My models on the stock market are off, way off. But by the same token,
I have never seen the equity markets so plagued with problems. Not just before the 2000 crash or even 2008’s meltdown. Or even right before the crash of 1987. Way back then.
And while my timing models for the equity markets are clearly wrong of late, all other indicators I follow tell me that the downside risk in the stock market vastly outweighs the upside potential at this time.
For instance, consider …
1. Declining volume. Normally, during bull market rallies, the volume of shares traded increases.
That’s not been the case here. As you can see from this chart of the Dow Industrials, overall trading volume has been contracting. A bearish omen.
2. The number of advancing stocks versus declining stocks is shrinking. You can see it right here on this second chart. Also a very bearish omen, advancing stocks should be vastly outperforming declining issues, and rising right along with the Dow. But that’s not happening.
Instead, the number of stocks declining is outpacing the number advancing, typically a very bearish sign.
And if that’s not enough …
3. The total number of advancing issues alone is shrinking. Note on this third chart of the Dow Industrials how even the total number of advancing issues has been shrinking as the Dow Industrials gets stretched higher. Also a very bearish omen.
There’s more: Earnings expectations are largely being slashed, the dollar is starting to soar (a negative for corporate earnings going forward) and several other indicators I monitor …
All tell me – that while my timing has been off – the equity markets could be setting up for an even worse decline than I had originally expected.
Think of it this way. Take a rubber band and stretch it vertically by pulling the top of the rubber band higher while your lower hand holds the bottom of the rubber band.
Now, at some point, one of three things is going to happen. Either …
1. The top of the band is going to be forced to shrink back toward your lower hand. In this case, the Dow Industrials would start to collapse toward where the majority of stocks are now trading, which is lower. Or …
2. The lower part of the band is going to be pulled higher toward your upper hand. Put another way, all the stocks that have been falling for the past year would have to suddenly come to life and catch up with the very few that have advanced.
Or …
3. The rubber band is going to break and the entire structure is going to lose its resilience and collapse.
So which is it with the equity market right now? Based on everything I just cited and all the other indicators I follow, there is no question in my mind that either 1 or 3 is going to soon happen.
Either the few remaining advancing issues in the stock market are going to be pulled sharply lower … or the entire structure is going to break in a way I had not anticipated, a very sharp crash.
Put another way, no, the stock market is not on the verge of a major new leg higher. That will come, but not until this market pulls back and sorts out its fractured internals.
How does that help you right now?
Here’s my thinking:
First, until we get more clarification on the timing element, you should not do anything further in the equity market. When that clarification comes, however, be prepared to act swiftly.
Second, yesterday you should have been stopped out of your shares in ProShares UltraShort QQQ (QID). Stand aside for now and wait for my next signals.
Third, for your shares in UVXY, hold them with a good-till-cancelled protective sell stop at $22.24. I believe this position is worth holding, since a top can come at any moment. My projection for this position remains for it to catapult to over $100 once the top is in place in the equity market.
Yes, I know it’s rough going here in the stock markets. But you must maintain your resolve, given how weak the internals are in the market, which I just discussed with you.
Now, on to some better news …
– The euro is taking a shellacking. You can see yesterday’s plunge on this chart. More importantly, two key support levels have given way and all that remains between the euro and a move toward the 1.04 level is a minor support level at the 1.10500 level.
That level should give way in a few days.
This is great news for the inverse euro ETF – EUO – as well as the January 2016 EUO call options, strike price $25. Hold both positions!
Conversely, the dollar is starting a new leg higher. This is just the start of a MAJOR rally in the dollar.
Hold your shares in UUP as well as the March 2016 UUP call options, strike price $25.
Also hold your inverse gold ETF (DZZ) as well as your shares in the oil ETF (USO) and maintain good-till-cancelled protective sell stops for both positions.
Gold continues to remain very toppy, while oil continues to form a base from which it should soon spring higher.
Stay tuned. These markets are now setting up for some very major moves. I am monitoring them like a hawk, and though we have had some troubles of late, I remain very confident that I can steer you through to the big profits that lay ahead.
Best wishes,
Larry
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