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  • Wells Fargo Indicates Imminent Broad Stock Market Correction Within 40 Days! 0 comments
    Sep 21, 2013 9:55 AM | about stocks: GS, TOL, C, BAC, NUE, X
     

     

    Ross Aldridge Consultants located in Las Vegas Nevada reviewed Wells Fargo top annalist Gina Martin Adams projection based on the markets fundamentals.

    Wells Fargo Indicates Imminent Broad Stock Market Correction Within 40 Days!

    Gina Martin Adams is sticking to her guns.

    The Wells Fargo strategist has been bearish on stocks all year, even as she watched the S&P 500 (^GSPC) add 21 percent. And on Thursday's " Futures Now ," Adams reiterated her call that the index would close out the year at 1,440.

    "Our target is based on fundamentals," Adams insisted. "We're basing our target on typical valuation measures, given the level of interest rates and also on earnings forecasts. And that's why our target is relatively low."

    In fact, "low" is somewhat of an understatement. Adams' target implies that the market will drop 16 percent in little more than three months, erasing everything that stocks gained after the year's first day of trading. This makes her one of the lone bears on the Street.

    (Read more: Robert Shiller to bulls: 'Don't expect miracles' )

    So what could produce such a dismal fourth quarter for stocks? First of all, Adams is highly skeptical about the rally that the market has enjoyed thus far.

    "It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams said. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."

    Indeed, the S&P 500's price-earnings multiple has risen from 17 on Jan. 1 to nearly 20. That means the market has largely been rising due to investors' willingness to pay more for those earnings.

    Adams goes on to argue that the recent rise in Treasury yields could put an end to this inclination.

    (Read more: Fed's taper surprise puts jumpy market in limbo )

    "The multiple is one of the most valuable components" of the rally, and "typical drivers of the multiple are interest rates." So despite the fact that yields have cooled off recently, "simply the fact that we moved from 1.6 [percent] on the 10-year Treasury rate to now the 2.7 [percent] range is a potential tremendous shock over the next six months," Adams contended.

    Adams believes that stocks haven't yet digested the rate rally. "Stocks tend to follow rates over time," she said. "Typically, when you get a 100 basis point [or 1 percent] move in Treasury rates, you get a contraction on the P/E multiple on stocks of about a full turn. That, by itself, implies you get something of a 10-percent-plus correction in stocks."

    And while the Fed's decision that it wouldn't slow its rate of asset purchases has driven the market to yet another all-time high this week, Adams doesn't believe the surprising announcement will ultimately make a difference.

    "Unless bonds can actually rally substantially with the so-called Fed bid, and the Fed is able to manipulate yields significantly lower, the damage has been done, and I think the cat is quite frankly out of the bag."

    Couple the rise in rates with slow earnings growth, and Adams believes the market is in for a very tricky fall.

    "We're going to have to face the music come October," she said.

    Uncertainty is one of the annoying staples of investing, but there are times when risk and uncertainty can be reduced to an absolute minimum. The Financial Select Sector SPDR ETF (XLF) is at such a low-risk inflection point right now.

    Technical analysis is not infallible, but sometimes it allows you to pinpoint key inflection areas.

    The Financial Select Sector SPDR ETF (NYSEArca: XLF) is at such a key inflection point right now.

    The XLF chart below offers a wealth of information:

    1) XLF is butting against resistance created by the May 22 high.
    2) The rally from the August 28 low has almost exactly retraced a Fibonacci 61.8%.
    3) The current rally high could almost be considered the right shoulder of a head-and shoulders top (although there's no real neckline).
    4) Key resistance is at 20.32 - 20.60.
    5) Key support is at 19.50 and 19.30.
    6) There is a bearish RSI divergence at the July 23 high.

    (click to enlarge)

    What Does All This Mean?

    As long as trade stays below 20.60, odds favor lower prices ahead for XLF, potentially a sizeable decline.

    How to Trade

    There are two low-risk ways to trade XLF:

    1) Go short now with a stop-loss above resistance or
    2) Go short once support is broken.

    Those are low-risk trades, not no risk trades.

    Why Low Risk

    Support/resistance levels act like traffic lights. A car driving down the street is most likely to stop (and reverse) at a traffic light. It doesn't have to, but if the light is red it has to stop.

    The XLF resistance level acts like a traffic light. XLF doesn't have to stop there (in fact, a bullish case can be made if XLF breaks above resistance), but if XLF is going to stop and reverse, it will be at this 'light.'

    Overhead XLF resistance provides a stop-loss level, which exactly defines the risk of the trade. The potential gain is significantly larger than the potential loss, putting the risk reward ratio in favor of the short trade.

    Only trading low-risk setups like this one results in about 60% winning trades, but the gains of the winning trades are 3-4 times bigger than the losses of the losing trades. The Profit Radar Report specializes in spotting such trade setups. The green bubble (August 5, 2012), marks when the Profit Radar Report stated: "Financials are currently underloved. With such negative sentiment, a breakout above 14.90 could cause a quick spike in prices."

    XLF echoes the current position of the S&P 500 (NYSEArca: SPY), which trades at a similar inflection point. The Nasdaq (Nasdaq: QQQ) has rallied much further than the S&P 500, the Dow Jones on the other hand (NYSEArca: DIA) has yet to catch up to the S&P 500.

    Regardless of the short-term outlook for XLF, the financial sector is still plagued by serious issues.

    Out of all people, it's Hank Paulson - former Treasury Secretary (during the 2008 financial crisis) - and the Federal Reserve who are addressing the vulnerability of the financial sector. Paulson warns of another financial 'firestorm' and the Federal Reserve preemptively implies that QE will not be at fault for a meltdown.

    More details here: Hank Paulson Warns of Another Financial Crisis

    Surprising New Fed Study - Is it Preparing Americans for a Market Crash?

    Ross Aldridge Las Vegas Nevada contributes reviews to the Profit Radar Report.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in X, NUE over the next 72 hours.

    Stocks: GS, TOL, C, BAC, NUE, X
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