Watch Out For The Head And Shoulders Top

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Summary

The market has been chattering quite a lot about the massive downside bets on the S&P 500 being placed by some of the industry’s best-known players.

That is something I would expect from my long-time client and mentor George Soros.

But Warren Buffett as well? He is one of the greatest long-term, pro-America bulls out there.

It is the sort of news that gives investors that queasy, seasick feeling in the pit of their stomachs.

The market has been chattering quite a lot about the massive downside bets on the S&P 500 being placed by some of the industry's best-known players. That is something I would expect from my long-time client and mentor George Soros. But Warren Buffett as well? He is one of the greatest long-term, pro-America bulls out there.

It is the sort of news that gives investors that queasy, seasick feeling in the pit of their stomachs. You know, like when a new Tesla (NASDAQ:TSLA) owner shows off his warp speed "ludicrous mode"? That is unless you are running heavy short positions in stocks, as I am.

Every technical analyst in the world is pouring over their charts and coming to the same conclusion. A "Head and Shoulders" pattern is setting up for the major indexes, especially for the S&P 500 (NYSEARCA:SPY). And if you think the chart is bad, those for the NASDAQ (NASDAQ:QQQ) and the Russell 2000 (NYSEARCA:IWM) look much worse.

This is terrible news for stock investors, as well as owners of other risk assets like commodities, oil and real estate. It is wonderful news for those long of Treasury bonds (NYSEARCA:TLT), the euro (NYSEARCA:FXE), gold (NYSEARCA:GLD), and silver (NYSEARCA:SLV).

A head and shoulders pattern is one of the most negative textbook indicators out there for financial markets. It means that there is only enough cash coming in to take prices up to the left shoulder, but no higher. There is not even enough to challenge the old high, taking a double-top decidedly off the table.

The bottom line: the market has run out of buyers. Be very careful of markets where everyone is bullish long term, but no one is doing any buying.

When the hot, fast money players see momentum rapidly fading, they pick up their marbles and go home. Some of the most aggressive, like me, even flip to the short side and make money in the falling market.

If we make it down to the "neckline" and it doesn't hold, then the sushi really hits the fan. Right now, that neckline is at $204.60 in the S&P 500. Break that, and it's hasta la vista baby. See you later.

Stop losses get triggered, the machines takeover, and shares move to the downside with a turbocharger. Distress margin calls on the most levered players (usually the youngest ones) add further fuel to the fire. We might even get a flash crash. This is when the really big money is made on the short side.

There is a new wrinkle this year that could make this sell-off particularly vicious. To see a formation like this setting up during May is particularly ominous. It means that "Sell in May" is going to work one more time. It's not like we have any shortage of bearish headlines to prompt a stampede by the bears.

The turmoil in Europe, one of the largest buyers of American exports, could cause the US to catch a cold. This is what the latest round of earnings disappointments has been hinting at. Margin debt to own stocks has recently exploded to an all-time high. It could well be that the market action is just the dress rehearsal for a deeper correction in the summer, when markets are supposed to go down.

If markets do breakdown, it won't be bombs away. They might make it down to $181, $177, or in an extreme case $174. But to get sustainably below that, we really need to see an actual recession, not just a growth scare.

Remember that earnings are still growing year on year, once you take out the oil industry. That is not a formula for any kind of recession.

It is a formula for a 10% sell-off in an aged bull market. That's where you load the boat with the best quality stocks MSFT, FB, GOOG, GOOGL, CELG, etc., which should be down 25-35%, and then clock your +25% year in your equity trading portfolio.

If you are NOT a trader, but a long-term investor monitoring you retirement funds, just go take a round-the-world cruise and wake me up on December 31. You should be up 5% or more, with dividends, and skip the volatility.

SPY QQQ IWM

Head-Shoulder

Head & Shoulders Shampoo

Ignore It at Your Peril

John in Owner

Volatility? What Volatility?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.