Warning Signs in Banks, FANGs and VIX

05/17/2017 2:50 am EST


Alan Newman

Founder, Crosscurrents Publications, LLC

If there’s anything we have learned in 53 years of observation, markets always, always, always go too far when emotions take over, cautions market timing specialist Alan Newman, editor of CrossCurrents.

A decline to the mean (measured back to 1880, a mere 137 years ago) would take prices down 42.8%. At this juncture, there is every reason now to believe stocks will repeat their 2000-2002 and 2007-2009 performances by collapsing 50%.

Randall Forsyth’s recent piece in the Barron’s had a few interesting facts about the so-called FAANG stocks, including Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOG, GOOGL), noting “these five had accounted for a disproportionate share of this year’s gains in the Standard & Poor’s 500 index.”

Mr. Forsyth further commented that the five issues accounted for nearly a third of the S&P 500’s total return through April 24th. However, a collective P/E multiple of 92.3 strongly suggests this popular group’s personal bull market is now quite long in the tooth.

We’ve been looking for months for something we could treat as a dead giveaway that Amazon is ready to reverse big time.

Maybe we’ve found it — again. The Chaikin Money Flow indicator has worked quite well in the visible past and the indicator just fell below the zero line. Caveat: we’d still expect some consolidation before any big reversal.

Over the course of the last 365 days, Amazon has gained a bit more than $166 billion in market cap. Yes, we said billion. At its recent high, the company was worth just under $454 billion, close to Belgium’s GDP, 25th largest in the world.

Meanwhile, the more we look at the largest bank stocks, the more this market resembles 2007. The dangers, of course, are derivative portfolios, such as those that imploded so dramatically less than a decade ago.

While we do not yet see the “canaries in the coal mine,” like Bear Stearns & Lehman in the last fiasco, the charts indicate the odds for a derivative event are rapidly rising.

A series of lower lows such as what we see below is always troubling. Not only is the chart of Goldman Sachs (GS) accompanied by the same negative bent for the CMF indicator, it is also confirmed by On Balance Volume.

GS is arguably the worst looking chart of all the major banks. The succession of lower high since March 2nd confirms the intermediate bear trend.

The VIX (Volatility Index) above 12.01 will be the first clue the downside is underway; above 13.46 would be a confirmation. For now, we need another downside test. For the S&P 500 at at 2322 and the Dow at 20,379 are very important support. If— a very big if — acceleration takes hold, watch out below.

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