A Trading Veteran's Market Perspective

We finally got the “required” breaks in Amazon (AMZN) and Netflix (NFLX), not to mention the Tesla (TSLA) fantasy. Also of note are Disney (DIS) and General Electric (GE) - key members of the equity cult. The big buy back announcement from GE, that got the idiots all fired up, fizzled (back below the pre-announcement level) and the straight up, mindless pursuit of “momentum” in DIS, got the “attention” of the robots when it broke - not a healthy sign when one of the key components of “The Dow” gets slapped hard (this gets the attention of all the soccer moms and bartenders who recently “discovered” the stock market.)

The hype surrounding the 200-day moving average (MA) is another ominous signal. The 200-day MA is a time tested support when in a bull market. There will be anywhere from two to as many as four or five VERY QUICK tests of that support. However, what all these “newbies” don’t understand, is the fact that each “test” drains more and more firepower behind the bull move.

By the time the amateurs and financial press “discover” the “importance” of that 200-DAY MA, the uptrend is about to roll over and the 200-day MA is about to become a RESISTANCE point for a newly emerging downtrend. Right now, that “magic” support has been “tested” more than a half dozen times over just the past six weeks (not to mention a couple of quick, successful tests over the past few years), WITHOUT getting any bounce. Now it is flattening out, “advertising” a top formation that even robots can recognize.

For many months, fewer and fewer stocks have been able to sustain their uptrend and up to 50% of all the stocks in the equity universe have dropped at least 20% off their highs. The handful of “key” (big cap) stocks propping up the major indices, are slowly dropping out (see DIS). Fewer than a half dozen of the 30 “Dow” stocks remain in up trends (HD, NKE, V, MCD, TRV, etc.) and when the last “props” fall out, things will get ugly very fast. When “they” finally figured out AAPL, (broke 200-day MA and turned it down) that should have been enough to tip the sentiment from wildly bullish and “hopeful” over to “..something to worry about...”.

None of this evolving process is new. It happens at the end of ALL bull markets. Before the 1962 break, US Steel and Bethlehem Steel (X and BS) propped the market just before it broke. In 1972, Polaroid, Xerox, Eastman Kodak, etc. (PRD, XRX, EK) propped it up (a lot of those “glory stocks” made it to bankruptcy years later).

In the tech bubble of 1999-2000, Someone unloaded 40 million shares of CSCO only a few points off its all time high, never to see that price again. SO, now we should be set up for the next episode of “The Stock Market Story” - the back side. As it unfolds, the “horror stories” on the way down will be similar to stories seen in previous bear markets. Only the names will change.