The Dow, S&P and Nasdaq Composite have all mirrored each other by dropping this week and bouncing off their bullish trend lines on Thursday. The essence of their wedge patterns is that the highs are not keeping pace with the lows. This shows an overall lack of demand but enough support to prevent a powerful drop.
The stock market has historically moved up and down with the economy. But recently, it has been moving higher when the economy is bad (e.g., 94 million adults out of the workforce, bloated inventories of 1.35 inventories / sales). Take the 4th quarter GDP growth of only 1.9%. A big component of that growth was energy as crude oil moved up from a low of 45 in mid November to 55 on December 30. But crude oil stock piles are now at an historic high while production of crude has been increasing. Crude has crashed as a result, falling from 53 to 48.5 in just the last three days. I predict that this will hurt first quarter GDP.
My overall graph dividing cyclicals by consumer staples has been falling precipitously since early December. The stock market grows when it’s the opposite with cyclicals ahead of consumer staples. The Auto Sector fell almost 4% in February and has already fallen 0.7% since March 1. The Basic Materials sector (i.e., mostly mining stocks) sank 2.7% in February and an astonishing 7.8% since March 1. The only sustained strength is in the Building Sector that’s gained for three straight months. But how much can that continue with the Real Estate Sector sinking 2.7% since March 1?
Here’s the chart of the S&P 500 with my lines showing the wedge pattern: