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Market Analysis

Market Outlook - The Finishing Touches

There is only one side to the stock market... Not the bull side or the bear side, but the right side. (Jesse Livermore)

My stance on the U.S. stock market for the next several months is neutral. While the case for residual upside can be easily made, the charts and commentary below should offer compelling evidence in support of my views. In short, tread carefully during the coming weeks.

It's been exactly two years (September 2016) since the last major 'Market Outlook' article. In this update, I will contrast the 'then' and 'now' whenever appropriate in order to put the technical conditions in proper perspective.  

(Click on a chart to enlarge it. Hold down the left mouse button to move around it. Press ESC to close it.)

Philly Semiconductor Index ($SOX)

$SOX/$SPX Relative-Strength Ratio ... Semiconductors are the engine of the modern, tech-driven economy. This ratio contrasts the performance of these cutting-edge stocks (deemed high risk/high reward) with the relatively safer and more established constituents of the S&P 500 index. I devised this forward-looking indicator back in 2011, and I've been heeding its advice ever since.

THEN NOW


THEN...
 On two occasions, namely, 2011 and 2015, this ratio reached the 2007 high, and the market went on to crash a few months later. In contrast, the decisive break that occurred just a few weeks ago is a major bullish development, especially for the semiconductor sector.

NOW... The ratio printed its all-time high back in March 2018 and remains well off its highs to this day despite the new highs registered by the $SPX and the other popular indices in recent weeks. This is reminiscent of early 2011 when the $SOX ran into resistance as early as February and consequently started to retreat several months ahead (in May) of the popular indices and the ensuing 'summer swoon'.

$SOX ... An early-stage, massive rounding bottom was identified back in 2013, leading us to suspect a whole new bull market was born from the wreckage of the financial crisis. But the shape of a chart alone was hardly enough to bolster this bullish view. What particularly stood out, however, was the 2002-2007 consolidation that unfolded as a triangle (a-b-c-d-e). Elliott Wave Theory (EWT) taught us that a triangle always precedes the last installment of a bull or bear market. In our case, the triangle preceded the crash ignited by the financial crisis, bringing to an end the nine-year-long bear market that began in 2000. (Note: this isn't true of all the indices). 

THEN NOW

THEN...  The $SOX reached the 1.618 AB milestone of the depicted SHARK pattern. I foresee 15-20 percent upside for this index before it runs into the next resistance hurdle. Overall, the chart sports a massive rounding bottom, suggesting the semiconductor sector is lagging other sectors of the stock market, and thus it continues to offer great bullish potential relative to most other sectors. 


NOW...
 Indeed, the semiconductor sector by far offered the most lucrative opportunity on the heels of the 2015-2016 correction, almost doubling the value of the $SOX in just two years and outperforming all the other indices. 

Dow Jones Transports ($DJT or $TRAN)

THEN NOW

THEN ... This index sounded off the warning siren by topping as early as late 2014, i.e., several months ahead of its peers and the summer 2015 crash. The Andrews Pitchfork, coupled with the Cup and Handle's measured move, foreboded the looming danger ahead. Interestingly, note what took place in 2012; while the major indices had been forging ahead towards new highs, the $TRAN moved in a relatively tight range throughout the year, only to finally break through the week of December 31st, 2012. This ushered in what we've affectionately come to dub "the BTFD year" (2013). Enter 2016 ... Reminiscent of late 2012 / early 2013, this index is poised to close this week on a similar note. For the last several weeks, we had been on the lookout for an "above water" weekly close, i.e., a close above the blue neckline of what's been identified as potential inverse Head and Shoulders pattern.

NOW ... The bull run that began in early 2016 is still unfolding as a 5-wave structure, mirroring the 2011/2014 structure. Wave a of 3 ended in October 2014 with wave 5 roughly equaling wave 1 in size. Wave c of 3 is currently at this very same stage, albeit the ideal Fibonacci projections for wave 5 (0.618 and 0.764) coincide with 2.618 x wave 1 and 2.764 x wave 1 at roughly 12,909-13,097 and 13,607-13,642. These levels are obviously well above the current price of the index, a minimum of 13 percent upside from here. That said, note that in 2014, wave 5 ended at 9,310, well below its ideal 0.618 and 0.764 projections (10,644 and  11,340).

Nasdaq Composite ($COMPQ)

THEN NOW

THEN ... The 2015 correction, as well as its magnitude, was forecasted in the October 2014 General Outlook. Now, this index appears to be on its way to new highs, and it should move more or less in lockstep with the Semiconductor index.

NOW ... I was totally expecting wave c of 3 to end earlier this year, right where wave 3 ended, i.e., at the top of the Bearish Crab PRZ (~7,600). At the same time, I've drawn attention in recent months to the fact that wave c of 3 is still missing an internal subdivision, namely, wave 5. This final subdivision is unfolding right now before our eyes. Where it finally comes to an end remains to be seen. It could end soon in the 3.618-3.764 x wave 1 range of 8,168-8,404 or it could muster enough momentum to progress towards the measured move of the Cup and Handlesomewhere above 9,100. That said, this scenario is very tough to get one's head around, considering the $SOX has likely fulfilled its current mission. 

 S&P 500 ($SPX)

THEN NOW


THEN ...
 This benchmark index appears to be on its way to 2400-2500. The recent volatility back-tested the 2120 area, which marked the rim of the yellow Cup and Handle. This cup's measured move points to the mid 2400's.

NOW ... Let me simplify things a bit: all the popular indices sport a similar wave structure, and hence they are all in the process of finalizing the 2016-present rally. The immediate target from here is clearly the 2.764 x wave 1 milestone at 3,022, given that the 2.618 x wave 1 at 2,919 has already been exceeded.

RUSSELL 2000 ($RUT)

NOW

Not much to weigh in on here relative to the other indices. The only thing I would note is the impending monthly TD (Tom DeMark) Sequential Sell 13 exhaustion signal due sometime in the next few short months. 

DOW JONES INDUSTRIAL ($DJIA or $INDU)

NOW

The monthly TD (Tom DeMark) Sequential Sell 13 exhaustion signal has been in place since early 2018, and it has a TD Risk level of 28,491.72. While a monthly close at/above TD Risk would invalidate this signal, the immediate target for wave 3 is 2.618 x wave 1 and 2.764 x wave 1(27,175 and 28,110). This is definitely something to look forward and reference back to.

NASDAQ BANKING INDEX ($BANK)

NOW

The $BANK, like the $SOX, has very likely printed its high back in June. This is one to keep on the radar at all times.  

BREADTH

NOW

The number of stocks making a new 52-week high is nowhere near prior levels; it's much closer to record levels than those printed by the January 2018 spikes. This begs the question: what's driving the popular indices to new highs? Answer: a handful of momentum stocks. Clearly, breadth is narrowing as the indices keep rising; this is not a good recipe for a sustainable run. In fact, this is one of the ways an aging bull run manifests itself. 

SECTOR STRENGTH

NOW

Most sectors are generally healthy, with no indications of money fleeing to safety (Utilities, Consumer Staples). 

SUMMARY

When a market reaches an important milestone, it transitions into a distribution phase, i.e., a topping process that consumes several weeks to several months. In 2011, the $SOX embarked on a profit-taking journey in early 2011, months before the summer crash. Likewise in 2014, the $DJT top in early November 2014, well ahead of the summer 2015 crash. Such disparities always forebode a coming storm and go completely unnoticed in the financial media. 

As this article has shown, the topping process is clearly evident in some of the indices, while others are within striking distance of their projected targets. The ensuing correction should amount to roughly 20 percent, even a little more in the case of some indices. 

Tread carefully,

Peter Ghostine (@peterghostine)


If you found my analysis thorough and useful, a $240 yearly subscription to the TradeWinds service on 61point8.com will entitle you to receive my ongoing analysis of the U.S. stock market indices and real-time access to my trades.

 

 

  

 

 

 

 


 
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