US stock markets are giving me a nosebleed
I wrote recently about how US stock markets had become severely overbought and were due a correction. Since then, however, markets have continued to power higher, reaching new all-time highs on an almost daily basis. The E-mini S&P this month has already climbed from 1974 to a new all-time high yesterday at 2115.75, a gain of 132 points or over 6.6% in just 3 weeks. I don’t deal with fundamentals in my articles, I focus on technical analysis only, and I don’t argue with the bull trend. That is a good thing as, despite the fact that in my brain this makes absolutely no sense whatsoever, without a negative signal I have remained positive in my daily technical analysis forecasts for my subscribers.
I could never have imagined just a few years ago the situation we are now in, with stock markets hitting record highs on a weekly basis combined with bond yields hitting record lows on a weekly basis. We have central banks around the world slashing interest rates, in some cases into negative territory, something I never really imagined possible when I was trading short sterling and Euribor options on the trading floor at LIFFE in the 1990s. I can hardly believe my eyes when I see negative bond yields in Austria, Belgium, Denmark, Finland, France, Germany, the Netherlands, Sweden and Switzerland. According to the headlines even some corporate bond yields have gone negative, including EDF, Nestle and Royal Dutch Shell – ‘…investors seemingly willing to pay for the privilege of lending to the most trusted borrowers.’ This frightening hunt for yield also drives stocks relentlessly higher. Is this not surely the mother of all bubbles?
From the FT, 5 February 2015:
The world is awash with more debt than before the global financial crisis erupted in 2007, with China’s debt relative to its economic size now exceeding US levels, according to a report. Global debt has increased by $57tn since 2007 to almost $200tn – far outpacing economic growth, calculates McKinsey & Co, the consultancy. As a share of gross domestic product, debt has risen from 270 per cent to 286 per cent.
I have no idea how this will all end, but I’m frightened at the complacency in the market at the moment, with the VIX trading at just 13.70. The market believes that the party will never end, but sooner or later we will have to wake from the dream. I simply cannot see what can sustain this bull market in the long term and I’m truly terrified when I think about what the longer-term future holds.
But as I write the party does go on, with markets dancing higher on the slightest hint of good news and completely ignoring anything negative. The markets did not decline on worries over the ‘Grexit’, yet powered higher when the short-term solution was reported. So back to the technical analysis:
Emini S&P is now testing both five-week and 13-week trend line resistance at 2115/20 with seven-month trend line resistance at 2125/30. Will this mark the high for the bull market?
E-Mini Nasdaq has rallied for 10 sessions in a row and has rallied every day in February except three. This is a gain of 370 points or 9% so far this month. I cannot see anything like this in my charts since September 2010. We then fell about 70 points or 3.5%. We are severely overbought in all timeframes and, while this is a concern, until we see a negative signal we have to stick with the bull trend… but I would be cautious.
Jason Sen – Technical Analyst & Trader
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