Correction Ahead or Major Crash?
I always consider two scenarios when doing any kind of short-term forecasting. In short, it’s because there are so many more variables that could affect outcomes in the short term that, really, things could go either way.
So, with markets opening in the red yesterday morning after closing out last week near all-time highs, here’s an update on the two scenarios we could see with stocks.
In Scenario One we could see a major top soon or in the next few months and then a major crash – greater than what we endured in 2008 – could begin by late this year.
In Scenario Two – which I still believe could be the more likely – we would see one more leg up in this Trump Rally and then a final blow-off in 2019. First though, we would likely see a normal correction just ahead.
On Friday, the Dow Jones Industrials finally joined most other major indices in making new highs. This is a bullish confirmation near term and another feather in the cap for Scenario Two. It would suggest several more months of rallying.
The late January peak we saw this year did look very much like the crescendo of a blow-off top, but we didn’t see that classic 40%-plus crash in the first three months that follows such major bubble tops.
We’ve seen one index after the next make new highs: The Russell 2000 (small caps) in mid-May, the Nasdaq in early June, the S&P 500 and Dow Transports in late August, and now the Dow Industrials.
Only two major indices have not yet accomplished this feat: the Dow Utilities, which is still 7% off the all-time high, and the broadest NYSE, which is 3% below its high. There is still a little danger from those non-confirmations.
Here’s the update to my S&P 500 Channel…
As you can see in the chart, there’s a resistance level at my first target at the top trend-line around 3,050 a few months from now, or 2,960 very near term on the S&P 500. And, as we did in January, we could go over that a bit.
There’s a short-term rising wedge since May that would also peak around these same targets just ahead or a few months from now. Hence, some level of a correction looks very likely just ahead.
The China trade war has continued to heat up.
Trump continues to face political and legal challenges.
The democrats could take the House and the Senate.
The million-dollar question is: Do we see the big peak just ahead? Or do we see a more normal 10% or 15% correction, with support at the bottom trend-line of this channel (or at worst at the February lows of this year) with the final peak hitting late in 2019?
I’m inclined towards the latter because most technical indicators like the advance/decline line and the inverted yield curve are still more bullish, albeit getting less so.
However, the smart money flow index is very bearish, and we’ve just seen the 16th Hindenburg Omen in the last few weeks. It warns a crash could happen. Every past crash has seen this omen trigger before the wheels came off… but many Hindenburg Omens have not resulted in a crash. Still, 16 omens, 14 of them consecutively? That suggests caution is warranted.
For passive portfolios, if you have the capacity to hedge (using options, etc.) through about late February without selling stocks and paying taxes, that could be the wisest move here.
If you’re following one of our strategies – be it Cycle 9 Alert, Triple Play Strategy, the Two Hour Work Year, Hidden Profits, Boom & Bust, Energy Profits Accelerator, Instant Income Alert, 10X Profits, or any other active trading strategy – stick with it and follow the guru’s instructions.
If we don’t see a major crash by late February, the odds would clearly favor Scenario Two, with a S&P 500 target around 3,300 and near 30,000 on the Dow by late 2019. After that, the next major crash becomes damn-near inevitable on the “Great Bubble Buster” 90-year cycle that hits hardest in late 2019. That would be the ultimate sell signal.