The rally in U.S. stocks over the last 10 weeks has been among the strongest in history. A major reversal in Federal Reserve monetary policy ("patience" now instead of "more rate hikes" ahead and an end in sight for "quantitative tightening"), record corporate share buy backs, and a massive new monetary stimulus program from the PBOC all contributed to the near record advance in U.S. stock prices since the reaction lows were posted on December 26th, 2018. And Bloomberg is now reporting this afternoon (Sunday, March 3rd) that the U.S. and China are very close to announcing a meaningful breakthrough in ongoing trade negotiations. What's not to like!
Given this bullish price action, how could anyone attempt to call a top here?
Trend followers are now 100% invested and loving every trading day!! Short sellers have been killed and most active investment managers are under-performing their benchmarks. How can anyone stay in cash with share prices running like they've run so far this year? Clear sailing ahead, right? Bullish pundits are already predicting new all-time record highs at 30,000 (+15%) for the Dow Jones Industrial Average, 3,000 (+7%) for the S&P 500, and 10,000 (+13%) for the Nasdaq Composite Index for this year. Why not?
For investors who are comfortable that Donald Trump will be re-elected President in 2020, and who are also comfortable that the U.S. Federal Reserve won't hike interest rates and will soon end its balance sheet liquidations, and if you are also an investor who is comfortable that corporations will continue to buy back record amounts of their own shares, then you should be comfortable owning U.S. stocks! (Maybe a bit too much "comfort" and complacency here?)
However, here are just a few obstacles which could upset the apple cart immediately ahead:
1. Year-over-year corporate earnings growth will be nominal in 2019 and may, in fact, actually be negative.
2. Corporate profit margins will be squeezed as upward pressure on wages and downward pressure on prices combine to present the worst possible climate for equities valuations that are already historically stretched.
3. It's not hard to see that the average American voter is now willing to accept a significant move to the political "LEFT" in an attempt to narrow the record wealth gap. Democrats actually won the last mid-term election (Nov 2018) by more than 9 million votes! And with 22 Republican senators up for re-election in 2020, it's not hard to imagine that the Democratic Party could win a majority in the Senate, maintain its current majority in the House of Representatives, and also win the White House with an overwhelming across-the-board mandate for change!
4. If the Democrats manage to win the White House, the Senate, and the House of Representatives in 2020 (which now appears likely to me), all of President Trump's favorable corporate legislation and also his pro-corporate executive actions over the last two years will be quickly reversed!
While the longer term picture for stocks looks increasingly negative, it is my strong view that despite extraordinary investment gains so far this new year, bulls are about to get a major shock.
1. All closely watched U.S. stock market benchmark indices are currently carving out dangerous "head and shoulder" tops (see charts below).
2. Weekly chart sell signals have been triggered by my computer trading program in market leading housing stocks and airline stocks. Technical non-confirmations of this year's bullish trend are already being posted as can be witnessed in the weak recent action within the transportation sector.
3. FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), once clear leaders of the equity markets over the last 10 years, are now under-performing the broader benchmark indices. A weekly chart sell signal was actually triggered last week by my computer program in Netflix (NFLX).
Bottom line: U.S. stocks are now poised on the precipice of another major correction that will match the size and duration of last year's 4th quarter 20% collapse!
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| Netflix Weekly Chart with Computer-generated Sell Signal |
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| FAANG Composite Index Weekly Chart |
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| Housing Index Weekly Chart with Computer-generated Sell Signal |
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| Nasdaq 100 Index Daily Chart with possible Head & Shoulders Top Formation |
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| S&P 500 Index Daily Chart with possible Head & Shoulders Top Formation |
