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
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
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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