Bull market headwinds

With the market only 2.6% off the all-time highs various indices, indicators, and the OEW count itself is suggesting the bull market is losing upside momentum. The most troubling of the indices is the Transports.

With the recent downtrend confirmation in the Transports we can now count a completed nine waves up from the 2016 low. This is simply five waves up with a subdividing third wave. Over the past 50-years whenever the Transports have topped a significant correction in the SPX has eventually followed. One was a minor 10% (1994), two others were a bit larger 15% (1984 and 2016), but most have eventually led to bear markets in the SPX. Typically, the lead time between a Transport top and a SPX top is several months. In 2015 the lead time was six months.

The next troubling index is the NYSE. It recently confirmed a downtrend, suggesting it has completed seven waves up from the 2016 low, with also a subdividing third wave. This implies, after this downtrend concludes it too will complete nine waves up during its next uptrend to new highs. Notice, both of these counts support the popular long-term Primary V scenario.

The DOW is currently in a similar position for this bull market, but it has yet to confirm a medium-term downtrend. When it does it will have completed seven waves up from the 2016 low, like the NYSE, and will also require one more uptrend to new highs to complete the nine-wave pattern.

Elsewhere the DJ World index looks similar to the DOW, and the DAX looks similar to the NYSE.

On the technical side. The SPX made a momentum peak in Q1 2017 at 2400, and upside momentum has been waning during the last 90-point rise. You can see the peak in the weekly RSI and MACD. Declining momentum can trigger a large selloff like 2011, or wane for months and months on end. It is a warning. When added to near completed five wave patterns it is its most effective warning, i.e. 2011.

Normally when these wave patterns begin to complete there are some fundamental factors at work. In 2007 the CDO’s were unwinding. In 2011 the European debt crisis. In 2015 the end of QE, and the first rate increase. In 2017, the stalled GOP/Trump economic agenda? When one adds the fact that the economy has not experienced a recession since 2009, one has to think one is long overdue. Especially with the FED planning on gradually reducing their balance sheet soon. The gradual balance sheet increase gave us the 2009-2015 bull market. Will the unwinding of that balance sheet give us a recession and a bear market? The market has risen 38% since the 2016 low, but it looks like it is time to get somewhat cautious in the weeks and months ahead. Best to your investing!