Professor’s Comments December 27, 2018

Posted by OMS  at December 27th, 2018

The markets rallied from EXTREME oversold conditions yesterday with the Dow gaining 1,080 points to close at 22,878.  The NASDAQ and SPX were up 361 and 116 points, respectively. Volume on the NYSE was low, coming in at 89 percent of its 10-day moving average.  There were 4 new highs and 808 new lows.

Yesterday’s rally was caused by buying from the Presidents Plunge Protection Team (PPT.  The Team picked a few deeply oversold with large short positions to get things going. Then once this selective buying took hold, traders were forced to cover their short positions which boosted stock prices higher and higher.  This is what the PPT does when it looks like panic conditions are about to occur. The rally didn’t change any of my key market timing indicators for equities.  The Dow, NASDAQ, SPX, and RUT remain on Sell Signals.

Since 21 September 2018, two days after Fed Chairman Jay Powell raised interest rates for the fourth time in 2018, the Dow has declined almost 17 percent.  The NASDAQ is down 22 percent. The Russell 2K is down over 25 percent, but remember, the ‘troop index’ started earlier than the Generals.  So far at its low, the markets have lost just over $5.7 Trillion.  To put this loss in perspective, we should remember the Fed spent about $3.7 Trillion to stimulate the economy from 2008 to 2016.  This $3.7 trillion drove the Dow from approximately 6,600 in March 2009 to 18,000 just before the November 2016 election. So taking $5.7 Trillion out of the market will impact the U.S. economy.

Several months ago, I started talking about the negative effect that raising interest rates would have on the market.  This was being done at the same time the Fed was selling assets from its balance sheet to the tune of $50 Billion a month.  You don’t need to be a genius to understand that taking this huge amount of money out of the economy will eventually have a negative effect on the equity markets.  And now it’s happening.

The real question now is how long will the decline continue and how low will it drop before a significant bottom is reached.  Will this massive loss of money cause the economy to go into a deep recession or will we enter something like the Great Depression?

From a technical perspective, now that the Dow has broken through the 24,000 level, there isn’t any real support until the 21,300 level which is where the 200-day moving average is located on the Weekly Chart.  Beyond this is the 18,000 level where there’s a ton of support.

On Monday, 24 December, the Dow fell to a low of 21,712 before the PPT stepped in to rally the markets.  Because the PPT can only ‘goose the markets’ so much, once the current rally fails, it’s likely that the Dow will resume its decline and test the 21,300 level.

A few weeks ago, when I first mentioned the 21,300 level, a few students had a hard time believing this could happen.  But after the Dow fell to a low of 21,712, they probably changed their mind.  This is what happens in a real Bear Market.  Equity prices fall much lower than anyone expects.  And the first decline in a real Bear Market is always a test of the 200-week moving average.  Then once the 200 is tested, the markets usually attempt some type of rally.  Right now, it’s hard to predict how and when that corrective rally will develop.  Students should understand the major trend is down and until it’s over, you never want to put yourself in a position to catch a falling knife.  As a minimum, I want to see what happens once the Dow tests the 200-week moving average before I even think about getting long.  IF the 200 doesn’t hold, prices could continue to decline until support at the 18,000 level is reached. I don’t see that happening soon, but I wouldn’t be surprised to see prices near this level before this Bear is over.

There were no changes to the Sector Ratio after yesterday’s session.  It’s still 0-24 negative.  I won’t be doing anything on the long side until the Sector Ratio changes.

BTW, I’m still watching crude oil at these levels. Valero (VLO) had a nice pop yesterday from oversold conditions.  I’m still not on a Buy Signal for crude oil or the refiners, but yesterday’s 4 point pop was a nice post-Christmas present.  I booked the profits and will now look to re-enter my trial position at lower prices.

With all the volatility going on now, please take some time to relax and enjoy the rest of Holiday season with your family. The market will be there next year. But you will need to be in the right frame of mind to trade it. So relax.

That’s what I’m doing.

h

My next report will be the WSR.

Market Signals for

12-27-2018

One hour video recorded from May 28, 2016 The Professor’s Signs of a Major Market Turn – Prospectives and the Projected Timing and Levels One hour streaming video – includes webinar handouts The Professor usually holds an update class whenever the Market looks like it may be making a major turn. If you have been following the Professor’s Comments you know that a turn is due….. LEARN MORE

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