August Top Full of Fire and Fury
As the North Korean threats continue escalating, the US has sent a colloquial response “full of fire and fury the world has never seen” that signaled institutions to take some stock market profits. Some bullies will say anything for attention on the school playground. Bullies seeking importance by announcing preparations to attack with nuclear missiles minutes from the US mainland can quickly move beyond the limits of civil discourse. The new tit for tat between Kim Jung-un and Trump was enough to spoil another record breaking day in the stock market and send investors scurrying for the exits. However, in the big picture prices only fell 1% and half of that has already been recovered, setting the table for another run to new highs.
In June we presented the chart below as our likely outline of the price action to come with the possible culmination of a stock market peak in August.
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The price action traced out our outline as precisely as one could expect as the projected twin lows in late June and early July caught the time and price for The Lows in stocks prior to our forecasted earnings season kick-off to the upside. The only element we adjusted in early July was the top end of the red box where we thought the summer highs would occur closer to 2500 S&P. With an ideal top due next week (+ or – one week), it’s time to revisit this forecast and consider what’s next.
The bull market in stocks is one for the history books having persisted over 8 years with 274% returns and counting. Additional amazement that has kept many investors on the sidelines has been the lack of corrections to purchase stocks since Trump was elected. Without more than a 3% correction since November, spectating investors quickly shout sell with every dip, hoping for that elusive 10%+ haircut to start buying stocks below perceived nosebleed levels. When traders become nervous they buy put options. The surge in option related pessimism shown here curtails our fear of an imminent top and serious correction just yet. If pessimism is rising while the Dow hits 9 straight record highs in a row, imagine how fast negative sentiment will build if prices actually fall a few percent.
How can stocks be half of one percent from a record high with increasingly oversold sentiment? Anecdotally we are hearing a few analysts looking for an August top and a correction into the well known seasonally weak September – October time frame. We enjoy positioning opposite the emotional crowd and in this case there are growing signs that the Bear camp is too large or the Bull campfire is too complacent. Until the low on July 27th at 2460 basis cash S&P 500 Index is broken, we would allow for prices to move beyond our original time and price window for an August peak. Inverse SP ETF’s can be used for hedging if prices breach this support that would target a correction to 2400 area basis the cash S&P 500 Index as the next support. Continued under performance by tech behemoths Google and Amazon are also micro-technical indicators for market direction to watch.
A news triggered market correction (North Korea) or exogenous flash crash can certainly occur at any time, but we would be patient with long positions before selling stock in anticipation of an Autumn tumult or recession (using 2460 SP as a pivot). Long term we base this bull market in stocks upon the bull market in the economy. Corporate profits are moving up, banks maintain easy credit with the GDP, inflation and interest rates at very low levels. Recessions historically arise from economic overheating and tightening credit, which after 8 years remain surprisingly elusive.
About Kurt Kallaus
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