Last week, we were quite optimistic when we wrote that 4 out of 5 risk indicators were flashing green. Now, just one week later, we are extremely close to the point that almost all risk indicators are flashing red. Let’s revisit the indicators.
Risk indicator #1 is the intermarket dynamic between crude and stocks, and that one is stabilizing. We consider it neutral for the time being. Given the negative effect that crude has had on stock markets, a stable crude oil price should be positive for stocks, unless the remaining risk indicators are not supportive, and that is exactly what we observe right now.
The second risk indicator is price behavior in stocks. The S&P 500 has a mega-support area which has been tested 5 times. That support level has held, and, given so many successful tests. But last week’s rally stalled immediately, and turned into a sell off in a violent way.
We pulled up a 23 year chart of the S&P 500 to understand where we stand in the bigger scheme of things. Clearly, today’s price level around 1880 has a HUGE secular importance, as it connects several swing lows and highs over the last 2 decades, as seen with the red dotted line. Chances are high, given the current chart pattern, that the 1880 are will not hold, in which case the breakout point at 1650 will be the next support.
The Volatility Index is even not close to its support line, as it tends to mark significantly higher lows.
Our third risk indicator is the Japanese currency, known to be a safe haven asset. A rise in the Yen is mostly a reliable ‘risk off’ indicator. Last week, the Bank of Japan announced an interest rate cut, and pushed rates into negative territory, which resulted in the Yen to sell off heavily. But, almost immediately after, the Yen turned up again. It is now extremely close to test its 90 WMA, and that coincides with the moment the S&P 500 is about to test its huge secular support, which is no coincidence. This carries potentially very bad news for stocks.
Risk indicator #4 is the TED spread. Over the last two weeks, it retraced significantly from a huge resistance area. But over the last couple of days, it is moving again in the same direction. Again, that is a bearish signal.
Last but not least, Treasuries are confirming their breakout to all-time highs, as seen on the chart.
While a week ago 4 out of 5 risk indicators were bullish, they now turned bearish. These markets are violent, and we predicted that would happen in our 2016 Outlook Report when we said “volatility in the stock market is on the rise, and we expect sharp sell offs” followed by “this will be an adult market, not for the faint-hearted.” This market turns even faster than we expected, knowing that we were prepared for it.
This week is probably THE most important week of the year. And things do NOT look good at this point.