(This is the introduction to the latest BullBear Market Report)
At the December bottom I turned intermediate term bullish for the start of the final 5th wave of the Long Wave, anticipating a rally back towards the high. On the back of the Fed capitulation on its rate hiking cycle and balance sheet normalization program, most of the market has recaptured its January 2018 high and some sectors and indices have exceeded the September all-time highs. After a better than 26% gain on the S&P 500 off the December low, there are significant technical indications that the market is ready to retrace 38.2-50% of the gains in a Wave 2 of 5 correction. The top has taken quite a while to play out with a gradual loss of momentum over the last two months. Many areas of the market have logged large bear RSI divergences on the daily and weekly charts and have started to roll over and the short term topping formations are starting to break down. More importantly, particularly for the longer term view, is that all indices and sectors that did log higher monthly closes above the previous all-time high montly close did so by logging large bear monthly RSI divergences between the January 2018, September 2018 and April 2019 highs. A series of monthly bear divergences is a clear warning sign that a long term top is in the process of building.
Earnings reports have had a minimal impact on the market, with daily ranges very narrow. The market has been very quiet and complacent. The best predictor of high volatility is an extensive period of low volatility. Bears have been driven from the market and are silent. Talk of a "melt-up" has become the narrative of late. The sleepy quietude should be broken soon, and it seems like it will be in the form of a downside correction rather than a bull wave extension.
It's no coincidence that the market bottomed on Fed capitulation of its rate hiking cycle and Quantitative Easing program and appears to have topped on foiled expectations for a rate cut this year. The market is addicted to endless and uninterrupted and ever-expanding Fed liquidity.
While a healthy correction is likely, I don't expect it to be as violent a decline as we saw in the latter part of 2018. Rather, I am looking for a complex corrective formation that will likely take 2-3 months to complete with many twists and turns. SPX and some select areas of the market will likely revisit the highs several times before breaking down to correction lows. While it's possible that this rally represented the entirety of Wave 5, the bulk of the technical evidence suggests it was more likely the first wave of Wave 5, with about a year's worth of topping action to come before the Long Wave has finally completed its last subwaves.
The rest of this report is reserved for subscribers and focuses on technical analysis of price charts and indicators in stocks, bonds and additional fundamental analysis and conclusions for traders and investors for the short, intermediate, long and very long term.