Stocks Plunge: Is This Decline Different?

Two weeks ago we wrote that the NYSE Cumulative Advance Decline Line was warning that a significant decline in stocks was coming. Well, stocks plunged this week, especially Thursday and Friday.

Is this decline different? Is the multi-decade Jaws of Death pattern complete? Has the next Great Bear Market started? Let’s put it this way, while it could be a head fake, the precise conditions we see this weekend are what we would expect to see at the start of the coming Economic Ice Age. Stocks have essentially reached the upper boundary of their two decade Jaws of Death patterns, the Industrials topping at 16,588.25 on December 31^st, 2013 (which was a major Bradley model turn date by the way). The S&P 500 topped January 15^th at 1,850.84, one day from the 14^th anniversary of the major top in January 2000. A bit more rally would still be acceptable and pattern valid, but prices have topped close enough at this point to the Jaws of Death’s upper boundary to accept that this pattern could be finished. Same with Trannies and the Russell 2000. Prices kissed the upper boundary of the Jaws of Death pattern in those indices as well. Same with the Wilshire 5000. Same with Europe’s Stoxx 50.

The NASDAQ 100 has just reached the upper boundary of its Rising Bearish Wedge from 2009, so techs look like they have topped. Shorter term stock market patterns are also complete this weekend. If you look at the chart of the S&P 500, a Rising Bearish Wedge that started in early 2013 is now complete. A Rising Bearish Wedge from 2011 in Trannies has just completed. There is consistent confirmation after confirmation in multiple stock market indices that this important topping stock market pattern is finished.

Then if we consider the completion of a Rising Bearish Wedge in the Cumulative NYSE Advance/Decline Line shown, that tells us the internal condition of the stock market has peaked and next will be a huge deterioration in internal breadth. Further, let’s consider that because we have a valid five observation Hindenburg Omen on the clock from mid-December 2013, and that all the major stock market declines of the past 27 years took place with an H.O. on the clock, we need to sit up and take notice.

Then let’s consider the power behind this week’s decline. It was powerful. The Industrials lost almost 600 points, four consecutive losing sessions, each worse than before, and the S&P 500 had its worst week since June 2012. Yes, this decline is different than those we saw in 2013. Let’s examine Friday’s decline to get an idea of the power of this decline. Demand Power fell 9 points while Supply Pressure rose a whopping 19. This imbalance tells us normal market conditions were not present. Over half the buying was artificial, from deep pockets, attempting to keep order in a market that was dumping stocks with both hands. Sell orders were through the roof into the close. There was essentially a dearth of buyers. The market was one sided, selling everywhere. Friday was a panic selling 90 percent down day.

Now, as stocks are set up for a massive decline over the next several years, and the start of that decline may be upon us, we would expect to see Treasuries ready to rally hard. Well, we see just that. Bonds are set up to rally hard, which means intermediate and long term interest rates are headed much lower. U.S. Treasuries will see a flight to quality as stocks crumble. Gold looks to need one more decline of about 100 points or so, and then it is poised to rally hard for a long time. That again is what we would expect to see at the start of the next Great Bear market in stocks and economies.

Fundamentals are weak. Friday saw currency issues in emerging markets, saw a slowing economy in China, and the truth is the U.S. economy is not strong. New non-farm payroll jobs are not sufficient to even meet population growth. Housing is frozen (like the polar vortex weather we are experiencing). Global stock market crashes typically include Europe, are sometimes led by Europe, and the Stoxx 50 is topping.

This is a very dangerous set-up that we would expect to see as Grand Supercycle degree wave {IV} down begins. Could it be a fake out, and we get one more spike higher in stocks over the next few months before the next Bear Market really begins? Sure, but what I can say is what we saw this past week is exactly what we should see at the start of the next Great Depression. Conditions are set up perfectly.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.