ARTICLE by Bert Dohmen
THE U.S. STOCK MARKET: A MEANINGFUL RALLY TOP!
The weight of the evidence suggests that a meaningful rally top has been made. The euphoria in the stock market the past several weeks was much greater than the performance. Bears just can’t be seen anywhere on Wall Street.
The “analysts” say “buy stocks, buy commodities, buy muni bonds, buy real estate, etc.” Caution has been thrown to the wind. Retail investors are back and throwing their money into U.S. stock funds for the first time since 2008. Wall Street is able to market derivatives again, pooled commercial mortgages, and some of the stuff that imploded in 2008. Isn’t it wonderful?
I warned in early January that we would see the point where the economy is doing better than the stock market. The improving economy is well priced into today’s stock prices. That sets the stage for a meaningful correction. On January 21, I warned in our various advisory services to sell based on a number of our indicators.
The major psychological levels, 1300 on the S&P 500 and 12,000 on the DJI were played with, the indices rose briefly above those but only on an intraday basis, and now we get the first day of the plunge. My technical indicators are now on “sell” signals. We always heed those indicators.
The Wall Street consensus for earnings on the S&P this year is $95. Now we are hearing some people talk about $105. Anyone want to go for $115? It can get you some TV time!
It’s interesting that when our technical analysis gives all the warning signs of a top, just then a bearish event occurs and the markets plunge. It happened late April last year when I advised to “sell all stocks”, just before the “flash crash,” and it happened now with the Middle East crisis.
Soon investors will hear all the reasons for a meaningful correction, such as companies talking about deteriorating profit margin, rising costs and inability to pass on cost increases. But by that time they will be locked in with losses.
THE CHARTIST’S VIEW
Let’s look at the charts and see if they are producing some warning signals.
The first chart is the “daily” chart of the S&P 500. The MACD indicator has given the third negative divergence, which to us is a “sell signal.” The last divergence was with the MACD below the signal line. That’s bearish. There are other “sell” signals on more complicated indicators as well.
The longer term chart of the S&P 500 (weekly) shows the start of the 2008 crash which represents the current, very important resistance area. A rule is that the start of a previous crash, especially far back in time, always requires a meaningful correction. Note how the index got back to the same level of the 2008 crash this week. This is probably an intermediate term top.
The warning flags are flying. The Middle-East crisis is very well orchestrated and will escalate until more governments are toppled. It’s not hard to figure out what groups will dominate these countries once the current leaders are gone. Iran is a road map.
Interestingly, the U.S. will be the beneficiary as a safe haven over the intermediate term, although the results will be very negative for us over the long term. Energy prices will soar, making alternative energy more attractive. And that’s where the big venture capital firms, with their excellent Washington connections, are positioned. The public will see their financial condition squeezed even further, making them even more dependent on Washington. There are already 45 million on food stamps. Eventually, that may double.
For now, stocks are very vulnerable. A correction is needed to make stocks more attractive again. Gold, the precious metals, and energy should be the safe havens.
Bert Dohmen, editor
Bert Dohmen’s WELLINGTON LETTER