If you have been paying close attention to the stock market, market internals/breadth,
and bonds for the past three months, you've likely come to the same conclusion
that I have.
The US stock market is showing signs of severe weakness with the market breadth
and leading indicators pointing to a sharp correction for stock prices.
With fewer stocks trading above their 50 and 200 day moving averages each
week, while the broad market S&P 500 index continues to rising, this bearish
divergence is a red flag for long term investors.
When a handful of large-cap stocks are the only things propelling the stock
market higher while the majority of small-cap stocks are falling you should
keep new position sizes smaller than normal and start moving your protective
stops up to lock in gains/reduce losses in case the market rolls over sooner
than later.
Small cap stocks are typically a leading indicator of the broad market. The
Russell 2000 index is what investors should keep a close eye on because it's
the index of small-cap stocks. Since March of this year, the Russell 2000 been
trading sideways and actually making new lows. This tells us that big-money
speculative traders are rotating out of the stock market and into other investments
like high dividend paying stocks, blue chips, and likely bonds.
Looking at the chart below I have overlaid the S&P 500 index and the price
of bonds. History has a way of repeating itself; although it may never feel
the same and the economy may be different, price action of investments have
the tendency to repeat.
In 2011 we saw the stock market and bonds form specific patterns. These patterns
clearly show that money was rotating out of the stock market and into bonds.
During times of uncertainty in the stocks market money has the tendency to
move into bonds, as they are known as a safe haven. Bonds tend to reverse before
the stock market does, so if you have never tracked the price chart of bonds
before, then you should start.
From late 2013 until now bonds and the stock market have repeated the same
price patterns from 2011. If history is going to repeat itself, which the technical
and statistical analysis is also favoring, we should see the stock market correct
18% to 30% in the near future. If this happens bonds will rally to new highs.
It's important to realize the chart above is weekly. Each candle represents
five trading days, and four candles represents one month. So while this chart
points to an imminent selloff from a visual standpoint, keep in mind this could
take 2 to 3 months to unfold or longer. The market always has a way of dragging
things out. If the market can't shake you out, it will wait you out.
So if you are short the market or planning to short the market be very cautious
as it could be choppy for the next several weeks and possibly months before
price truly breaks down and we see price freefall.
To get my pre-market video analysis each day, and trade alerts
visit: www.thegoldandoilguy.com
