-- Weekly Market Summary --

The Market Has Stalled and the Slippery Slope
 is Getting Greased

By Joe Duarte on July 20 2017

I am seeing some very negative developments in the market. My weekend chart review produced an overwhelming number of very broken stock charts. Furthermore, sectors such as housing, healthcare, and agriculture are increasingly fragile.

A perfect example of a broken stock is Blackrock Inc. (NYSE: BLK), the purveyors of the iShares ETFs. The breakdown of BLK, if it persists, is huge as ETFs are the bellwethers for the passive robot investing crowd. Thus, this could signal a change in the dynamic that has fueled the current bull market.

But you can go back to sleep because Blackrock isn’t worried. Indeed, this Wall Street bank is as bullish as ever – recently noting on its website: “The current U.S. economic cycle has been unusually long, sparking fears that it may die of old age. We have a different take. Looking at the quantity of recovery rather than the time it has taken reveals an economy with ample slack to power on. Its remaining lifespan may be clocked in years, not quarters.” But if Congress doesn’t pass tax cuts and somehow improve healthcare, all bets are likely off.

Yet while Blackrock is ragingly bullish, the BLK chart is bleak. Note the loss of momentum on the ROC indicator and the negative slope of the Accumulation Distribution (ADI) and On Balance Volume (OBV). Until proven otherwise BLK has stalled and may be entering a long bearish period.

Reluctant Bear Sighting

Last week I was bearish but this week I’m more concerned. Indeed, I hate to join the bears club, given the group’s record over the last ten years - especially since the November 2016 bottom. And of course, my joining the club may be a buy signal. Nevertheless, it’s hard to ignore that this bull market is stalling. Moreover, the more I think about it, this market reminds me of the proverbial greasy incline otherwise known as the slippery slope.

Strangely enough, although the phrase is widely used and understood, few know its origin or true meaning. But if they knew they would be frightened as it pertains to the incline which hastens the path of the wicked to hell. Be that as it may, the slope was originally described by St. John Bosco, a 19 th century Italian priest, whose vivid dreams featured this particular slippery structure which during his slumbers was populated by the rapidly descending cadre of worshippers in his congregation. Consequently, aside from being an interesting – if somewhat dramatic analogy, it’s not a totally out of place description of the current activity in the stock market, where it’s hard to buy stocks.

The Market’s Most Accurate Indicator Is Flashing Danger

Regular readers know my admiration of the NYSE Advance Decline line (NYAD), an old fashioned and highly reliable indicator whose signals have correctly predicted every significant market decline since the crash of 1987. As long as they NYAD rises, more stocks are rising than falling, a sign of money moving into the market. This is especially useful when the line’s trend is compared to a major index, such as the S & P 500 (SPX). Accordingly, a bull market is a period of time when the S & P 500 and the NYAD are rising in tandem, as we’ve seen since the November 2016 bottom, up to the past two weeks when the NYAD has started to struggle, and SPX has followed.

Consider the following:

1) The Stall: NYAD has broken below its 50-day moving average and seems to be gathering steam to the down side for the first time since the November 2016 bottom.

2) The RSI indicator is as oversold as it’s been in the last ten months and NYAD is still looking very top heavy.

3) The ROC indicator is not yet showing any sign that momentum is about to shift to the upside.

4) The MACD indicator, which I’m using to confirm the activity of the ROC, is no different, also showing no change in momentum.

Altogether, it looks as if the NYAD has given a sell signal and that the down side action is nowhere near a meaningful reversal.

The S & P 500 looks worse. Consider the following:

1) The index looks to be in the early phase of a free fall and is now tracing a lower high and lower low pattern.

2) As is the case with NYAD, the ROC shows no sign of a reversal, meaning that the tendency for prices to move to the down side is nowhere near being arrested.

3) Perhaps the most daunting is the activity of the Accumulation Distribution line (ADI) and the On Balance Volume Indicator (OBV), which are both moving lower. This combination suggests that there are now more sellers than buyers (ADI) and that they are quite willing to sell (OBV).

The Bears Have the Upper Hand

As I’ve said many times, stocks could turn on a dime and we could be headed for new highs on Monday. And while that remains plausible, and I could have some egg on my currently bearish face, given the sudden change in the technical aspects of the market, a big rally to new highs is no longer as likely as it might have been two to three weeks ago. From here on, until proven otherwise, the bears have the upper hand. Moreover, for investors this is not a time to be a hero. In this market the best strategy is taking profits on big winners, considering a few bets on the down side, and waiting until this situation gets sorted out before putting new money to work on the long side.

I’m a pragmatic guy, so if I’m wrong and the market once again moves higher I’ll cover my shorts and just buy back in on the long side. It’s all in a day’s work. But with a large number of charts suggesting that the market has stalled and has no floor underneath, I’ll take my chances. All things considered, there are plenty of beaten up stocks that could be bought at the moment. The only problem with buying some of these relative bargains without waiting a few days to see what happens is that they could still get cheaper, with our money riding the down trend. So there is no hurry to buy at this time. And there is no indication that the eventual buying opportunity will materialize any time soon. Ultimately only one thing’s for sure - no one in their right mind wants to experience an airplane’s stall at 40,000 feet, which is only a prelude to the proverbial slide down the increasingly greasy slippery slope.

 

 

















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