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What's With the Stock Market?!

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Wednesday, July 29, 2015
Money and Markets
What's With the Stock Market?!
by Larry Edelson

Dear ,

Larry Edelson

Other than purchasing select stocks with very good fundamentals and chart patterns, for over a year now I have been warning you that a steep stock market correction was coming. So much so, that many are now calling me "a stopped clock."

That's fine. I can handle it. But the facts are these:

A. The Dow Jones Industrial Average is now down 1.5% since the first of the year and down 4.3% since its record high of 18,351.36 in mid-May.

Moreover, the Dow Industrials are now trading at the same level they were in November 2014. Meanwhile ...

B. The Dow Jones Transportation Average is down a sharp 11.28% since the first of the year and 13.29% since its high of 9,310.22 in late November 2014.

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That in itself is a very bearish sign for the Dow Industrials, for historically, it has trouble rallying — and often starts sliding — when the transports are doing poorly.

C. The Dow Utilities is down 10.27% since the first of the year and 14.37% since its high in late January.

True, the Nasdaq has hit new highs this year and the broad S&P 500 Index has also. But that's deceiving.

In the Nasdaq and on both the AMEX and NYSE (where most S&P 500 stocks are traded), since the start of the year, far more stocks have been declining than advancing.

You can see the trends on these three charts here, each one showing that the number of advancing stocks minus the number declining is getting smaller and smaller.

Click here for larger image

Healthy markets? No. When taken together all of the above are signs that tell me a sharp, severe pullback is still in the offing.

And those are just some of the internal weaknesses in the broad equity markets. There are many more bearish signs, including record investor complacency, declining volume, pressures from the stronger U.S. dollar, cyclical forces and more.

So how low could stocks go? How bad could a correction be? No one can tell you with 100% accuracy, but here's what my work tells me:

Click here for larger image

A. The Dow Industrials has weekly support at 15,672 and 14,395. Worst case I see the Dow falling no lower than long-term support at the 13,938 level. Yes, it could get that nasty.

B. In the S&P 500, major support lies at 2,025 and 1,893.50. Worst case I see it falling no lower than long-term support at the 1,709.75 level.

C. The NASDAQ has support at 4,380 and 3,756, which would be a worst-case scenario.

So I maintain my views:

Click here for larger image

A. The long-term bull market in stocks is still in play, and the Dow will explode higher to over 31,000 over the next two to three years. The S&P 500 and Nasdaq will lag but still experience terrific gains.

But ...

B. There will be no further gains in any of the major averages until a very sharp, sudden correction occurs, one that causes the majority of investors to panic.

The line in the sand on the upside remains Dow Industrials 18,500.

Keep in mind that any pullback though, as sharp as it may become, will merely be a healthy correction, one that will actually serve to re-energize the markets by forcing die-hard bulls to sell, thereby giving the market new buyers once the correction plays itself out.

My suggestion remains the same: If you have equity positions you cannot or do not want to exit, for whatever reason, consider hedging those positions via an inverse ETF such as:

 ProShares Short S&P 500 (SH)

 The two times leveraged ProShares UltraShort S&P 500 (SDS)

 ProShares Short Russell 2000 (RWM)

 For small caps, Direxion Daily Small Cap Bear 3X Shares (TZA)

 For tech stocks, ProShares UltraShort QQQ (QID)

What can one expect after a correction?

My answer: Europe's equity markets will not recover and instead enter the realm of longer-term bear markets, while most Asian equity markets — excluding Japan — will soar higher again with U.S. markets.

As I have said all along, don't get caught up in economic stats, earnings reports, or the like to understand how markets are going to be moving from here on out.

Why? It's simple: The world is entering a major sovereign debt crisis and that's going to turn many markets inside out and upside down.

Everything you thought you knew about economics, about markets, about relationships between asset classes — will change right before your very eyes.

Best wishes and stay safe,


The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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