By Poly

This is an excerpt from this weekends premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

Cycle Counts

 

Cycle Count Observation Probable Outlook Cycle Clarity Trend
Daily Day 33 Range 36-42 Days – 1st Daily Cycle. Bearish
Green Failed
Investor Week 7 Range 20-24 Weeks Caution
Green Failed
4Yr Month 79 Range 50-56 Months- 8th Investor Cycle. Bearish Green Up

 

In a classic example of the power of Short-covering, the S&P 500 has risen 190 points in just 16 sessions. Market valuations remain at historically extreme levels, so it’s not like the markets are cheap and investors are rushing in to buy value. The economic news remains uninspiring, and announcements continue to re-enforce a recessionary, low growth environment. So once the Short covering has run its course, the only catalyst for a continued rise in equities (back to 2,000 and above) would be the idea that the central bank will become more accommodative again.

In a case of bad-news-is-good-news for the markets, it’s clear that equity over-valuation exists because of FED policies. For several years, the FED has responded to bad economic news by increasing liquidity, and this has pushed asset prices higher. But the FED’s ability to safely provide liquidity is not unlimited, and it appears that the FED’s powerful accommodative policies have been exhausted for now, leaving asset prices vulnerable at current levels. Unless economic announcements become much more negative, forcing the FED steps back in with some sort of stimulus, the bear market in equities will almost certainly continue.

Since 2015’s broad topping pattern, equities have frequently moved sharply in both directions. The extreme nature of the moves makes predicting the day-to-day markets extremely difficult, which is why traders find it so difficult to profit in an environment like that we have today. In the short term, however, Daily Cycle timing and the market’s overbought status greatly favor a reversal and decline toward the next DCL.

spx

here is clarity again in the S&P’s Investor Cycles, especially with a Three White Soldiers pattern in place. Three straight weeks of solid gains have lifted the S&P sharply to close back above the 26-week moving average. The current rally will draw the bulls back in and swing sentiment back to the bullish side, setting up another decline.

Since I believe that equities are well into a bear market, the recent strength should be seen as only counter-trend. We’ve had 2 significant Investor Cycle declines since August, and it appears that we still have some upside “filling” to do before the longer term bear market decline continue. The next step is a DCL decline, which should get bears excited before price launches in a new DC. I expect the new DC rally will push the S&P back above 2,000 and form the top for the current Investor Cycle. If this scenario unfolds, I’d expect sentiment to once again become too bullish, at a time when the equities Cycle has the time and room to sell-off in a confined fashion. But this scenario is not a given – if the bear market is underway, greater-than-expected downside risk is always present and the bottom could fall out of the market at any time.

3-5-equities-weekly

 

 

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