Everyone seems to want to know: What’s with the stock market, Larry? It’s defying your forecasts. So is Europe’s stock market. It’s hurting our positions. What gives?
I’ll address these questions thoroughly – and many more – in our live Q&A session this Thursday. So be sure to attend that webinar.
But let me address the main questions I’m receiving on the stock market, head on right now.
Q: Larry, why is the stock market rallying?
A: From a fundamental point of view, it’s capital flowing into just a few big name stocks, such as Google, Apple and Microsoft. Those companies and others like them have enough weighting in the major indices to push the indices higher even while the majority of stocks lag or even decline.
I showed it to you in Friday’s issue, and it means that the U.S. equity markets are on very thin ice. Volume is declining. The number of stocks advancing is dwindling, while the number declining – already in a stealth bear market – is increasing.
It is a fractured market. Fractured markets are typically resolved by a giant collapse. Not by a major new advance.
Indeed, even during Friday’s rally, the number of stocks advancing versus those declining, fell. The internal structure of the market continues to weaken.
So why then is big capital moving into a select few stocks? Call it safe harbor. It typically happens when big fund managers want to avoid weaker segments of the market and instead crowd into the best of the best.
Remember, they have to be invested. So as they move their money around, they opt for the safest of the safest. So while that is pushing the indexes higher, it is also very deceiving. Most of the market is peeling away to the downside.
Think of it this way: You’re on one of many small sailboats in the middle of an oncoming storm. You’re far safer abandoning your smaller craft and boarding a nearby larger ship. So are the others in their smaller boats.
Yet, there are so many of you that after a while, the larger ship can’t handle the weight anymore. And then suddenly, it lists to one side, and runs into major trouble itself.
Similarly, it is only a matter of time before the internally fractured market – and the larger ship, the Dow and S&P 500 – begins to list and run into their own troubles.
Q: Why is Europe’s stock market rallying?
A: There are two primary reasons. First is the expectation that the European Central Bank (ECB) will soon start printing more money. So the less savvy investors are buying stocks, assuming money printing will continue to inflate the European equity markets.
But it won’t. It’s just a knee-jerk reaction. If euro printing were to send Europe’s stock markets into a new bull mode, it would have done so when the ECB first started printing massive amounts of euros months ago. And it didn’t.
The second reason Europe’s stock market has recently rallied is very similar to what’s happening to the Dow. Germany’s DAX is really the equivalent of our Dow. And it is largely the DAX that has rallied, while most stock markets of other European countries are actually trading sideways or lower.
In other words, the DAX is the Dow of Europe, but the other stock markets in Europe are like the declining issues in our markets. Fund managers in Europe are putting their money in Europe’s blue chips (in the DAX) while shedding almost every other type of equity, Europe’s small caps, etc.
Put another way, Europe’s stock markets are just as internally fractured as our equity market is, a very bearish sign.
So I repeat my warning in Friday’s issue:
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.
Q: What would tell you that your forecast for a decline in the stock market is dead wrong, and that instead, it’s ready to blast off again to your long-term target of Dow 31,000+?
A: There are three major developments that would have to unfold, simultaneously.
FIRST, the Dow would have to close above major resistance at the 17,700 level. Then, it would have to hold that level and climb to a new all-time high above 18,500.
SECOND, the number of stocks advancing would have to surge tremendously. Those that have been declining would have to turn around and rally substantially.
THIRD, volume would have to increase dramatically as well.
Is it possible for that to happen? Of course it is. But it is highly improbable according to all of my research and indicators.
Instead, the far more probable course of action will be a sudden collapse, that seemingly comes out of the blue.
The above are the primary reasons I am having you stick with the recommended UVXY position. If stopped out, I will then determine what the next move should be in stocks – but it will NOT be going long the market. The risk is definitely on the long side, even though it does not appear that way on the surface.
Meanwhile, gold is still looking weak, oil is basing, the dollar is getting firmer and firmer, and the euro is on a new leg to much lower levels. ALL good news for the recommended positions in DZZ, UUP, EUO and related options.
The Fed starts its October meeting today and announces any decisions it makes and issues its policy statement on Thursday afternoon. I doubt the Fed will raise rates this month. The economy is still too fragile and the Fed is also acutely aware of the problems in Europe.
However, the Fed is also under extreme pressure to start “normalizing” rates. So frankly, anything goes.
Either way, whatever the Fed does or doesn’t do, says or doesn’t say – come Thursday – won’t amount to a hill of beans when it comes to the markets.
At worst, it will add some volatility. At best, it will be the trigger for the markets to make their next moves, which will take the shape of the trends already at force: Higher for the dollar, lower for the euro and gold, lower for the stock market.
Hold all positions and related stops.
Best wishes,
Larry
