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A serious warning sign for investors

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By Dr. Richard Smith, Founder, TradeStops:

It’s been three months since the stock market was rocked in early February with downward moves of close to 10%. The February drop represented an explosion of volatility.

For all of 2017, the major market indices had been their least volatile in decades. One of the most profitable trades of 2017 was being “short” volatility through the purchase of inverse VIX ETFs.

(Don’t feel bad about missing the short volatility trade. It completely “blew up” in February with multiple ETFs completely wiped out.)

February’s volatility sea-change was jarring to longtime market participants. Jack Bogle, the founder of Vanguard and a leading advocate of passive investing, said this in the weeks that followed:

“I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right; I’ve seen two 50% declines, I’ve seen a 25% decline in one day and I’ve never seen anything like this before.”

Since February’s big jump in volatility, things have calmed down a little. The Dow and the S&P have not seen as many wild swings and two percent range days.

But that doesn’t tell the whole story. The averages are now breaking down internally.

As of this past Wednesday, our new Ideas by TradeSmith indicators showed that more than 40% of the stocks in each of the major averages are currently in the Stock State Indicator (SSI) Red Zone.

We showed you in this article how dangerous the markets become when more than 40% of the stocks are in the Red Zone. Here are the current numbers:

  • S&P 500 – 43% in SSI Red Zone
  • S&P 400 Midcap – 44% in SSI Red Zone
  • S&P 600 Small cap – 45% in SSI Red Zone
  • Nasdaq 100 – 46% in SSI Red Zone
  • DJIA – 60% in SSI Red Zone (18 out of 30 stocks are stopped out!)

In the past six weeks alone, the Nasdaq 100 has seen 15% of its stocks move into the SSI Red Zone, yet the index is essentially the same as it was in the third week of March.

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How can that be? What is keeping the Nasdaq 100 afloat when almost half of the stocks are in the SSI Red Zone?

Just three stocks are doing the heavy lifting: Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT).

These three stocks make up more than 30% of the Nasdaq 100 Index. And these three stocks have done quite well, highlighted by blowout earnings from AMZN and AAPL. They all remain in the SSI Green Zone.

The Nasdaq is still benefiting from a halo of good earnings news in regard to the FANG companies. Google’s earnings were also excellent, and Facebook eased investor fears with its continued ability to book profits in spite of the Cambridge Analytica scandal.

Then too, Apple got a boost on reports of more aggressive buying from Warren Buffett. Berkshire Hathaway reportedly bought an incredible 75 million Apple shares in the first quarter.

But the good news from FANG stocks is mostly in the rearview mirror now, and arguably “priced in” to current stock valuations. So, what happens if even one of these stocks begins to stumble? It could result in the swift downturn we warned you about here.

With so much optimism already baked into FANG shares, there’s a chance that selling pressure in other areas of the market could catch up to them. And that selling pressure is being increased by a strengthening U.S. dollar.

One of the indicators we follow is the relationship between the S&P 500 and the U.S. Dollar. Historically, they are negatively correlated. This means they have an inverse relationship.

The dollar index bottomed at the same time the S&P 500 made its all-time high, as you can see via the chart below. Since then, the dollar has been rising, and the market is falling. The inverse relationship remains intact.

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Our proprietary time-cycle forecasts suggest the dollar’s move higher should continue into the summer and fall. This would be a negative for stocks, both in terms of historical correlations and the impact on corporate profits in the S&P 500.

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Companies in the S&P 500 earn close to half their revenue from overseas. When the dollar strengthens, U.S. exports become more expensive and thus less competitive, while overseas earnings booked in foreign currency become less valuable.

At the same time, the time-cycle forecast for the S&P 500 is bearish over a comparable time window. These forecasts (for a stronger dollar and a weaker S&P) thus reinforce each other… in a bearish direction for stocks.

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Here is the takeaway: Rising volatility plus market weakness plus bearish time-cycle forecasts – not to mention the negative U.S. dollar correlation and the impact of a “sell in May” period of historical weakness for equities, which runs from May to October – all combine for a serious warning sign that investors should heed.

With the major U.S. indexes showing more than 40% of their stocks stopped out, you too may have had a large percentage of your stocks hit their SSI Stops. You should already have a risk management plan in place. If not, don’t delay!

I’ve been stopped out of some of my positions and am happy to be holding more cash given these current market conditions.

These are challenging times for investors, no doubt. Please note, however, that I’m not saying that it’s time to dig up your buried gold and run for the hills. It’s just a time to be more vigilant, defensive, and selective.

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Richard Smith

Crux note: If you want to hear more from Richard, as well as a (practically guaranteed) lively debate from Porter Stansberry and Steve Sjuggerud on the final investment you need to make in this bull market – click hereYou don’t want to miss the live event on May 10…


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Stocks

Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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