I haven't done a big picture update on the equity markets in a while so I thought today was as good of a time as any. I've been writing for over a year that the major US equity markets have topped and they are now in the very slow process of rolling over. Seven-year bull markets don't die easily. All of the weekly charts shown below are sporting a similar pattern: lower lows and lower highs. I'm also noticing that the time spent at each intermediate peak is dwindling meaning that there is less and less "chop at the top." I interpret this to mean that there are fewer and fewer bulls to support prices with each subsequent rally. If true, there will come a point in time where there is no "subsequent rally" and prices will really start a waterfall decline. Anyway, here are the charts. Let me know what you think.
Just a quick note this morning to show what appears to be a two-year topping pattern playing out on the NYSE Composite (NYA. If you look at May 2015 when the NYA was making new highs, there were multiple bearish divergences showing up on the chart. Neither momentum indicators, RSI and MACD, were making new highs alongside price. In fact, they had topped long before and were making a series of lower highs. Also worth noting was the complete lack of volume at the highs. This suggests lack of bullish conviction and is a major red flag.
By no means does this guarantee that a head-and-shoulders topping pattern is in the bank. Some time is still required to carve out the right shoulder. Given the bearish divergences taking place all over the market, which I've written about numerous times, I believe this topping pattern has a very real chance of playing all the way out. As such, if the NYA breaks below 9,500, then the measured move suggests a price target of 7,750, or 25% below current levels.
In yet another sign that this 7-year bull market is growing weary, the NYSE Composite Index has failed this week right at its 50 dma. Not only that, but it sliced right through its 200 dma on increasing volume. I'm seeing a nice, rounded topping pattern with all of the tell-tale signs that the market has peaked. This chart reminds me very much of the Dow Transports Index which is also exhibiting similar topping patterns. Watch for the NYSE Index to trade down to that green horizontal line of support before bouncing back a bit, possibly to the underside of its 200 dma.
The NYSE Index consists of more than 1,900 stocks, 1,500 of which are based in the U.S. If 1,900 companies, on average are topping out, you can bet this is a representative slice of the overall economy.
One month ago today, I posted a series of stock indices from around the world and argued that, with few exceptions, markets were poised to break higher. Literally the next day, stocks started exploding higher in what turned out to be a three week equity-buying bender. Nasdaq 5000 and the new Apple watch dominated the mainstream financial press while Greece and the runaway US dollar was completely forgotten.
Curiously, however, as quickly as the breakouts occurred, they have since reversed. As I write this morning, the markets are down another 1% putting most of the major US equity indices below their respective breakout points from last month.
First, take a look at the NYSE which is, perhaps, the most broad-based of the major equity indices. The 11,100 area has proven virtually insurmountable over the past year. It's made four separate breakout attempts, all of which have failed. The most recent attempt last month, broke above on an intraday basis, but immediately turned tail. It has fallen hard ever since. Both its MACD and RSI have turned sharply lower suggesting that sellers have taken control. It now sits squarely on its 50 and 200 dmas.
Next up is the S&P 500. It too broke out in early February only to stall and head lower these past few days. As with the NYSE, momentum indicators have failed to confirm the breakout and now the index is sitting right on its 50 dma, a full 3% below its peak.
Same goes for the small caps as well. The Russell 2000 broke out in February only to sell back down in recent days. While the chart below shows it sitting right on the breakout level, it has traded down to 1209 this morning which officially puts it below the breakout point. Momentum indicators are faltering as well.
Last but not least, we have AAPL, I mean NASDAQ. Of all the indices I have shown, NASDAQ is the only one still above its breakout point. From December to February, it formed a very clean consolidation pattern with well-defined upper and lower boundaries. As with the others, it broke out in early February and was hell-bent on tagging the 5000 level. Which it did, just prior to rolling over with everything else. In addition to its momentum indicators not confirming the breakout, volume has been weak suggesting lack of conviction for the buyers.
While pullbacks are healthy, the swiftness and severity of what we've seen so soon after the breakout should be concerning for the bulls. It's still too early to tell if we're seeing breakouts or fakeouts so caution is advised.
In yesterday's post I showed how the S&P 500 was forming a neat little diamond pattern that was very near resolution. I pontificated that the FOMC meeting could very well be the catalyst that causes the market to break up or break down from the consolidation. Well, just a few hours later, that's exactly what happened. The Fed announcement came out and the markets promptly tanked into the close. Let's take a look at what that means graphically.
First off, you can see how yesterday's action clearly broke the pattern to the downside. Volume was elevated and the movement was decisive - both of which strengthen the argument that the S&P has now decided to go lower. The calculated price target based on the diamond is somewhere around 1800, which, you will notice, coincides with the lows from October, a natural area of support.
I've sketched out what I believe is a likely path going forward. Stocks tend to mirror time and duration sequences when coming out of consolidation patterns. In other words, the path out of a consolidation will be the mirror image (approximately) of the path that led into the consolidation. So looking at the graph, you can see the sharp rebound off the October lows taking the index to its ultimate high in late December. Trough to peak, it took a little over two months. Now that the market has broken down, in my opinion, we can approximate the next move lower by using the same timeline. The market peaked in late December, so I would expect it to reach my calculated target of 1800-ish about 2.5 months later, or mid-March.
Next I wanted to point out what I'm seeing in the New York Stock Exchange Index (NYSE). This is a much bigger picture than the daily analysis I did above, but I think it supports my argument that we're starting to see the major indices roll over.
So here is a monthly chart of the NYSE going back to the previous market top in 2007. After bottoming in early 2009, it's been on a tear, literally moving up on an uninterrupted 45 degree angle. I've plotted an upper and lower trend line that clearly shows a massive rising wedge formation. I won't get into all of the technical details of a rising wedge, but suffice it to say, this is not a good sign for the bulls. (You can read more about rising wedges here.)
The NYSE has desperately been trying to stay inside the wedge but it's been getting more and more difficult these past few months. You'll notice that it broke below the wedge for the first time in over 5 years back in October, but soothing words from the Fed caused the market to spike, thus ensuring a monthly close safely back inside. November was pretty much a non-even but then December saw another spike down below the line. Not to fear though as we got more Fed blah blah blah which yanked the market right back into the wedge. So here we sit in January with only two trading days left in the month. The market had its little hissy fit with the FOMC announcement and now we're sitting 3.5% below the wedge. Unless we see an incredible push today and tomorrow, I think the pattern has finally resolved itself to the downside. I've circled the MACD which just posted a negative cross, a decidedly bearish indicator. The RSI isn't helping either as it appears to be rolling over as well.
Rising wedges don't really have a generally accepted price target calculation so I can't give you a measured move forecast. What I can say, however, is that since 2012, the NYSE has moved straight up, with hardly any moves down (same can be said for the S&P). This means that there aren't any areas of strong support until 8500-9000, a full 15-20% lower than current levels.
I want to leave you with one last chart that I pulled from a ZeroHedge article posted yesterday.
While it didn't seem to get the level of attention that many of their articles get, I thought this was an outstanding graphic demonstrating just how disconnected the equity markets are from the credit markets. Comparative charts can be deceiving if the scales of the two y-axes are not the same. In other words, you can easily manipulate the charts to show what you want them to show simply by changing the scale of one of the axes. The chart above, however, has roughly the same scale, percentage-wise, for both the 30Y yield and the S&P 500 so chart movements can be compared as apples-to-apples.
In "normal" times, you should see a fairly strong correlation between bond yields and equity markets. This is evident in the chart for all of 2012 and 2013. But in 2014, that correlation broke as yields plunged and equities continued their 45-degree ascent. Divergences happen all the time, but they eventually revert back to the mean and re-correlate. So my interpretation of this graph is that either 1) the S&P needs to drop 30% to catch down to yields or 2) yields need to almost double to catch back up to equities. Given what we're seeing in the S&P, my money is on the former.