A three-day bearish reversal this week confirms the bearish stance

The stock market has been in a bearish trend since early December. On Tuesday it broke the bearish trend line and rallied almost into the close for a very bullish move. But, the next two days pushed the price back under the bearish trend line. This is very bearish. The DOW lost 1.7% in December, the S&P 1.9%, and the Nasdaq Composite the most: 2.4%. The Nasdaq Composite is strongest on a longer-term basis: it’s still above both it’s medium and long term trend lines. But, it has also been in a bearish trend started in early December. The S&P and Dow are below their long-term trend lines.


Since 1995, central banks around the world have increased their balance sheets by ten times from $2.1T in 1995 to $21T today. Meanwhile, worldwide GDB increased by only four times! Combine this with zero (or even negative) short-term interest rates, and the era of almost “free” money has created an historic $185T of debt. This was used to build mountains of investments doomed to fail. Consider, for example, the junk bonds used to fund the fracking in western Texas and South Dakota. The crash of crude prices has caused immense problems for the fracking companies. Some have gone bankrupt and others have refinanced with other junk bonds. Meanwhile, western Texas, south Dakota and Saudi Arabia continue to pump lest they lose market share to their competitors. This will continue to push crude prices down further. The price will fall even faster the more the world sinks into recession. It is hard to imagine a recovery in the junk bonds any time soon.


My chart dividing cyclicals by consumer staples continues to show the defensive staples ahead. The stock market performs much better when the cyclicals are leading. The relative strength stock-sector table also shows widespread weakness. There were big losses in relative strength in the Technology Hardware (-4.2%), Apparel (-3.8), Chemical (-5.7%), Energy (-8.8%), Media (-4.7%), Building (-4.5%) and Transportation (-3.9%) sectors. The Real Estate Sector lost only 0.9% since December 1, but it has lost relative strength for eight of the last nine months and for six months straight.


Here’s the chart of the S&P 500.

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