|After dropping off a cliff the Dow has moved sideways for the past five months. Today it closed below the 200-day Moving Average for the first time in 501 days. A phenomenal run to be sure. But what now?|
So it goes with the current correction in the Dow Jones Industrial Average. Although the S&P 500 tested its 200-day moving average over two months ago, only today has the Dow closed below the average for the first time since June 27, 2016 - the third longest bullish streak above the average ever. The strength of this market has been breaking down since early February and I blogged about it at the time.
Since then I have been watching the Dow on a daily basis. Among the many things that could be noted about the recent market activity is the fact that the Dow formed a symmetrical triangle throughout February and most of March. Out of that formation the Dow broke down into decreasing highs and lows until a recent, modest uptick in May and the first half of June.
Overall, during this time, the Dow touched the 200-day MA on April 2 and again on May 3, but recovered each day. In Dow Theory the intra-day action is not as fundamentally important as the open and the close of the day. Today it ended the day below the average. What could this mean?
This might be bearish but it is also healthy. The markets were WAY out of whack with the "Trump rally" which basically lasted from election day 2016 through late-January 2018, an incredible though historically unsustainable run. As I posted before, markets do not typically behave either bullishly or bearishly in such an "uncorrected" fashion.
I also noted that the further the Dow strays either above or below the 200-day MA, the sharper the snapback toward the average. The initial stage of this correction was extremely sharp before it gave way to a sideways, range-bound condition. This condition should most likely be read as the bull working through the overbought condition that existed in January. The fact is the market did not break down completely. Rather, the 200-day MA moved up to where the market was holding. That actually could be seen as a sign of strength.
Either way, closing below the 200-day MA is a sign that the "radicalized" nature of the markets has probably (finally) run its course. If this bull market continues, it will do so with traditionally normalized returns, not the ridiculous action of 2017. So that is healthy to the extent that it is more sustainable.
In reality no president has nearly as much sway over the stock markets as Donald Trump typically and narcissistically ascribed to himself before the correction. (The Federal Reserve has more impact.) Recently, Trump again made the unlikely claim that the markets could be up as much as 60% before the end of the year. He has called the current US economy "the strongest ever" (which is classic fake news). This only reflects how desperate Trump is to "win" the economic issue. His brash, unfounded statements also reveal his completely self-centered blindness to the reality of the world economy that trivializes the US presidency. No reasonable president has ever done what Trump has repeatedly done - tie the success of his term in office to stock market performance. More simply put, tax cuts and deregulation alone do not a bull market make. The world is more complicated than that Donald.
But, I digress. The point is the Dow is now (finally) testing the support of the 200-day MA after today's negative action, breaking a historically extended winning streak. Is this just an understandable and even predictable healthy technical adjustment in a continuing bull market? Is this the confirmation of the beginning of a bear market? No one knows.
On the one hand, the US economy remains strong and corporate profits should reflect this. On other hand, we have potential trouble with inflation, tariffs, interest rates, and other uncertainty. On one hand, The Motley Fool lists 7 reasons the markets will continue to go up. On the other hand, Investopedia states that we should all be worried about the coming recession. As a better president, Harry Truman, once quipped in response to the "on the one hand, on the other hand" economic analysis: "Give me a one-handed economist."
It is not pessimistic to contend this bull market is long in the tooth. We have experienced nine years of strong growth (though some believe this current bull market began in early 2016). This chart on the history of bull and bear markets since 1926 shows that, while the current bull is robust, it still isn't as strong as previous bullish streaks. CNBC would disagree with that analysis, however. According to its research this is the strongest bull market in modern times.
Nevertheless, like bear markets, bullish ones have an expiration date. Former Federal Reserve Chairman Ben Bernanke recently labeled the Trump economy as the "Wile E. Coyote economy", destined to go "over the cliff" in the foreseeable future. Seeking Alpha reported that four factors were coming together to form the next American recession. According to the conservative Financial Times, Trump's tariffs endanger the entire global economy. Trump just belches that we "ain't seen nothing yet." I bet that's true, but perhaps not as Trump intends
Even if it isn't the strongest economy ever, the present US economy has not been this robust in many years. Warren Buffett is definitely optimistic about the near future of the economy. His advice is to ignore all the noise about buying and selling and simply keep leveraging into the market. So there is a reasonable argument for future gains. Looked at from his perspective, today's action might setup an excellent buying opportunity.
So, from the perspective of technical analysis, I will now watch the RSI, MACD, and Slow Stochastics indicators for guidance. As of the close of business today the MACD is only beginning to enter "oversold" territory. The RSI is not confirming anything yet (it is within the mid-range of its scale), while the Stochastics is mildly oversold. This is not a definitive technical situation. If the RSI and the MACD continue downward for the next couple of days then it will be time to make a judgment call as to whether the oversold condition constitutes a buying opportunity or advises to remain cash heavy.
Today's Dow event does not constitute either a buying or selling opportunity. Rather, the action of the next few days or weeks will reveal that. The 200-day MA is rising and will continue to rise in the near future. It will take a series of negative days to flatten it out and/or send it downward. For now, this remains another indication of underlying strength.
The stock market reacts to short-term news but is generally a leading indicator, not a lagging one. My guess is that in February the markets began the process of discounting a coming recession brought on by poor economic decisions (new tariffs, debt inducing tax cuts) and healthy economic fluctuations (a return to historically viable interest rates and more limited liquidity), a pattern that will remain until this correction has fully expressed itself. In other words, the time to expand stock positions lies somewhere in the future.
We can only hope that this correction will take the edge off of middle America's cultish acceptance of the trainwreck that is Donald Trump. He and his party deserve their fair share of credit for this state of things, just as they so eagerly accepted full credit when the good times were rolling before. As in so many other ways, Trump has demanded enough rope to hang himself, even if he really has almost no control over what is happening at all.
Ironically, today, for the first time, a majority of Americans say they approve of the way Trump is handling the economy. Unlike the wisdom of the stock markets which is a leading indicator, public opinion is almost always a lagging indicator of the state of things. Trump's popularity is up because the economy was on fire, not because his policies can perpetuate such growth - they can't.
Is the American majority justified with its appraisal? Who is more correct, Warren Buffett or Ben Bernanke? No one knows but one of the Dow's longest streaks above the 200-day MA ended today, after 501 days. It could be a sign of a return to healthy market conditions within a robust economy (in which case we should all invest more) - or it could be a sell signal for a coming recession (in which case its time to divest). There is more uncertainty than clarity. Trump took a lot of credit for this bull market (which began in 2009). He should now carry the burden of the past half-year (so far) of correction as we await further developments.