Stock market crash looming over?
Updated
Last week, the FED meeting resulted in no rate hike. However, Jerome Powell reiterated the central bank’s commitment to fight inflation, with dot plots showing the possibility of one more rate hike this year and interest rates staying elevated for at least another two years. That is no surprise to us as we have been warning for months about interest rates going higher and staying there. In addition to that, since late last year, we have been warning about the most deceitful bear market rally in cryptocurrencies and stocks as well.
Since then, we have seen a very uneven recovery, with the major indices like SPX and Nasdaq being propelled higher by a handful of companies while Russell and small caps were staying far behind in the recovery process. Furthermore, earlier this year, a big case was made out of the Chinese reopening of the economy after the Covid-19 pandemic. Back then, we remarked how much would depend on the performance of the Chinese economy and that its slowdown could inadvertently endanger the U.S. stock market and bring recession to the West. Then, in August 2023, we issued another warning about the Chinese stock market rolling over, signaling trouble for the U.S. markets.
Fast forward to today, and we have seen a failure of the Chinese indices to advance higher despite attempts by regulators to calm down the market, and in the U.S., personal savings declined, credit use soared and inflation reaccelerated. Furthermore, commercial bank deposits resumed a decline, and delinquencies on credit card loans started to soar rapidly. As for the narrative in the media, the widely accepted opinion is still that the U.S. economy is headed for a soft landing. But, we remain very skeptical about the FED’s ability to deliver one. In our view, many signs point to the more harsh scenario, with the environment increasingly favoring a significant market selloff.
Illustration 1.01
Illustration 1.01 shows the chart of the delinquency rate on credit card loans, which doubled in the last year and a half.
Illustration 1.02
The picture above displays the daily chart of SPX. The yellow arrow indicates a bearish breakout, which marked a new low for the index since 27th July 2023.
Technical analysis gauge
Daily time frame = Bearish
Weekly time frame = Bearish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Since then, we have seen a very uneven recovery, with the major indices like SPX and Nasdaq being propelled higher by a handful of companies while Russell and small caps were staying far behind in the recovery process. Furthermore, earlier this year, a big case was made out of the Chinese reopening of the economy after the Covid-19 pandemic. Back then, we remarked how much would depend on the performance of the Chinese economy and that its slowdown could inadvertently endanger the U.S. stock market and bring recession to the West. Then, in August 2023, we issued another warning about the Chinese stock market rolling over, signaling trouble for the U.S. markets.
Fast forward to today, and we have seen a failure of the Chinese indices to advance higher despite attempts by regulators to calm down the market, and in the U.S., personal savings declined, credit use soared and inflation reaccelerated. Furthermore, commercial bank deposits resumed a decline, and delinquencies on credit card loans started to soar rapidly. As for the narrative in the media, the widely accepted opinion is still that the U.S. economy is headed for a soft landing. But, we remain very skeptical about the FED’s ability to deliver one. In our view, many signs point to the more harsh scenario, with the environment increasingly favoring a significant market selloff.
Illustration 1.01
Illustration 1.01 shows the chart of the delinquency rate on credit card loans, which doubled in the last year and a half.
Illustration 1.02
The picture above displays the daily chart of SPX. The yellow arrow indicates a bearish breakout, which marked a new low for the index since 27th July 2023.
Technical analysis gauge
Daily time frame = Bearish
Weekly time frame = Bearish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Note
Since the start of summer 2023, each dip in VIX below the level that preceded the 2020 crash was followed by an explosion in VIX. This continues to be the case also this time. If VIX puts in a new high, it will be very bearish for the market, further increasing the chances of the current weakness transposing into the market crash. Illustration 1.03
The picture above shows the daily chart of VIX. The yellow arrows indicate dips below the critical level.
Note
VIX posted a new high, further worsening the situation.
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