As we come into one of the most important stock market cycles in the past 60 years we have reached some very important levels both psychologically and technically. My original idea for this letter was to write a lengthy paragraph about the overall state of the market. After some thoughts it is probably better just to list the things that I see happening at this time and let you decide your course of action. The one thing that I feels very strongly about and that is the low of the week of March 11. Should we take this out we are going down in stocks and it will not be just for a few weeks or months. So here goes!
First- there are many cycles and patterns completing the go all the way back to 1974, 1982, 1987, 2000, 2007, and 2009. They are all related to the golden mean and also to Pi 3.14!
Second- we have a divergence and the Dow Jones industrial average for me 1-3-5 lower top pattern
Third- there is a Dow theory sell signal in the transportation’s and utilities as they have not made new highs. The Dow Jones utilities made a sell signal Gartley on Friday!
Fourth – the Vix index volatility is completing a bearish butterfly pattern very similar to the last two times that we’ve had major corrections in markets over the past year and a half.
Fifth- the NASDAQ is completing a major butterfly pattern as it is the only index that is substantially above its old highs.
Sixth- the biotech index IBB is lagging badly which is important because it had been the leader.
Seventh- stock markets in the United Kingdom, emerging markets, Germany, and China are all completing major patterns at perfect Fibonacci levels at .618 or .786!
Eighth-there is a head and shoulders pattern and the Dow Jones E-mini futures which includes overnight trading which the Dow Jones industrials does not do.
Ninth- the banking index BK X is also lagging badly and is only been able to make a 786 retracement in this last rally.
10th- the stock of Apple which is probably the most widely followed stock in the world is making a bearish Gartley pattern as of the close on Friday. Earnings come out on Monday after the close in the stock has a history of being higher 75% of the time after the release of earnings. This has been over the last six years!
These are some of the things that I’ve been watching but they are technical indicators which are far from perfect. But we live in an imperfect world when trading stocks or anything else for that matter. The three things that really bother me the most that no one seems to pay attention to anymore because it’s different this time. And it is truly different this time as it is far worse!
First- we have bullish consensus is highs it’s ever been including the 1929!
Second- margin debt continues at record levels
Third- volatility index is near all-time lows showing that there is complacency for any correction coming in the market. This will be far more than a correction in my opinion
Fourth- in the past 14 months companies have bought back $1 trillion of their stock. This is in addition to the $4 trillion of quantitative easing in the US. Not counting foreign quantitative easing.
Fifth- corporations are borrowing at a faster pace than any time in history. Simple to understand as rates are very low and they can buy back their stock increasing their value which gives the executives of the company and added bonus as their remuneration is usually based on stock performance.
Sixth- in the past six years our money supply is increase 400% due to quantitative easing. The big experiment called quantitative easing will end in a disaster in my opinion. It just does not make common sense to do something like this. We cannot do this on our own lives nor can the government do it and get away with it indefinitely. How it’s going to unwind I’m not sure but no one else is either.
The one thing that I am absolutely 100% sure of is that if we go below those lows of March 11 we are in big trouble. This was a huge cycle equivalent to the low of last February and almost as important as the lows 2009. We have been waiting for this cycle hard to come in for quite some time especially since we made the low on March 11 at an exact 61.8% retracement. All of this is based on technical analysis and none on fundamental analysis. I’ve always believed you should trade what you see not what you hear or believe. Keep in mind that the Federal Reserve had no idea that there was a crisis coming in October 2007. If you don’t believe this fact just going to Google and ask a few questions. It’s on the Internet so it must be true?
My prayer is that none of this will really happen and we will go on the road towards Camelot once again. However, if you start to see bumps in the road make a U-turn and get out of the way!