By Poly

This is an excerpt from this weekend’s 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%.

It is a difficult to update my viewpoint when the equity markets had one of the smallest (top 10) price variances in history this week. The action brought little clarity to long term direction, with traders remaining of two minds as to whether the new high portends a breakout with force. And with the VIX at significant lows, traders do not appear to be particularly concerned with downside risk. Although the market eked out a gain this week, its failure to either break strongly higher or drop lower means that equities remain in an extended (12 week) consolidation period.

But as equities have repeatedly made small new highs, the Bollinger Bands have begun to expand. Once the bands begin to widen after a long tightening period, experience has taught that a fast moving market generally follows quickly. Very rarely do markets move back into a tight, coiling range once the Bollinger Bands have begun to expand.

Ordinarily, with equities in their current position – the 5th DC of a 32 week IC – I’d state, almost unequivocally, that they are on the verge of a substantial fall. Over the past 15 years only one Investor Cycle – the most recent – has made it further before topping. And it topped on week 32. The cycle count is really strong evidence to support a drop for at least the duration of the current Daily Cycle.

Netting it out, regardless of the direction the market decides to take, I’m confident the move will begin in earnest next week, and will be extreme in its strength.

5-23 Equities DailyMainstream analysts are starting to catch onto the fact that economic reports are weaker than expected. And it’s more than just unemployment numbers, which have a serious time lag issue and are very noisy. Additional leading economic data points point to at least a slowing of the economic “recovery”.

This slowdown is why we’ve seen the FED narrative shift so quickly. A chart of broad surveys (below) shows that 2014 had a fairly robust expansion, at least on a year-to-year basis, such that the FED began to taper its asset purchases. By the end of the year, the FED was calling this a sustainable recovery, and expectations for raising rates were accelerated substantially. And the prospect of higher rates is why the markets have stalled lately; higher rates and less liquidity would undermine the foundation of the current cyclical bull market.

The view that we’re experiencing an economic slowdown doesn’t reflect an individual survey or a one month period. It rather is the conclusion from multiple surveys spanning almost 2 quarters, so the data are substantial. The data show that since the 2015 began, a significant slow-down has taken hold.

I’m among the first to acknowledge that the macro economy is not well-correlated with the current bull market, and weakness in the economy has had little direct bearing on the current market. What the market is concerned with, however, is an end to easy money and zero interest rates. These, ultimately, pose the greatest threat to the current bull market. I believe that if economic numbers continue to deteriorate, the market may be surprised by the FED deciding to indefinitely delay the end to ZIRP, and potentially introduce another round of quantitative easing.

5-23 economyMembers need to be aware that I’m setting aside pure Cycle analysis in my weekly Cycle outlook. Essentially, I’m going against what is clearly a Cycle count that shows an extremely high probability of a market decline! I’m doing so because the current market pattern is unique, and I believe it will result in a significant upside move. In short, I’m favoring my intuition over the Cycle count, and have taken Long positions.

I’ve been asked a lot lately why this week’s all-time high, at 31 weeks, is not going to be the top. It’s a reasonable question since ICs almost never reach this deep in the count. The answer is that it might be the top, but the contradictory evidence of a possible move higher is strong. I’m not married to the view that a surprise upside breakout is coming, so if the market drops from here and breaks the 26 week moving average, I won’t be shocked. And if that happens, equities will almost certainly freefall toward the next ICL, so I may quickly reverse and take a Short position to capitalize on the drop.

To explain further: I expect the next move to be a long one, based on both the duration of the coil, and price repeatedly banging against all-time highs while the market was in the timing band for an ICL. I know the last IC top demonstrates that a market can make an all-time high very deep in a Cycle, but the current IC is vastly different from the last. In this case, the market has moved sideways for 3 months. In a bull market, this is very unusual and very bullish behavior. And it’s how Cycles form time-based ICLs. My call for a move higher is based only on the chart pattern and my personal read of the tape, so it goes without saying that I’m going to be cautious with it.

5-23 Equities Weekly

 

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