As of Friday, February 9, 2018 at the close of trading EquitySurge™ has continued a strong sell signal for USA equities.
Well…. finally the stock market has begun the massive unwind we have been predicting for more than a year now.
Yes, we missed out on some extraordinary gains in stocks during 2017, but our biggest fears last year are playing out now and in extraordinary fashion.
The S&P500 Index is going to tag its 200 day simple moving average today for the first time since around the election in 2016. That level is approximately 2538.
From there we see a drop to the 2500 level soon thereafter. The biggest risk with this drop, which is being driven by a sudden and severe decline in liquidity (money flow), is that the entire “Trump Trade” move higher from after the election in 2016 and through all of 2017 is at risk, which is what our worry was at the beginning of 2017.
If the entire move higher from the 2016 election is realized, that means the S&P500 Index could drop back to the 2100 level. Yes, you read that correctly, 2100.
How likely is a move down that low? At this point pretty likely, but it will take some time for that to happen.
In the meantime it’s possible the Federal Reserve is out in the press as early as next week talking about scaling back further interest rate hikes this year, which might calm equity markets in the short-term. However we thing think the long-awaited return of inflation is at our doorstep, and even if the Fed discusses fewer rate hikes in 2018, the bond market may do the job for them by bidding up yields on US Treasuries in anticipation of rising inflation, which will continue hurting bond prices, and causing more volatility in stock prices.
At some point is it possible we see renewed talk of more QE? Maybe, although the bigger issue to us seems to be how best to contain potentially runaway inflation.
For those who like to study history, perhaps a review of the 1970’s and early 1980’s is apropos right now, as that was a period of high inflation, rising interest rates and slowing economic growth: “Stagflation” was the term used at the time and it was ugly in the stock market.