Tuesday, July 21, 2015

THE FED HAS SET THE MARKET UP FOR ANOTHER 87 STYLE CRASH.........

THE FED HAS SET THE MARKET UP FOR ANOTHER 87 STYLE CRASH

The Fed has aggressively intervened in the markets over the past few weeks to prevent the market from continuing down ahead Yellens speech to Congress. This has been a familiar pattern for the last several years. Obviously it's much easier to handle Congress if the markets are rising and everyone is happy with their 401K's.

However, the Fed has traded some short term gain for massive pain further down the road. By not allowing the market to fully correct into an intermediate pullback the Fed has prevented the market from building the energy necessary for a strong breakout and rally higher. Yes the intervention made it easier for Yellen to deal with Congress, but that has come with a price. The price is that stocks will now remain in the same choppy range they've been in all year. And come this fall when the yearly cycle low comes due (and probably the 7 year cycle low) we are almost certainly going to experience some kind of crash event.

spx

I doubt it will manifest as a one or two day spectacle like it did in 87, more likely as a several week collapse similar to what happened in China recently. Ultimately I think we will see the S&P retest the 1000 to 1500 level b
efore the final low is struck.

In the chart below you can get a feel for just how stretched the market is above the 200 week moving average. A move back down to the 1000 to 1500 level could play out. I know this seems virtually impossible at this time. Recency bias does that to traders. Because we haven't had a serious correction in years we assume it will never happen again. But I assure you it will. Back in 2007 no one could have imagined the market dropping 60%.

crash

We have a huge divergence in the advance/decline line. This happens at most multi-year cycle tops and specifically at the last two bull market tops.

We have the weekly money flows diverging sharply as institutions have been slowly exiting the market over the last two years.

Ever since QE3 ended fewer and fewer stocks in the NYA are holding above their 200 day moving average.

A crash will panic the Fed and they will start QE4. This will set the stage for a very troubling stage in American history.

 

No comments:

Post a Comment