U.S. Stock Market: YES! The Long Awaited Correction Has Begun!

With today's 1.38% decline, the Dow Jones Transportation Average is now down 3.49% from its all-time record high as posted just 5 trading days ago on July 23rd. And as incredible as it sounds, another drop of just 15.33 points (or -0.19% to negative on the month) will trigger a monthly chart sell signal in my computer trading system. As can be seen below, monthly chart signals in the DJTA have been fairly reliable over the last 18 years.

A monthly chart sell signal was triggered in UPS today! Please see chart below. This monthly chart sell signal in UPS is the first sell signal ever recorded by my computer system in UPS since it went public in November 1999. While index chart signals are generally more reliable than individual stock signals within my computer trading system, this monthly chart sell signal in UPS looks very strong to me, especially if a matching monthly chart sell signal is soon triggered in the Dow Jones Transportation Average (which looks like a near certainty to me).

Of course, the most powerful card in the bearish camp's hand right now is the chart of the Russell 2000 Index (please see chart below). This closely watched barometer of small cap stocks is now down 5.92% from its all-time record high of 1213.55 as set on July 1, 2014. And an exceptionally strong preliminary monthly chart sell signal has already been triggered by my computer trading system here, the first monthly chart sell signal in the Russell 2000 Index since July 2007, the exact high of the great 5-year bull market from 2002 through 2007. After the July 2007 monthly chart sell signal, the Russell 2000 Index plunged 60% over the next 20 months!

Bottom Line: The southbound train has left the station!

Dow Jones Transportation Average Monthly Chart with Computer-generated Buy & Sell Signals

UPS Monthly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Is The Long-awaited Correction Finally Underway?

In the universe of about 300 relatively active securities that I closely follow, preliminary monthly chart sell signals have been triggered by my computer trading system in the following stocks and indexes: AMD, ALL, BAS, DHI, FWLT, KMB, LLTC, MCHP, MO, QCOM, IWM, Russell 2000 Index, SNDK, and YUM.

For your review, I have attached the monthly chart for Qualcomm (QCOM) and the Russell 2000 Index with all signals generated by my computer trading system. As mentioned in previous columns, the accuracy of signals generated in the Russell 2000 Index has been nothing short of amazing!

Official weekly chart sell signals were triggered last week in the following stocks (and one ETF): AB, BRCM, KO, F, HON, RTH, SMH, TPX.

The latest weekly charts for the Semiconductor ETF (symbol SMH) and Honeywell (HON) are shown below along with all signals generated by my computer trading system.

Bottom Line: It looks to me like a major stock market correction is now underway!

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

Qualcomm Monthly Chart with Computer-generated Buy & Sell Signals

Honeywell (HON) Weekly Chart with Computer-generated Buy & Sell Signals

Semiconductors ETF (symbol SMH) with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart Sell Signal Still Intact

As reported to readers in a special update late Thursday, July 17th, a preliminary monthly chart sell signal was triggered by my computer trading system in the Russell 2000 Index at Thursday's close. While Friday's rebound placed this sell signal in jeopardy, it remains intact (just barely) for now. As mentioned in Thursday's column, this sell signal will abort with any meaningful advance in the Russell 2000 from Friday's close.

Without going into the details, I think it's fair to say that most international news recently has been negative for equity prices (Ukraine/Russia, Israel/Gaza, Europe/Portugal Banks, etc.), while domestic U.S. earnings news has been mostly positive for equity prices recently. Throw in $2 trillion in merger activity so far this year, and it's not hard to rationalize the bullish view.

The S&P 500 Index is up 7.03% year-to-date so for in 2014, and most other major indices are also up nicely. However, the Russell 2000 Index is down 1.03%, as small-cap stocks have mostly underperformed large-cap stocks. The big surprise to many, I suppose, is that gold/silver mining stocks are currently the #1 performing sector, with a year-to-date gain so far of 21.19%!

So where do we go from here?

For now, I am staying with my computer-trading system, which currently has more than a few interesting sell signals now in force. For your review below, I have attached three of the more significant charts.

1. Russell 2000 Index Monthly Chart, which now reflects a preliminary sell signal for July 2014. If this becomes official on July 31st, then this sell signal would be the first since July 2007, the exact top of the last great bear market.

2. Dow Jones Industrial Average ETF Daily Chart (symbol DIA), which reflects a sell signal from Thursday, July 17th.

3. Nasdaq Composite Index Daily Chart, which reflects a sell signal from Monday, July 7th.

Russell 2000 Monthly Chart with Computer-generated Buy & Sell Signals

Dow Jones Industrial Average ETF Daily Chart (DIA with Computer-generated Buy & Sell Signals

Nasdaq Composite Index Daily Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index: Monthly Chart Sell Signal Triggered Today

Just a quick note this evening.

A preliminary Monthly Chart Sell Signal was triggered in the Russell 2000 Index today by my computer trading system (see chart below). This signal will not become official until July 31st. A rebound in the Russell 2000 Index between now and then could possibly abort this signal, but given my recent warnings in this column, I wanted to provide this special update to all readers.

The last monthly chart sell signal in this popular small-cap benchmark index came in July 2007. The exact top for the Russell Index was posted in that same month, and the correction that followed was 60%! While I am not forecasting a 60% correction right now, I do think we are now in a bear market and that the Russell 2000 Index will correct at least 30%. And the S&P 500 Index can be expected to correct at least 20%.

Preliminary monthly chart sell signals were also triggered today in the following stocks: ALL, FL, JNJ, MO, SNDK, and YUM, among others.

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Russell 2000 Down 4% Last Week

The Russell 2000 Index (of small-cap stocks) was down 4.0% last week, but the S&P 500 Index (of large-cap stocks) was down just 0.9%. So nothing to worry about, right?

In my view, last week was nothing short of amazing, especially on Thursday and Friday!

Portugal's largest bank, Espirito Santo International SA, missed a bond payment as reported very early Thursday morning. Maybe this is a small thing to some, but for these bondholders the loss in principal was about 20% overnight. There appears to be some "irregularities in its accounts" and maybe even some "ponzi-like" maneuvers within this Bank, according to a report by Bloomberg.

I was making the long drive to work on Thursday morning at the height of this debacle. Stock index futures here in the U.S. were down about 19 points (about 1% pre-opening) at 8:00 AM ET, but this turned out to be about as low as they fell all day. I was listening to Bloomberg radio at that time when well-respected Wall Street veteran Barry Ritholtz co-hosted a segment. With the world "collapsing all around us" in terms of sharply lower stock futures prices, Mr. Ritholtz asked an outside guest a direct question, "why should a problem at a bank in Portugal impact U.S. stock prices?" I think Barry Rithholtz is one of the wisest and most level-headed advisers on the Street, but I was completely taken aback by this question. Of course, I was then (and still am now) short the U.S. stock market with my largest possible exposure, and I was feeling pretty good about my position at the time. To me it was obvious! Problems at Portugal's largest bank are just the tip of the iceberg in terms of potential bank failures all across Europe. The next global financial "contagion" was clearly beginning in earnest and this contagion would spread like wildfire, and no amount of central bank action could stop it. Alright, maybe this view was a little outside reality at the time, but I remember thinking this scenario exactly. In fact, in my head, I was already thinking that a "mini-Lehman" crisis was just getting started and that I was perfectly positioned.

While I couldn't read Mr. Rithholtz's mind, of course, but when he asked this question to a guest on Bloomberg radio that Thursday morning, my read of the inflection in Mr. Ritholtz' voice at that time was that he thought the overnight collapse in S&P 500 Index futures was way "OVER-THE-TOP" and completely unjustified. I even sensed from Mr. Rithholtz that (if he wasn't already long the limit, which I think he may be) Thursday's gap-down opening would be the greatest buying opportunity ever! As it turned out, while Thursday's gap-down opening wasn't the greatest buying opportunity ever, it was a pretty good trade for the bulls, just as Mr. Rithholtz's tone suggested. Bad for me, of course, and worse the next day when U.S. stocks again absorbed several selling sprees, only to finish higher on the day.

So where does that leave us now!

Despite Thursday's miraculous resilience in U.S. stocks last week in the face of ominous news about Portugal's largest bank, I remain convinced that U.S. stocks are poised on the precipice of a major decline. In the interest of full disclosure, I still remain significantly short (and unhedged) the S&P 500 Index. And I have even sold ALL my gold/silver mining shares in my managed accounts (with nice profits).

Before I talk about the Russell 2000 Index monthly chart below, I just want to relay a fascinating story I read about this morning on Yahoo Finance (www.finance.yahoo.com). The stock of Cynk Technologies was halted Friday by the Securities and Exchange Commission. Apparently, the SEC is "shocked" that there is "gambling going on" in the market for penny stocks. According to a direct statement released by the SEC, there are "potentially manipulative transactions" in the trading of CYNK's stock. Of all the places where there are "potentially manipulative transactions", why would the SEC get involved in CYNK's stock. Here's why: CYNK's stock price recently went from $0.06/share to more than $20/share. At $20/share, this "penny" stock had a valuation of more than $6 billion. The next FaceBook maybe? No, well how about Twitter then? No, not quite. According to the Yahoo Finance story, CYNK is a "social network" company with no revenues, no products, and only one employee. At the time of the halt on Friday, CYNK's stock was $13.90/share. The SEC has imposed a halt in trading until at least July 24th. Any guesses where it will open at that time? I'll bite; how about under a $1.00/share? For those who believe that U.S. stocks are still attractive at current valuations, you may wish to open your eyes to the speculative excesses that seem to be everywhere right now. And if your mantra is "don't fight the Fed", then maybe it's time for you to read the transcripts of recent speeches by St. Louis Fed President Bullard and Philadelphia Fed President Plosser. Both are now saying that the Fed is very close to achieving its objectives and that increases in short-term interest rates will come sooner than most investors now seem to expect.

And how about the stock price of Lumber Liquidators (LL) last week? Ouch!! For anyone thinking that the collapse of Q-1 GDP was just weather-related, you may want to read the latest Q-2 earnings report and follow-up management forecasts from this company. This "growth" stock is now down 54% from its all-time high of $119.98 set last November! As recently as this past Wednesday, July 9th, LL's stock was trading at $77.27/share. It now $54.86, down 29% in just two trading days!

Lumber Liquidators (LL) Daily Chart with 250-day Moving Average Line

And now to the Russell 2000 Index Monthly Chart below. Of all my charts, this is my favorite. It's my favorite because my computer trading system has been PERFECT in ALL its calls for at least the last 16 years. Six perfect calls in a row! And with last week's 4% decline in this key stock market barometer, I now strongly believe that a monthly chart sell signal will be triggered in the Russell 2000 Index here in July. And given my computer trading system's perfect track record of forecasts in the Russell 2000, the bearish case for the overall stock market is that much more compelling to me. We're not there yet, but a 7th perfect call in a row is about to be triggered in the Russell 2000 Index on the very near-term horizon!

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

Special Update: Sell Signals Triggered in Gold/Silver Mining Shares Today!

Just a quick update this evening relating to the Gold/Silver Mining Shares.

I turned aggressively bullish on Gold/Silver mining shares in May, and by early June I had accumulated substantial positions in several of my favorite names (EXK, AG, GG, and GDXJ).

In this column on June 3rd I wrote the the following Special Update:

"Daily Chart computer-generated buy signals were triggered in the following Gold/Silver mining stocks:

Agnico Eagle Mines (AEM)              $30.48

Gold/Silver Mining Index (XAU)        $84.98

Barrick Gold (ABX)                          $15.97

Endeavour Silver (EXK)                  $  3.90

First Majestic Silver (AG)                 $  8.44

Fortuna Silver Mines (FSM)             $  3.93

Gold Mining Share ETF (GDX)        $22.37

Newmont Mining (NEM)                   $22.82

The sheer number of buy signals here is incredible! Of course, most of these stocks have been annihilated since their early February 2014 highs, but today's buy signals bode well for the group as a whole over the next several months (at least)! In the interest of full disclosure, I have significant long positions in Endeavour Silver (EXK), First Majestic Silver (AG), Goldcorp (GG), and the Junior Gold Mining Shares ETF (GDXJ)."  (Exact copy of paragraph from my June 3rd Column.)

However, ....

Daily chart Sell Signals were triggered by my computer trading system today, July 10th!

While I remain confident that the long term bull market in Gold and Silver has now resumed after several years of retracement and base-building, the rally (and first leg up) in Gold/Silver Mining Shares that began on June 3rd looks like it may have ended today. Recent gains in this sector have been nothing short of spectacular. From its closing price on June 3rd, Endeavour Silver (EXK) surged 61% to today's intra-day high. Fortuna Silver (FSM) jumped a similar amount, and all of the stocks listed above posted exceptional gains over the last five weeks.

However, it's time to take profits and exit all positions in this exciting group. Daily chart sell signals were triggered by my computer system in the following Gold/Silver Mining shares at today's close: ABX, AEM, AU, AG, FXM GDXJ, GDX, GG, HL, NEM, PAAS, PPP, RGLD, SILJ, SIL, SSRI, SLW, and XAU.

Here is a representative stock from the Gold/Silver Mining Sector with all computer-generated buy and sell signals reflected:

First Majestic Silver (AG) Daily Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - A Bridge Too Far

Any discussion of the greatest stock market analysts of all time must include the name Laszlo Birinyi. Very few can claim to match his incredible track record of prescient forecasts, and fewer still have his extraordinary ability to view the "forest through the trees" to capitalize on exceptional long term trends. Last week, Mr. Birinyi raised his upside target for the S&P 500 (yet again) from 1,970 to 2,100. This new target is expected to be reached within the next six months and corresponds to the largest spread between the S&P 500 and its 200-day moving average since 2010.  

While every great analyst has his or her own "secret" indicators, and Mr. Birinyi may very well have found the "keys to the kingdom", it looks to me like the primary reason for raising his target is the fact that we're in a bull market and the bullish case must be given the benefit of the doubt. According to Mr. Birinyi in a note to his clients, investors should acknowledge that this is not an ordinary, average, typical or normal bull market and thus many approaches and metrics are not useful or applicable. And most interesting to me is the fact that Mr. Birinyi acknowledges that according to some tried and true valuation measures, like the Shiller CAPE ratio, the current U.S. stock market may very well be as overvalued now as it was at the major tops in 1929, 2000, and 2007.

The fact that Mr. Birinyi has a hot hand right now can't be disputed. He's nailed this 5-year bull market like almost no one on the Street. But I think this latest upside revision to his forecast is a "bridge too far". I have attached two charts for your review:

1. The New York Composite Index Daily Chart against the spread between its daily closing price minus its 200-Day Moving Average. It may be noteworthy that when this spread gets to 800, the rally is stock prices stalls or even corrects. While all the corrections have been relatively shallow so far, they have been significant and worthy of attention.

2. The Dow Jones Utility Average Weekly Chart - A weekly chart sell signal was triggered last week by my computer trading system in this key market barometer. Despite the well publicized $200 million personal bet by PIMCO's Bill Gross that U.S. interest rates will stay low or move lower, my research suggests otherwise. Longer-term T-Bond prices look heavy to me, and with the Fed clearly in "tapering" mode, my view is that a meaningful intermediate term top in long term bond prices is now in place in this market.

The title of this column refers to the disastrous Operation Market Garden in World War II where the Allies attempted to break through German lines at Arnhem across the river Rhine in the occupied Netherlands in September 1944. A Bridge Too Far is the title of the non-fiction book by Cornelius Ryan published in 1974 which tells the story of Operation Market Garden. The title of this book comes from a comment made by British Lt. Gen. Frederick Browning, deputy commander of the First Allied Airborne Army, who told Field Marshal Bernard Montgomery before the operation, "I think we may be going a bridge too far."

NY Composite Index Weekly Chart with Spread Between 200-day MA & Actual Closing Price

Dow Jones Utility Average Weekly Chart with Computer-generated Buy & Sell Signals