For the past few weeks we’ve been warning about a rollover top in the making in the stock market, and it appears that something’s now afoot.
We don’t want to jump into alarm mode, of course – it’s too early for that. And it’s more than likely there won’t be any need for alarm bells at all. But a pullback of some brief duration and modest scope certainly looks to be upon us.
When the time comes for panic, we’ll present you with a shrieking fit the likes of which you’ve never seen before.
Know, too, that we’ve hedged ourselves against such an event. All three regular Normandy publications have offered some variety of bearish moneymaking initiatives over the last month, just as the ‘creeping interim rollover top’ – as we once designated it – began to reveal itself.
Have a look now at two charts.
The first is the Dow Jones Industrials for the last six months –
We Call a Top
It’s clear from the action of the last few days that our prognosis of an interim top was correct. Remember, on November 20th in Put on Your Parkas, Gang, we openly fretted that –
“There’s been no volume of late,
Volatility has dropped significantly, and
Intraday trading ranges have been dramatically stunted.
All of which has produced action that resembles a quick rollover top in progress.”
Then, a week later, in our Thanksgiving Day issue (A Walrus Thanksgiving), we stated unambiguously that –
“The tightening intraday action and rounded shape of trade over the last three weeks smell fishy to us. Beyond that, RSI is calm…too calm, and MACD will cross lower today or tomorrow. This is experience speaking more than anything else. But we wouldn’t be surprised if we saw a pullback in equities that drew the buck lower in its wake – temporarily to be sure – but lower.”
The Thanksgiving Day warning was issued at Dow 17,810 exactly. Since then, the market climbed to just under 18,000 (intraday) before falling off sharply. Today it sits at 17,533, but more importantly, as the chart below shows, we’ve lost the first major moving average (short term) and are now heading toward the all-important 137 DMA. That latter is trending today at 17,010, and we believe the index will greet her there in short order. At that stage we’ll reassess sentiment levels, among other things, in order to bring you a better understanding of where we’re headed next.
But for now, count on an immediate 3% decline for the index.
Will the dollar follow, like you said?
Can’t be certain, but it hasn’t yet, and if inflows into bonds are any indication, it could be we were wrong on the dollar altogether.
Take a look at a chart of the thirty-year yield. And know that there has been no financially stressful event – particularly in the last ten years – that that did not cause an immediate reaction in the bond pits.
Here’s the thirty-year yield for 2014 –
Thirty-year yields are heading toward October’s 52-week lows as well as all-time bond lows set back in mid-2012 (not seen on chart). All the moving averages are unfurled and pointed southward (red arrow), and this more than anything is indicative of a general sense of worry.
Worry? Who’s worried?
True, much of the downtrend (in red) can be attributed to Fed purchases and tensions overseas. But discounting those two items, we see the reaction of bonds to stock market fright both back in October and now (in blue). It has clearly been supportive of bond prices (which move opposite to yields).
As for the dollar, so long as we continue to see strong inflows into bonds, it’s unlikely the busk will back off. When the move lower in equities is complete, we’ll take another look. But for now, bond inflows are clearly keeping the dollar afloat.
So what do we do?
Well, for one, keep an eye on those bearish trade recommendations we made recently. Here at Bourbon & Bayonets, for example, we suggested just a week ago that you consider a short sale of Tesla Motors (NASDAQ:TSLA), then trading at $229.30. Today she’s going for $209.84 and with just a hundred shares shorted you could have pulled in $2,000. Had you opted for our second recommendation of a longer term PUT purchase, you’d be even richer.
Today, it’s hard to know if there’s any more immediate downside to TSLA.
But for Walmart (NYSE:WMT), we believe there is.
Try the same techniques you employed on TSLA.
And check back with us in a week.
Many happy returns,