SuttonWatch.Net: End Game For U.S. Stocks

Last week's rally in most major U.S. stock indexes served to abort preliminary monthly chart sell signals that were triggered the previous week in my computer trading system. Please see last week's column to gain more insight into the mechanics and potential ramifications here.

So where do we stand now?

In the interest of full disclosure, despite last week's rally I am still short the S&P 500 and the Russell 2000 in my managed accounts. Monday's gap down opening (on 032717) was a meaningful trading low, but I remain convinced that a major stock market top is forming and that the next big move will be to the downside.

Here are just a few potential negatives on the immediate horizon:

1. The Trump Administration's tax reform efforts will meet with the same fate in Congress as its attempt to repeal and replace "Obamacare".

2. The "Russian Story" and all its implications relating to the 2016 Presidential Election and potential ties to the White House is NOT likely to disappear anytime soon. In fact, the current investigations by the Congress and by the FBI are likely to expand in size to dwarf and undermine almost every attempt by the Trump Administration to enact meaningful legislation across the board.

3. The current U.S. economic recovery, which dates back to 2009, is now on borrowed time, and a fairly significant slowdown lies immediately ahead. While the upcoming recession is not expected to result in negative GDP for more than two or three straight quarters, there are possible scenarios that could unfold where the negative economic consequences would be much worse.

4. Central bank tightening in the U.S. and China right now doesn't bode well for the so-called "reflationary" trade which has served to create historic bubbles in financial asset prices, especially in the United States.

5. Evidence of a major top in bank stocks is clear (see official monthly chart sell signals in March for US Bancorp (USB) and Wells Fargo (WFC) below.

6. Official monthly chart sell signals in March for Amgen and CSX don't bode well for two major sectors of the U.S. economy (biotechs and railroads - please see monthly charts below).

7. Populist political movements throughout the world, especially in Europe, increase the odds of harmful government protectionist economic policy actions that will almost certainly doom financial asset prices on a global basis.

8. I worry most about a potential "Black Swan" event relating to a major terrorist strike in one of the G-7 countries, which might then trigger a massive over-reaction by one or more of the major global military powers with probable involvement and support from the Trump Administration and the U.S. military.
9. Saudi Arabia's Aramco IPO is expected to be the largest IPO in history at potentially more than 4x the record-sized Alibaba offering. Early reports indicate a $2 trillion valuation for Aramco. If a 5% stake is offered, then this IPO would total $100 billion as compared to the $25 billion Alibaba offering. While this massive negative "liquidity event" is not expected to unfold this year, Aramco could be listed on the NYSE as early as Q-1 in 2018.
10. And the most important potential single negative for financial asset prices immediately ahead relates to recent comments from two key U.S. Federal Reserve officials regarding the Fed's $4.5 trillion balance sheet. In 2008, the Fed's balance sheet held less than $1 trillion. Since then, several "quantitative easing" measures have resulted in open market bond purchases by the Fed of more than $3.5 trillion. While the Fed claims it hasn't expanded its balance sheet since early last year, all funds from maturing bonds and interest payments received by the Fed on its massive bond portfolio have been regularly reinvested in the marketplace. Influential NY Fed President William Dudley said recently that the Fed is now considering NOT reinvesting these funds which would then result in a natural draw down of the Fed's balance sheet. And St. Louis Fed President James Bullard recently went one step more aggressive here with a suggestion that the Fed may actually begin outright liquidation of its bond portfolio! In my view, the financial markets have yet to discount the staggering negative liquidity ramifications of ANY plan to downsize the Fed's massive balance sheet and its $4.5 trillion bond portfolio.

Bottom line: Don't fight the Fed! Potential U.S. Tax Reform from the Trump Administration is doomed! The Russian Story will dominate the news for President Trump's entire term! Current record high valuations in U.S. share prices fail to discount the increasing probability of a "black swan" event that could easily result in an overnight downside gap of 5% or more!