Make Or Break Time For Stocks

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Includes: BAPR, BAUG, BIBL, BJUL, BJUN, BOCT, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWL, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PAPR, PAUG, PJAN, PJUN, PMOM, PPLC, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWL, RWM, RWSL, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SFY, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SSPY, SYE, TNA, TQQQ, TRND, TWM, TZA, UAUG, UDOW, UDPIX, UJAN, UOCT, UPRO, URTY, USA, USMC, UWM, VFINX, VOO, VTWO, VV, ZF
by: Michael A. Gayed, CFA
Summary

Perhaps there's no better timing for the disconnect John Paulson refers.

The Fed turned 180-degrees and delivered already a rate cut.

As it turns out, we’re on course for the lowest interest rates in 5,000 years. No kidding!

"There is a disconnect between the performance in stock market and the performance in many companies." – John Paulson

Perhaps there's no better timing for the disconnect John Paulson refers. The S&P 500 (SPY) and Dow Jones Industrial Average (DIA) flirt with all-time highs despite many calling for a recession.

The Fed turned 180-degrees and delivered already a rate cut. Only last December it planned more hikes for 2019, but here we are. It plans to cut some more, as early as this September.

No one can blame the Fed. According to a recent New York Fed survey, U.S. inflation expectations dropped to multi-year lows, to the lowest level in the survey’s six-year history. The Fed can’t remain indifferent.

On the other side of the Atlantic Ocean, the ECB is getting ready for another round of stimulus. While divided on quantitative easing (how much for how long?), the ECB can’t afford to disappoint markets.

As it turns out, we’re on course for the lowest interest rates in 5,000 years. No kidding!

Having everything from above in mind, it shouldn't surprise anyone the stock market's reluctance to fall. After all, basic economics tells us lower rates are bullish for stocks. With the trend in lower interest rates continuing, will the stock market continue to rise?

If macro fundamentals say yes, the technical perspective calls for a make or break time. Both bulls and bears have a case for the last years price action.

A rising wedge is always falling, so they say. One can easily argue that now that the price pierced the upper trendline, the wedge completed.

If that’s the case, the reward for trading the wedge outpaces the risk by a factor of 2:1 minimum. Not bad!

Bulls see it the other way around. The market seems to form a bullish triangle, albeit a “non-conventional” one. But still a triangle.

The standard interpretation of such a triangle is to wait for the price to break the upper trendline. In this case, the S&P 500 (SPY) and most probably DJI will make new all-time highs. Moreover, technical traders argue that such triangles form at the end of complex corrections. The break higher, if any, will trigger further waves of buying.

Like in a heavy-weight boxing fight, bulls and bears sit at crossroads. Both parties know the other side’s strengths and weaknesses, with central banks as referees.

Let the games begin!

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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