As of Memorial Day weekend, we can assume no real net gain for the markets since October, writes Jeff Greenblatt.
I cover lots of markets and I am always on the lookout for any clues that could keep me one step ahead of the crowd. We have recently talked about interest rates. Thus far nothing new to report on that front. But one of these days the bond market is going to drop and when it does, rates will go higher and the world debt pyramid will shake. What ends up happening is everything is fine, until it isn’t.
Now we have a situation with the heating oil market. Wednesday was a day where crude oil took a right turn lower after it was locked in a consolidation for a good part of the month. But how many noticed that while crude was off the highs, heating oil still managed to pull off a fresh new high on the continuation chart just last Thursday? That ended and now manifesting its first technical violation of the uptrend. It has a very good Kairos reading. In the Fibonacci community, traders only look at the retracement levels. Against the September high it was a 63% retracement. What folks fail to do is realize the importance of the inverse ratio to the retracement which is 1.58. The continuation chart rolled over on Wednesday the May 22, so your prices might be a little different. The bottom line is with the prices prior to the rollover what we had (and probably still do) was an inverse ratio at 158 days off last year’s high. That’s called a retracement slash line square out because the numbers in the slash line square out with the time element (see chart below). I generally don’t care about it unless we get the reaction, and we are starting to get the reaction.
Why is this important? If HO breaks down from here, chances are high it will take the rest of the energy complex with it. If that happens it will impact oil stocks, which will ultimately hit the stock market. Tech has been weak during this latest bounce phase. The stock market really can’t afford to lose many more sectors. Think about something else, as we hit Memorial Day weekend this is the traditional peak of the driving season in the seasonality which is embedded in the energy complex. From this point forward, the bears have the wind at their back. Does that mean energy has to drop?
Absolutely not and we’ve seen years where the cycles go contrary to seasonal tendencies. But in an average year odds favor bearish action over bullish action.
Getting back to the stock market, a couple of weeks back when Powell stayed dovish and didn’t do anything with rates, the market’s first reaction was to sell. That meant the market had interest rates baked in the cake and was ready to move to the next issue. Within two trading days the market took the hit on Chinese trade drama week. Now President Xi has called for a ‘Long March’ which means they are digging in and neither side expects a trade deal anytime soon.
We’ve also discussed the Presidential cycle for the past seven months. The verdict is nearly in. As of Memorial Day weekend, we can assume no real net gain for the markets since October. Some charts are higher, others lower. What should’ve happened, in the words of coach Hank Stram in the famous gladiator movie of Super Bowl IV is for the boys to “matriculate the ball down the field.” For those of you too young to remember, just put it in the search engine.
As I’ve long told you, the bulls have only matriculated the ball halfway down the field and that doesn’t get the job done. Now we sit not only on the cusp of a Chinese tariff war, but an internal battle with House Democrats and if you don’t think what we witnessed today on television, go look at a chart of the Watergate era. The street is as complacent as ever and we enter a period at the end of May where bulls no longer have the wind at their back.
Then we have the potential of trouble from the energy sector. After China trade drama week, a series of calculations for the low did appear last Tuesday. But they are very mediocre and what we’ve seen is a very mediocre bounce. May has been very ordinary. It’s hard to say how soon markets could get hit. We have the potential of a grand top forming where the Dow as well as the Russell 2000 have not confirmed new highs elsewhere. The DAX/FTSE are a long way from their peaks. The theme here is even if markets don’t drop, expect them to get more challenging. Just because the first half of the year has been bullish, don’t fall into the trap of projecting the same on the second half.
