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As news wires wheel out stories from Black Monday thirty years ago when the US stock market fell by more than 20% in one day, current stock markets are seemingly making all-time highs every day. The mind gets used to this white noise and becomes somewhat desensitised to these records. Of course, over the long-term traders know that markets can swiftly turn lower as was the case three decades ago.
The current eight year bull market has feasted on the flood of cheap money from global central banks. More recently, we’ve had a series of upbeat quarterly earnings reports from the major blue chips to keep the Dow above 23,000. Last night for example, IBM’s stronger-than-expected earnings report lifting its own shares nearly 9% higher and with it the Tech sector.
Of course President Trump has had a hand in the stock advance by dangling the tax cut carrot in front of markets once more. The repatriation of up to $200 billion is expected to be directed to share buybacks and lower tax rates will also boost bottom line earnings.
Aside from some of the reasons for the ebullient markets, it is always best to look at price action and to decide whether there are any meaningful signs of price exhaustion and so a trend reversal. Bears in the market would believe sufficient evidence includes:
- Prices trading outside the upper Keltner Channel
- RSI divergence on various timeframes and above seventy-five
- Decisive and clear sign of range expansion to the downside
- Break below daily ascending trend channel
As we can see below for the S & P 500 futures, today’s turn ticks most of those boxes. The last piece of evidence is more conservative and would need more pronounced confirmation.
500 Futures Daily Candle Chart
What is clear however in this bull market is that the ‘buy the dips’ mentality has been prevalent whenever we have had a move lower. Some would also argue that the market has also not experienced a delusional phase or a ‘blow-off top’. For sure, the 30th anniversary of that fateful day in October 1987 brings the vagaries of the market into sharp focus for traders and investors alike.
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