In the time since the U.S. “recovery” from the financial crisis began, it’s been difficult to be a bear on Wall St. In defiance of a bevy of indicators that the equities market was primed to lose its footing, stocks have basically been on a perpetual climb for eight years.
The long-awaited correction appeared to have arrived early in 2016, directly following the 0.25% interest-rate hike from the Federal Reserve in December. A brutal January saw the stock market shed about 10% of its value. Not surprisingly, this sparked a significant rally in gold prices as investors sought safer ground. However, Wall St rebounded swiftly and hasn’t looked back since.
Common sense—among other reasons—tells us that stocks can’t simply go up forever. If there’s a looming selloff of equities, look for the gold market to outperform once again.
Moreover, multiple signals are flashing that just such a selloff could occur in the near future.
This week was mostly a black eye for the U.S. stock market. As earnings season is upon us, equities saw a modest rebound from earlier losses, but the illusion of an interminable rally has perhaps been shattered.
The losses prompted HSBC chartist (i.e. technical analyst) Murray Gunn to warn that the losses and increases market volatility are a sign of things to come. He now believes there’s a “very high” possibility of a “severe fall in the stock market.” He cites rising bearish sentiment as one strong indicator that a wave of selling could be just over the horizon.
Risk factors such as the upcoming presidential election and an approaching referendum in Italy that could send the country’s vulnerable banking industry into turmoil are strangely being ignored. Earnings expectations remain optimistically high across Wall St—and, of course, there’s always the looming uncertainty regarding U.S. monetary policy.
Another signal from studying technical charts that is becoming an increasing concern is known as a “symmetrical triangle pattern” showing up in the S&P 500. In layman’s terms, this pattern shows a narrowing between the highs and lows of the index, eventually meeting at some point (like the “nose” of a triangle that points toward the right).
According to experts like Cornerstone Macro’s Carter Braxton Worth, this pattern typically leads to a sharp break in one direction or the other. While some believe this simply means the bellwether S&P is about to climb higher, Worth cites a number of prominent examples where the triangle pattern preceded a devastating selloff: both United Technologies (UTX) and Allergan PLC (AGN) saw downturns of greater than 25% in a matter of weeks after the “narrowing point” of the triangle.
It’s important to keep in mind that technical analyses are far from definitive, but they do offer valuable context and a precedent from which to base one’s expectations.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.