STOCKS TANK AS BIG TOP FORMS ON WALL STREET:

The market is forming a major top and unless we see another bullish monetary or fiscal bazooka show up – we are likely headed into a bear market in 2019. Stocks plunged last week after the major indices hit resistance near their declining 50 and 200 day moving average lines. The major indices opened sharply higher on Monday, then sold off, after briefly flirting with their respective 50 and 200 DMA lines. Stocks plunged for the rest of the week, erasing the big gains we saw after Jay Powell’s dovish speech on November 28, 2018. That is a BIG PARADIGM shift because the market stopped reacting blindly bullish (if that’s even a phrase) to the Fed. Remember, it is not the news that matters, but how the market reacts to the news. In a bull market, the reaction is overwhelmingly bullish and in a bear market, the reaction is overwhelmingly bearish. Meaning, in a bull market, the market rallies on both “bullish” and “bearish” news and, in a bear market, the opposite is true. For the last ten years, we have been steadily rallying and the reaction has almost always been bullish. For the first time in ages, that dynamic changed & that needs to be respected. Furthermore, the market is forming a big top as the major indices are forming bearish technical patterns – see here. If support holds, then we can rally from here. If support breaks, then odds favor we are heading into a bear market.

MONDAY-WEDNESDAY ACTION:

Stocks rallied sharply on Monday as they bounce from deeply oversold levels. General Motors said they will slash its salaried workforce by 15%, a more drastic cost-cutting plan than investors had expected. The stock was up nearly 5% on the news. Separately, oil and tech stocks rallied from deeply oversold conditions. On Tuesday, opened lower but reversed and turned positive after the White House said talks were being held on “all levels” between the US and China before Trump and Xi meet. Technically, the market is deeply oversold and is trying to bounce as it pauses to digest the recent (and steep) sell-off. Stocks rallied nicely on Wednesday as the “bounce” continued. The Fed came out in the morning and warned that a ‘particularly large’ plunge in market prices is possible if risks materialize. Later in the day, Fed Chairman, Jay Powell, gave a speech and said, the Fed is close to it’s target and will not be aggressively raising rates in the near future. That was enough to send stocks sharply higher.

THURSDAY & FRIDAY ACTION:

On Thursday, stocks plunged again as trade fears dominated the headlines. News broke on Wednesday that Huawei CFO Meng Wanzhou was arrested by Canadian authorities in Vancouver, where she faces extradition to the U.S. The big news is that the arrest happened on Dec. 1 which was the exact same day Trump and Xi met for dinner at the G-20. Huawei is one of the largest mobile phone makers in the world and Meng is the daughter of the founder and is well connected in China. Clearly, the arrest is a setback for the trade talks. In other news, the 10-year Treasury yield fell to 2.83% amid the recent stock sell-off. It was above 3% on Monday. Treasury yields are important to watch because the yield curve just inverted (and that usually happens before a recession). Stocks opened higher but turned lower on Friday as sellers showed up after the latest slightly weaker-than-expected jobs report was announced.

MARKET OUTLOOK: BIG TOP FORMING

Stocks are forming a big top as the major indices continue to go nowhere fast. Right now, the next big levels of support to watch are October’s low and then February’s low. Meanwhile, resistance is the 200 and 50 DMA lines & then 2018’s high. If support is breached, odds favor we are heading into a bear market.