Ominous Signs in this Market Indicator

The stock market has been on a rip lately. The S&P has risen well above 3000, and currently sits at 3120.5 (^GSPC Chart). But how high will we go without a pullback? More importantly, how big will that pull back be?

Yesterday, while trying to find clues, I put the ‘On Balance Volume’ indicator on my SPY chart. This indicator basically gives you an idea of accumulation and distribution in the market; it tells you, in general, if the market is scooping up shares, or selling shares. I use the OBV from time to time, but have not used it in a while. What I found was scary.

SPY chart as of 11/15/2019

Notice the descending trend on the OBV indicator? More importantly, notice the pullbacks that have happened each time the OBV dropped in relation to the market rip higher?

At the end of last year we had a correction. The markets tanked for a couple months, and finally bottomed out on December 31. Since then the market has climbed to all-time highs setting record after record.

Our first substantial pull back of this year happened right after the May high. This is when the Trump administration basically said a deal with China was currently off the table. The markets did not like the news one bit, and down it went. From there it rallied to new all-time highs in July.

Same story in July – more negative trade news, and the market soon fell. However, the fed started to talk about lowering interest rates, and the market liked that. It soon rallied again in September and met up with the July all-time high. Then, of course, another pullback on… you guessed it… negative trade news. Since the pull back bottom in early October, we have rallied to even higher highs. The market is on a rampage!

But there are ominous technical signs that this is not sustainable without some sort of pull back or correction. Take a look at the chart one more time:

SPY chart as of 11/15/2019

The blue vertical lines are meant to show the market highs in relation to the OBV. The red arrows, of course, are pointing to the highs of the OBV in relation to the blue lines. The blue dashed line on the indicator shows the May OBV high, and the purple dashed line shows the July OBV high.

Notice, each all-time market high comes with a lower OBV high. This is divergence. The On Balance Volume indicator is showing divergence with the overall market.

After the July market high, the market pulled back. The OBV might have predicted this, as it could not reach the May OBV high. Same story for the September rally – the OBV might have predicted that one as well. This time, the September OBV could not reach the July OBV high or the May OBV high. And here we are today. The OBV is right at the September OBV high, but well below the July and May OBV highs.

Quite a tongue twister that last paragraph was. LOL! But you get the idea.

There is one other ominous sign the OBV is giving me. Notice the OBV has been slow to rise during this current rally when compared to the other rallies? That is showing that there is lack of conviction in this move. It seems market players are leary about moving forward on the current trajectory. The other rallies showed steeper OBV rise.

As I always say, this does not guarantee a pull back or correction will happen any day now. There is no “holy grail” of market indicators. The OBV is no exception to that. This is just something I noticed and wanted to share.

This post is my opinion only, and should not be taken as advice. Always do your own research before making any investment decision. Seek professional and licensed advisers if you are unsure.

PULL BACK VS. CORRECTION VS. RECESSION – WHAT’S THE DIFFERENCE?

I hear it all the time, “we are gonna have a pullback,” but the individual was really referring to a correction. Or, I’ll hear someone say “we are gonna have a recession,” but what they really were talking about was a correction. There is a difference.

Pull back

A pull back is anything in the opposite direction of the trend, that is no more than 10%. What does that mean? If stock ABC (hypothetical company) is trading for $10 per share, and they have a pull back of 2%, that means they “fell” back .20 cents (2% of $10). So now company ABC is trading at $9.80 per share after their pull back.

A pull back can happen to the downside (in an uptrend), and to the upside (in a downtrend. In an uptrend, when there is a pull back, you might hear someone say “buy the dip!” What they are saying is, buy after the pull back because the stock will be cheaper. However, NEVER take anyone’s word for that. Make sure to research the stock first, before buying in.

Correction

A correction is when a stock or index falls between 10% and 20%. So, if company ABC is trading at $10 and they lose 10% from their share price, they are said to be in “correction territory.” They started at $10 per share, and are now trading at $9 per share.

A “bear market” is anything after 20%. So if stock ABC lost $2 (20% of $10), they would be in a “bear market.” A recession, actually, has absolutely NOTHING to do with a percentage drop. That’s a myth. Although, to be fair, a lot of people collectively do consider 25% or so to be recession territory. However, by definition, a recession has nothing to do with that.

So technically, anything from 0% to a true recession, is just a correction! Think about it…

Recession

The “R” word! It strikes fear in the hearts of many.

The definition of recession is: ” a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”

So there you have it!

THIS IS THE BLACK SWAN

For weeks, if not months, you have probably been hearing the term “black swan” in the markets. People will say “this could be the black swan..” or, “is this a black swan?” Well, in my opinion, the black swan is here!

A black swan in market talk is any unforeseen event that could shake things up negatively. Well, as you probably already know, Nancy Pelosi announced plans to move forward with an impeachment inquiry against President Donald Trump.

This is my black swan event. This, in my opinion, is the catalyst that could send the markets lower. As I stated in a previous post, the technicals are mounting in favor of the bears. Chart after chart, bearish signals are increasing: Double tops, RSI and Volume divergence, lower-low/lower-close, etc. etc… I could go on. But it has seemed like a strong catalyst would be needed to put those bearish signals in motion.

I do not believe a trade deal will get done in October… and that, mixed with impeachment inquiries, could very well cause the markets to tumble. How much will they tumble (if they tumble), is anyone’s guess. But, if you held my feet to the fire and asked me my opinion on the drop, I would say somewhere between 10 and 20%.

Who was the architect behind this economy? Some would argue Obama was, but I think the majority would say Trump was. The threat of removing the very architect of this tremendous bull market is frightening for market participants. Not to mention the overall political uncertainty that impeachment proceedings bring.

If nothing else, this will create a pretty bumpy ride. Maybe I’m wrong, and honestly I hope I am, but I do not think so. I think when you factor in the mounting bearish signals, the market bears are looking for any catalyst they can get their hands on to drop it. But that’s not a bad thing.

When people here recession they almost freeze in terror. But I don’t. I’m not even saying this will start a recession… but, corrections and even recessions are actually healthy from a market standpoint. They bring prices back down to manageable levels, and the smart investor is just waiting at the bottom to scoop up all the good deals. Which, is what I will be doing when the time comes – bet on that!

SPY MONTHLY CHART LOOKING GRIM

The technicals are mounting in favor of the bears. Looking at the monthly chart for SPY, I noticed yet another double top… and more ominous, divergence with the RSI and volume.

What does the declining volume tell me? It tells me that month over month buyers are becoming harder and harder to find. What does the declining RSI tell me? It tells me that SPY is trying to come down from such overpriced conditions.

Of course, fundamentally, you have QE (quantitative easing) propping up the price. This is creating a condition, in my opinion, that will eventually trap new and novice investors. The newbies are probably buying up stocks, because they see there’s a rally. But the problem is, the rally is so old, and so high in price, that they are bound to get burned when this thing comes crashing down.

Do I think a recession is imminent? No. Do I think a big correction (15 to 20%) will happen? Yes! However, with that said, lowering rates and QE after QE is not necessarily a good thing. That could lead to recession type behavior eventually… it’s called DEBT!! The more debt companies get themselves in, the harder it will be for them to climb out if and when interest rates begin to tick back up.

I am overall a bullish investor, but right now I have a bearish sentiment. The technicals and fundamentals are pointing to a big correction in the works. But that’s ok! Because, after it does correct, I will sweep in and scoop up as much as possible for the next leg up. That’s investing 101 for a bull: buy low, sell high. Right now, it seems investors are buying high and selling high… that’s very dangerous!

Remember: ALWAYS DO YOUR OWN RESEARCH AND CONSULT A PROFESSIONAL IF YOU ARE UNSURE WHAT TO DO.