Stock-market bulls are ‘playing with fire,’ says financial blogger
Are Wall Street optimists pyromaniacs? At least one financial blogger thinks the bulls are engaged in a dangerous game that could get them scorched, as U.S. stock markets continue to flirt with all-time highs.
Sven Henrich, a financial blogger at Northman Trader, says investors are chasing U.S. equities, like the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index which have been streaking, in fits and starts, to fresh heights.
Henrich, in a blog post titled “Playing With Fire,” cautions that a peak may be at hand and that the subsequent unraveling, when and if it comes, could leave yield-hungry investors swirling in a world of hurt. Why is Henrich so unnerved, with a plodding race to the top for markets presumably lining investors’ pockets? He cites, in part, distortions created by central banks, which arguably have buoyed the market’s enthusiasm on the way up, but may slowly be unwinding accommodative policies, at least in the U.S., to the peril of some.
|As I’ve said earlier this year tops are processes and they take time and this here is no exception. But so far the only surprises have been the unprecedented levels of central bank intervention and the resulting low levels of volatility. But people chasing into overpriced stocks in the hopes of even grander returns? That’s standard fare in any topping process. And invariably when you play with fire you risk getting burned.|
The blogger and market technician says a move for the S&P 500 above 2,450 — which it hit Monday, and briefly touched on Tuesday — may prove a top and provide a selling opportunity:
|We consider any $SPX moves above 2450 (as yesterday) to be a selling opportunity setting up for a sizable technical correction and volatility spike. That initial spike may well be a fade for a trade, but we’ll cross that bridge when we come to it.|
Check out the chart below:
Beyond the technical call, Henrich touches on a point that continues to befuddle investors: The tendency of stocks to rally while other measures of economic health are sounding bearish alarms.
Indeed, bond prices and stock values have been moving mostly in the same direction — a relatively strange phenomenon. That’s because Treasury prices, which move inversely to yields, tend to climb when investors are at their most cautious, fretting about growth and mounting risk, while equities rally on economic optimism.
Government-bond yields have been stubbornly low despite a Federal Reserve that has stridently championed higher rates, and sluggish inflationary signals that have given some market-watchers pause.
June 21, 2017
Northman Trader’s Sven Henrich says bulls are playing with fire right now as the S&P 500 inches toward what he calls the “danger zone,” of 2,450 to 2,500. He says be ready to sell if stocks near that level:
Henrich says the market is setting itself up for a “recessionary move” into 2018/2019. He adds that if banks “lose control of the liquidity house of cards they have built all around us,” investors could be staring at a “generational selling opportunity.”
Of course this won’t all happen overnight, as a market top is a slow process. ”But people chasing into overpriced stocks in the hopes of even grander returns? That’s standard fare in any topping process. And invariably when you play with fire you risk getting burned,” he says.
Read the full post here.
May 9, 2017
Stocks stuck in ‘captive market’ & a pullback is ahead: Northman Trader
Henrich’s second source of worry lies with the fact that fewer and fewer stocks are participating in the rally. According to Henrich, the ratio between the S&P 500 equal-weighted ETF (RSP) and the S&P 500-tracking (SPY) has flattened while the SPY rises, which he takes as a sign that fewer stocks are driving the rally.
“From our perspective, as we move higher in price, it provides an opportunity to sell this market, especially with volatility being so low,” said Henrich.
Chart following appearance:
April 3, 2017
Northman Trader sees red flags in the market
Sven Henrich, Northman Trader, explains why he is seeing signs of a correction.
CNBC Fast Money appearance discussing specific technical signals in the Nasdaq, small caps & the volatility index:
Update: April 14, 2017
The Nasdaq has declined for several days in a row since the discussion of the technical signals
Following the appearance I expanded on the analysis in Beast Mode.
This bull market’s final wave: Get ready to move from ‘buy the dip’ to ‘sell the rip’
Vast technical disconnects. Structurally high debt loads. A huge sentiment shift. Valuations bursting well above the mean. Perhaps that’s all a bit wonky, but you don’t need to be a market technician to get the sense Sven Henrich is feeling bearish about things.
He’s been hesitant about this market’s staying power for a while now, and he went on CNBC a few days ago to offer some sobering thoughts during what turned out to be the worst week for stocks since the presidential election.
Henrich doubled down over the weekend, explaining on his Northman Trader blog his full reasoning behind what he says is “the final wave” of this bull market.
“From our perspective, these markets remain completely uncorrected in any historic sense since the 2009 lows and, whether one wants to acknowledge this or not, a recession is coming,” he writes. “Indeed a reversion to any mean, be it technical, price or sentiment or altogether may accelerate the timing of a coming recession.”
Read his whole, chart-heavy post from Saturday. But bottom line, Henrich says we’re moving from a “buy the dip” to a “sell the rip” environment.
He did, however, point to a strong flow of cash into ETFs as potentially delivering some upside risk to his bearish “final wave” thesis (see our chart of the day below for more on that). This metric, of course, could cut either way.
March 22, 2017
Bye-bye bull—this is the market’s ‘final wave,’ warns the ‘Northman Trader’
The market has enjoyed a stellar bull run, but a correction is likely looming, according to Sven Henrich, also known as the “Northman Trader.”
“We’re coming from a point of view that we’re in this kind of final wave of this bull market, and the market is transitioning from a ‘buy the dip’ to kind of a ‘sell the rip’ environment,” Henrich, who runs an independent market analysis subscription service called “NorthmanTrader,” said Wednesday in an interview on CNBC’s “Trading Nation.”
Specifically, Henrich is eyeing a trend line extending back to the market’s infamous 1987 slide. This line intersects briefly with the market at 2003 lows, then once again at a “key pivot” area, Henrich pointed out, when the S&P took a large downturn in 2009. This trend touched resistance at the 2015 highs, and is now looming just above the market’s current levels.
“So if the market rises above from the current highs, then we expect there to be significant resistance,” Henrich, who has garnered a wide following on social media for his market commentary, said Wednesday.
At the same time, the CBOE Volatility Index (known as the VIX) has been highly “compressed” this year, which Henrich noted is very unusual to see as the market reaches new highs. In fact, Henrich said, the VIX is trading in a lower and tighter range than in the “record compression years” of 2006 and 2007.
Yet Henrich doesn’t believe the low volatility can last. He says the VIX has formed a series of “rounding bottoms,” which tend to resolve themselves with substantial rises into an area marked by a declining trend line.
With the VIX in another rounding bottom, “timing-wise, it looks like it may want to spike up in that range again.”
Update: April 14, 2017
The $VIX has since broken out of the rounding bottom pattern toward the upside
February 9, 2017
This chart points to menacing trend in stock market:
The stock market’s historic win streak could be in jeopardy.
NorthmanTrader.com founder Sven Henrich has spotted a menacing trend affecting the S&P 500 Index, which last week scaled to record peaks along with other major indexes.
Henrich’s latest chart shows fewer and fewer stocks moving above their 50 day moving averages. It’s the same situation which appeared right before stocks saw a serious pullback in Summer 2015, according to Henrich, a widely followed market watcher.
On “Fast Money, this week, he predicted history will repeat itself.
“In December, we had about 80 percent of stocks above the 50 day moving average. In January, it was about 75. Yesterday [Wednesday], it was actually just in the low 60s,” said Henrich. “So, 40 percent of stocks were not even above their 50 day [moving average]. So, that shows underlying weakness as we are stretching to go to higher prices.”
Update: April 14, 2017
Between the appearance February 9 & April 14 key sectors dropped sizably speaking to the underlying weakness outlined in the indicators, including energy, small caps, banks and retail all dropping between -3%-5.5%:
Chart-watcher Sven Henrich, otherwise known as Northman Trader, thinks the S&P 500 is setting up for a major pullback. He bases that on a technical indicator that shows the number of stocks above their 50-day moving average — perceived to be the dividing line between a stock that’s technically healthy and one that isn’t.
His chart below shows how the S&P 500 reached its December highs with 82% of stocks above their 50-day moving averages. In January, that percentage was 75%, and now it’s only 60.6%. That means almost 40% of stocks are ailing, leaving fewer to hold up the rally.
“Bottom line, the few stocks that are carrying this rally are extremely overbought, while the broader market is showing emerging weakness. This sort of combination has spelled trouble for stocks in the past, most recently in the summer of 2015, but also in 2007,” said Henrich.
Update April 14, 2017
The trend of lower highs has continued into mid April
Bull market is in its final inning
On Friday, blue chip shares in the Dow Industrial Average flirted with the psychologically charged 20,000 level, which have largely been driven higher by anticipation over President-elect Donald Trump’s business-friendly policies. Yet a few observers think the party is nearly over, and the punch bowl is about to run dry.
“Risk has been priced out of the market,” said Sven Henrich of NorthmanTrader.com on CNBC’s “Futures Now.” Henrich, who is known online as the Northman Trader, said that despite the abundance of optimism on the part of investors, technical indicators could be pointing to some near-term pain.
“I would expect that at some point there would be a buying opportunity for people who may want to invest in this market,” said Henrich. “But if this line breaks, we may see significantly more downside that we’ve seen in previous corrections as well.”
What’s more, Henrich also believes that the S&P 500 has continued to trade in a “bearish wedge pattern” that began just after the end of the last recession. The wedge pattern Henrich speaks of consists of two trend lines: One that runs along the S&P’s highs and a second that runs along its lows, that look to meet sometime in 2017. It is at that point that Henrich believes the rally will have run its course, and a downside will soon follow.
Summary Video Clip:
December 22, 2016
With caution being thrown to the wind, it’s time to get some protection
Negativity has been replaced by positivity, any sense of caution has been thrown to the wind, bullishness is pervasive, and bears look like idiots. In short: All the conditions one wants to see if one is interested in a market fade or at least in getting some protection.
On Dec. 4, I suggested new highs on markets were a fading opportunity, especially in context of low volatility. I outlined technical upside risk into 2,235-2,275 on the S&P 500 SPX, -0.46% Subsequently, the SPX exceeded my risk range by two points before retreating a bit.
Firstly, a long-term monthly chart of the SPX reveals the entire 2016 rally to be a lot weaker than advertised as it comes with pronounced negative divergences in relative strength and a weak moving average convergence/divergence (MACD) in context of a very much narrowing bearish wedge pattern:
In light of recent market strength I stand firm in my analytical view that risk is highly underpriced and markets continue to set up for major pain as recent highs have come in context of larger bearish structures that have produced a newfound bullishness in markets, perhaps a key ingredient that was lacking over the past couple of years.
The Twitter accounts investors need to follow in 2017
@NorthmanTrader — Chartist who goes by “Northy” waxes wise on markets and technicals on his website here. Some of his tweets are locked, but he sneaks out a few that are always worth a look. You can also find him guesting at MarketWatch from time to time under his real name, Sven Henrich.
Red flags are flying for tech shares
One of the big technical red flags over the past few years has been weak internal participation. Particularly during the May 2015 highs we noted weakening internal structures that ultimately culminated in the August 2015 down move. The correction in January and February was no exception.
The reason this is of particular interest: This summer’s new highs were driven by technology, specifically the high-cap tech players that control most of the market cap of the index. While some call this sector rotation, I see it as money desperate for yield chasing whatever is popular at any given moment, a tale of headlines full of sound and fury, signifying nothing.
While I see potential technical upside risk into 2235-2275 on the S&P 500 SPX, -0.46% the underlying picture continues to suggest what it has in the past several years: Selling strength especially in context of new highs and low VIX readings.
Bottom line: Downside risk is much larger than the upside risk in my assessment.
Stocks have made new all time highs within days of falling below November 2014 highs following the election night lows on promises of additional government stimulus.
Yet here we can observe a negative divergence: Stocks above their 50-day moving average (MA) are much lower than at recent highs, indeed following a similar trend we saw at the May 2015 highs: A declining number of stocks above their 50-day MA. And perhaps even more pronounced, note how the SPX has completely diverged from its components above their 200-day moving averages, a very strong negative divergence vs. summer highs:
Bulls have one big problem in further advancing markets here and that is complacency. As perfection and a stock nirvana are priced into markets, the VIX is back to the low end of the range with multiple open gaps above:
While not all gaps fill, data history shows that all VIX gaps tend to, which strongly suggests a VIX spike to come with lower prices being part of the equation. It is how markets react then that we see how much of this advance was indeed hot air.
November 10, 2016
The line stocks can’t afford to cross
There’s a key technical level which could disrupt the market rally sparked by Donald Trump’s win, according to a widely followed market watcher.
“If you look at the long-term chart of the S&P [500 Index] futures, this week we actually saw a test of the long-term support trend line back to 2009. That only happened after-hours and in overnight action,”said NorthmanTrader founder Sven Henrich recently on CNBC’s “Futures Now.”
However, he added “that confirms this trend line. It’s a very steep trend line. It’s an important trend line.”
Henrich argues investors are seeing ‘quite the panic sector rotation’ right now. And, it’s been helping to drive the Dow to all-time highs. He’s also forecasting volatility levels are bound to increase significantly going into next year.
“While we see this massive rally in the last week, we need to be keeping in mind that on the short-term chart, we actually have broken the February trend line that would support from February into Brexit,” said Henrich.
“We broke it in September and now we are re-testing it from the underside. Until we break above that, this rally is still very suspect,” he added.
November 4, 2016
Why this ‘bull market’ is really a myth
“Despite having made marginal new highs on select indices, markets haven’t been in a bull market since GAAP earnings peaked during the spring of 2015. If this thesis is correct, volatility is still much too low, and investors can expect volatility to rise into 2017.
The recent pullback has brought the S&P 500 SPX, -0.17% back below its December 2014 highs, highlighting the fact that the larger market has gone nowhere over the past two years. It is true that select indices have made new highs this summer yet, as I highlighted in September (Time to Get Real), these new highs came on major negative divergences flashing warning signs. More troubling is that the broader indices have failed to make new highs and the recent pullback has caused further technical damage by breaking key support trend lines to the downside.”
These numbers suggest that this bull market is a myth. And these broad performance measurements highlight why so many funds are underperforming.
Where is the bull market? It’s in a very select group of high-cap tech winners that are largely responsible for propelling indices such as the SPX and the Nasdaq 100 NDX, -0.40% to record highs this summer.
Yet their strength highlights the fragility of this market: Narrow leadership holding up a broader market that is weak. So should anything happen to these few leaders, markets are at risk of major damage beyond what we have already seen.”
Regarding $TWTR the stock:
October 6 chart:
Sven Henrich, otherwise known as Northman Trader, says Twitter has been in a “constant downtrend” since the IPO, making a “double bottom” in February and May. But he noted that shares are now back near that listing price.
“In lieu of buyout [talk], the stock must hold $20/$21 or risk heading back into the $14-$19 range,” he said, in emailed comments.
October 10 chart update:
October 5, 2016
Exactly how much of a bull market do we have here? Not much, going by this chart from Northman Trader’s Sven Henrich:
It shows market performance from May 22, 2015 to the present, covering the S&P 500, Dow industrials, Nasdaq, Russell 2000 and FTSE All World Index, among others.
Henrich says the Nasdaq has reached its highs on the back of a handful of high-cap stocks. “Much of the rally off of the lows has been driven by a renewed collapse in yields again driving the TINA (there is no alternative) effect,” Henrich tells MarketWatch.
“With financials and the larger $NYSE being down 5-6% compared with the highs last year and earnings being down 15%, it is perhaps a bull market in name only,” he says.
Discussing the potential risks of an upcoming recession
“Despite all the uncertainty and rancor surrounding November’s U.S. presidential election, one thing is clear: Past trends indicate that the economy could be facing a recession — and could drag the market down with it.
So believes Sven Henrich of NorthmanTrader.com, who crunched the historical figures that suggest, regardless of who becomes the next president, the markets could be in trouble. According to Henrich’s analysis, data show that since 1960, 70 percent of new presidents face an economic downturn very early in their first term.
“In this particular cycle, we’re seeing something that we’ve never seen before in any U.S. election, and that is neither candidate, whether it’s Hillary Clinton or Donald Trump, have a majority support within the population,” said Henrich. “So no matter who wins, in January Americans are faced with a president that the majority doesn’t support.”
Outlining how market price continues to be driven by the Fed.
“So what have we learned? Northman Trader’s Sven Henrich says the market has been behaving like a kooky cartoon character. This chart shows just how wacky it was, as it followed the dictates of Fed utterances:
Investors should be cognizant that higher prices here are driven by two factors only: performance-chasing by underperforming funds, and global central banks adding liquidity at a record pace as there is policy panic about the lack of global growth, productivity and real investment,” Henrich says.
“Markets are getting ever more expensive as a result of 100% multiple expansion and not driven by a strong fundamental underpinning,” he adds.
Outlining rising wedge patterns in stocks and indices.
A bust for the S&P 500 just in time for spring? That’s what one market technician says could be in the pipeline if a bearish chart pattern he’s watching pans out.
Sven Henrich, otherwise known as NorthmanTrader, flags what’s known as a rising-wedge pattern that he says points to a potential 20%-to-25% meltdown by spring. It’s a negative technical signal that starts wide at the bottom of the chart and narrows as it moves up, in step with rising prices and tighter ranges.
Henrich says this rising wedge is developing alongside “extremely steep support lines,” with the market still completely uncorrected. He notes that while there’s no guarantee that a wedge go to a peak apex, this wedge is getting harder and harder to sustain. Piling on the pressure are concerns about a brewing U.S. recession and presidential election uncertainty, he noted.
“Every major top in the past 30 years has come on rising wedges with major negative RSI (relative strength index) divergences,” he tells MarketWatch. “And every one retraced between 0.50% and 0.618% of the move at least. Every time.”
As for how investors should prepare for a potential big drop for the S&P 500 by spring, Henrich says his strategy has been to sell into strength over the past two months. “As a long-term investor, my personal view would be to not be afraid, to have some cash and be able to adjust. Valuations are high and using strength to diversify into some cash is probably a solid idea,” he said.
See also detailed technical article: Time to Get Real Part III for further details.
Discussing the rising wedge pattern with Brian Sullivan.
“Wedges are very powerful patterns, and when they break, they have a fairly sizable implication,” Henrich said Monday on CNBC’s “Trading Nation.” “The rising wedge demands a resolution in the coming months.”
For Henrich, this pattern is likely to resolve to the downside. He points to a series of divergences, including the spread between insider buyingand the S&P 500.
In another sign of instability, Henrich points to the FTSE All-World Index’s inability to hit a fresh record high.
How could this play out? Given the rising wedge pattern and based on the market’s high valuation from historical norms, the chart-minded trader predicts that “we can see a 20 to 25 percent correction into 2017.”
“That’s actually not a historically outrageous correction,” added Henrich, who runs a subscription service and is not a professional money manager. “We just haven’t seen it in such a long time that no one’s used to it any longer.”
Discussing market risk ahead of the UK Brexit vote.
“According to NorthmanTrader.com founder Sven Henrich, 1,950 could be the number to watch on the S&P 500. Looking at a chart of the S&P 500’s key levels, Henrich had predicted that the index could have climbed to as high as 2,150 had the U.K. had chosen to remain in the European Union. But now with the Brexit referendum settled in favor of the leave camp, those levels are unlikely, especially given that the S&P 500 looks to be staying in its months-long trading range.
“We’ve been in a range, nothing has changed in that regard,” Henrich said Thursday on CNBC’s “Futures Now.” “But every time the S&P 500 gets above 2,100, volume kind of dies and the marginal buyers are disappearing. So we need some sort of trigger to get buying in.”
“At the same time, they’re saying that equity prices are vulnerable to rises in term premiums at more normal levels, meaning that if we suddenly see some sort of move, equity prices could correct,” he added.
U.S. markets plunged Friday morning following the vote, with the S&P 500 seeing its worst open since 1986.
Outlining a key technical support level.
“If you’re looking for a potential sore spot in U.S. stocks right now, Northman Trader has a pretty good idea of where to find it.
“So far U.S. markets continue to handle the pressure of overseas markets well, and from my perspective no real damage occurs until a sustained break below 2,025” on the S&P 500, he says on his blog. Here’s that chart:
Northman says U.S. stocks look set for a relief rally into the end of the second quarter/July Fourth, as long as U.K. voters opt to remain in the EU next week. Should that referendum go the other way, markets could get rattled and test that 2,025 zone, he told MarketWatch.
That test could happen before that decision, he says, especially if the Bank of Japan loses control over the yen or investors get a lack of follow-through from U.S. earnings growth.
Global market performance has been “decoupled” from U.S. markets this year so far, he says. “Markets could use some good news soon or risk breaking below 2,025, which could trigger another deeper dip similar to the prior three we have witnessed since 2014.”
May 18, 2016
Discussing a critical technical level that must hold before month end
A closely followed market watcher has spotted a disturbing pattern that could bring the S&P 500 down to a level not seen since June 2013.
While Henrich doesn’t manage any money, his chart work on NorthmanTrader has garnered a significant amount of attention in the online world. His latest take on stocks comes as nearly all of Monday’s big market gains were wiped out Tuesday, when the index closed at 2,047.21.
The S&P 500 must stay above the 2,025 to 2,030 range in order to keep the S&P 500 from falling by nearly 500 points from current levels, Henrich said.
“If we break below this level by the end of May, then stocks may actually indeed retest lows or break lower because the technical targets on a break like that would be significantly lower from here,” he said.
Henrich’s bear case revolves around earnings declining by 7.1 percent in the first quarter, even as most central banks continue to pursue stimulative policies”.
On the other hand, if this scenario doesn’t play out, he believes a bull case could emerge.
“If GAAP earnings can reverse the trend and reverse higher, then markets can break to sustained new highs with technical targets of 2,334 and 2,458,” Henrich told CNBC.
Note: The S&P 500 hit 2025.9 2 days following the appearance and the support level held.
Discussing technical range targets once consolidation range breaks
It’s been pretty quiet in the market lately. Too quiet, if the latest from the Northman Trader is any indication. But it won’t last.
“A big move is coming in the S&P 500, and it will take everyone’s breath away,” the blogger wrote over the weekend. It could go either way, but his technical take is that we’re looking at a double-digit swing sooner or later for the broader market.
“Northy” explains that the S&P SPX, +0.80% has been stuck in a “multiyear consolidation range” between 2,134 and 1,810, and if/when a breakout or breakdown finally occurs, it “could result in a measured technical move of the height of the range.” That’s 324 points, which would mean a burst 15% above record highs, or a 30% drop from them.
“This is a big battle for control,“ he says, pitting bearish fundamental and technical signals against highly accommodative central bank policies and the potential for incremental earnings improvements. “Clarity will only emerge once the range is decisively broken in either direction.”