Decline, Deterioration, and Bear Warnings

Written by Dennis Slothower
Posted June 3, 2017

Trump Rejects Climate Pact

The stock market responded favorably to the President’s announcement that the United States will be pulling out of the Paris Climate Pact that benefits countries like China and India at the expense of the U.S.

Whether you agree or disagree with the President’s decision, the financial markets liked the news. Under the terms of the deal, the earliest the U.S. can formally extricate itself from the accord is November 4, 2020 (the next presidential election day). So, in a manner of speaking, the actual decision will be made at the next Presidential election.

The stock market also liked the news coming from private jobs. The ADP Employment Report improved to 253K in May from 174K in April, encouraging investors that perhaps Friday’s jobs report might be a strong one too. Usually, jobs improve this time of the year with the growing season but the markets believe the President is taking constructive steps to improve job creation.

Economic Data in Decline As Banks Pump Stocks Again

While financial institutions pumped the stock market today on this climate rejection news, typical of the market going into what might be a favorable jobs report, overarching our stretched market is the Fed’s continuing tightening of the monetary policy with the probability of a rate hike now climbing to 91% in the June FOMC meeting.

The three rate hikes we’ve had up to this point are affecting the economy.

Today’s “Construction Spending Report” produced a big disappointment, as total spending declined 1.4%, verses expectations of a +0.5% increase. Seasonally, construction should be picking up with warmer weather but higher interest rates are affecting construction.

This certainly will undercut the GDP for the second quarter.

This is also related to yesterday’s “Pending Home Sales” which came in at -1.3% from the previous month at -0.9%. Rising interest rates do matter.

Another clue of financial stress building is the $1 trillion owed on credit cards and the growing delinquencies in spite of full employment.

70601-Credit-card-delinquency

Delinquencies are rapidly climbing even though the initial jobless claims continue to fall. This is a revealing chart because it illustrates that more and more Americans aren’t making it on their part-time jobs, especially as health insurance premiums rise.

Technically, the big-cap technology stocks continue to lead the indexes higher and are incredibly stretched or disconnected to their mean averages, dangerously so.

At the same time we continue to see more deterioration in market breadth.

70601-SPX-vs-SPOver200

While the President is having success pissing off the socialists and the UN working to undo President Obama’s legacy, the Federal Reserve, who is committed to further tightening, is all together another issue.

Technical Topping Amid Crushing Commodity Declines

The jittery markets seen this week are mostly a byproduct of equity prices reaching the top of several trading channels where corrections normally occur. In addition, traders are suddenly spooked by the crushing declines in the energy commodities at a time of the year when driving demand accelerates and oil/gas prices usually spike. This divergence is real and should give all market investors concern that upside potential may no longer exist for the broader markets as well:

70531-crude-oil

As you can see, a death cross signal has occurred for crude oil, where the current prices are below both the 50-day moving average and the 200-day moving average and where the 50MA has just crossed below the 200MA. This is the beginning of a bear market for crude oil. And as crude oil goes, the rest of the equity market typically follows.

To see this decline in even greater clarity and across a broader energy market, take a look at the leveraged energy fund XLE:

70531-energy-XLE

XLE was near $78 in early December, when the Feds began their tightening policies with a rate hike. Today it finished at just over $65 — an astounding 17% decline occurring at the same time larger-cap indexes have recently reached new record highs. This is a topping pattern warning!

With such a massive decline in the most significant and relevant commodity for the equity market combined with near-100% assurance that the Federal Reserve will once again hike interest rates in their June FOMC meeting, it is no wonder that prices are reversing at what we might call “peak equity” — it may finally be downhill for equities from here. We have been expecting it for some time now.

Meanwhile, crude oil July futures fell 37 cents to close at $47.95.

Financials Edge Toward Major Bear Market Pattern

Another market sector is signaling that a “top” may be in and it is an important leading sector... the financials.

The financial sector has been under pressure for some time now, particularly because of the huge sub-prime / derivative exposure by Deutsche Bank investments. Nearly all major banks, especially U.S. Banks, are exposed far more than most of the U.S. public realizes or that the banking cartel is willing to reveal.

70531-Fin-HeadShoulders

This is a serious bear market head-and-shoulders pattern that is about to be “confirmed” when prices drift below the neckline (dashed black line), which is only 1% away from today’s close.

This is an especially sensitive development because today several industry leaders offered caution on financial market trends and fairly alarming conditions at a conference sponsored by Deutsche Bank, called the Deutsche Bank Financial Services Conference. Some of the most notable concerns surrounding the industry include slowing loan growth, rising delinquencies for sub-prime auto loans, and a recent flattening of the yield curve.

A strong downward movement in the financial sector combined with the strong downward movement in the commodities sectors will make it very difficult for the broader equity market to remain viable — in spite of the heavy cash flow rotation into the five largest capitalized companies, which alone have held the major market indexes afloat.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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