I hate to be that guy spouting out doom and gloom. Bears have been the laughing stock of the market for 4 years now as bulls and the buy the dip mentality continues to be handsomely rewarded. However, using the information I have gathered it truly seems as if a perfect storm may be brewing for the equities markets that is getting to such an extreme, I feel I cannot ignore the facts any longer and must begin actively making steps to protect myself from any potential downdrafts in the markets that may or may not be coming.
When I first started trading I thought to myself if the market crashes again, If I am close to the action surely I would be able to recognize some warning signs in time to get out before it happens again. Today I am recognizing some of those signs converging at once.
Quantitative Easing is a complicated process that is difficult to fully understand how it works. In essence QE started as an experiment after the financial crisis of 2008 designed by the federal reserve to spur economic growth and get companies hiring, reinvesting in infrastructure, and get the American economy moving again. Essentially what it is; The fed is 'printing money' to guard against deflation (the bane of borrowers) and keep the money supply healthy and flowing. (It has not actually increased inflation for whatever reason and why it hasn't is way above my head and the scope of this post.) The other main objective of the feds QE is to get the housing market booming again. By buying up mortgages and keeping interest rates as close to 0% as possible. The theory is that people will once again have the confidence and wherewithal to purchase homes. Increasing home and equity prices can also help contribute to the Wealth Effect as people feel more comfortable and willing to spend as the value of their assets appreciate.
Needless to say that QE has been an outstanding success in terms of home and equity prices. The market has rebounded astronomically to new All Time Highs and housing prices have been steadily working their way higher.
The fed is in the process of actively reducing monthly purchases and is planned to be completely done with QE by the end of 2014. The effect this will have on the markets is currently unknown.
Technically Speaking The homebuilders ETF XHB is in an area that was a Nasty Bulltrap 2006-2007 and I expect there to be heavy resistance in this range. If the theory that strength in housing leads an economic recovery we want to see home builders continue much higher out of this consolidation.
These Charts suggest that while the unemployment rate is dropping significantly it could be caused from people simply dropping out of the workforce altogether. Perhaps this is not surprising as more and more baby boomers are reaching retirement age.
So the economic and employment data may not be as good as the market suggests. In fact our economy is so bad right now that Q1 2014 showed a -1% drop in GDP. One more quarter of negative growth and we are officially in a recession. So Who's buying stocks? Well the answer is the companies themselves. They are taking advantage of the cheap interest rates the fed is providing to not actually hire more Americans or invest in infrastructure but to buy back their own stock which artificially inflates corporate earnings.
Corporate Profits are at the highest levels they have ever been in history.
As corporations are raking in profits the like of which have never been seen. Workers are quite frankly getting screwed. The rich are getting richer, the poor are getting poorer, and the middle class is shrinking into oblivion. There is no way that this trend is sustainable to a healthy and thriving economy.
The etf for the S&P 500 the SPY is currently making all time highs but volume is not confirming these new highs and is actually making lower highs. Volume has completely dropped off to some of the lowest volume in years. This type of divergence can often be seen before changes in trend.
This chart helps confirm that as the spy makes new highs money is cumulatively flowing out of Rydex funds. In low liquidity conditions (such as summer trading) it doesn't take much $ to manipulate prices. The real purpose of algorithms by major investment institutions is to move large amounts of money quietly and secretly over time without disrupting prices. That is something to keep in mind as you see prices move higher on little volume.
The Nadaq Composite could potentially be forming a Head and shoulders pattern. If this plays out that is a very bearish chart pattern. Still has much more work to do to confirm this pattern however and is at an area of resistance that if broken could easily negate the pattern.
The sheer magnitude of the bull market run has been pretty breathtaking. The monthly chart shows that the S&P 500 has gone nearly parabolic. To assume this is all because of QE is ridiculous as the theory Reflexivity takes over. Basically reflexivity states that people see something happening and they then think it will continue to happen forever because that is what the trend is dictating. Unfortunately these type of parabolic moves have ended the same in the history of markets. Ultimately with a very fast and violent crash. The timing of the top is quite the feat however as markets can remain irrational for quite some time before the bubble inevitably pops.
The rapid rise of stock prices has led to a rush from investment bankers to take an immense number of companies public while the markets hot. The amount of money losing companies being taken public has reached an extreme not seen since the dot com bubble of the late 1990's, early 2000's.
Parabolic Moves ultimately play out the same Every Time.
RSS Feed