports
  • As markets complete the current wave off the 2011 bull market start, fundamental factors are coming to a head
Synopsis
  • US stock market is somewhere in the final stages of the rally from the 2011 bull market initiation.
  • The very long term wave from 1949 may also complete with this current wave, or the current wave may only represent the first wave of a larger Wave V.
  • Eventual yield curve inversion is strongly indicated, which has been highly correlated with stock market tops and recessions.
  • There are deep and potentially intractable issues confronting the economy that must be overcome as the Fed raises rates and reduces its balance sheet.
  • The time frame for a potential end to the current wave is between 10-24 months.

In general the lines of analysis established in these last two reports have been born out by susbsequent developments.  So this report will take these initial themes and develop them further, honing and shaping them while also layering new observations.

 

Contents of this report:

I.  TECHNICAL ANALYSIS OF THE SECULAR SHIFT IN RELATIONSHIP BETWEEN TREASURY BONDS AND STOCKS

II. VERY LONG TERM, LONG TERM, INTERMEDIATE TERM AND SHORT TERM TREND ANALYSIS, US STOCKS

III. GLOBAL STOCKS TREND ANALYSIS

IV. Technical Indicator charts, US stocks

V. Technical Analysislook, Treasuries and Bonds

VI. Crude Oil and Bitcoin Technical Analysis

VII. Fundamentals

Please subscribe to view the full report.

 

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