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Is The Technology Sector Setting Up For A Crash? Part IV

As we continue to get more and more information related to the Coronavirus spreading across Asia and Europe, the one thing we really must consider is the longer-term possibility that major global economies may contract in some manner as the Chinese economy is currently doing.  The news suggests over 700+ million people in China are quarantined.  This is a staggering number of people – nearly double the total population of the entire United States.

If the numbers presented by the Chinese are accurate, the Coronavirus has a very high infection rate, yet a moderately small mortality rate (2~3%).  Still, if this virus continues to spread throughout the world and infects more and more people, there is a very real potential that 20 to 50 million people may be killed because of this event.  It may become one of the biggest Black Swan events in recent history.

We really won’t know the total scope of the damage to the Chinese and Asian economies for another 35+ days – possibly longer.  The information we have been able to pull from available news sources and from the Chinese press is that hundreds of millions are quarantined, the Chinese Central Bank is pouring capital into their markets in order to support their frail economy and, just recently, President Xi suggested stimulus will not be enough – austerity measure will have to be put into place to protect China from creating a massive debt-trap because of this virus.

Austerity is a process of central bank planners cutting expenses, cutting expansion plans, cutting everything that is not necessary and planning for longer-term economic contraction.  It means the Chinese are preparing for a long battle and are attempting to protect their wealth and future from an extreme collapse event.

From an investor standpoint, FANG stocks have outperformed the S&P, NASDAQ and DOW JONES indexes by many multiples over the past 5~6 years.  The chart below highlights the rally in the markets that originated in late 2016 (think 2016 US Presidential Election) and the fact that foreign capital poured into the US stock market chasing expected returns promised by future President Trump.

It becomes very clear that the FANG stocks rallied very quickly after the elections were completed and continued to pull away from valuation levels of the S&P, NASDAQ and DOW JONES US indexes.  How far has the FANG index rallied above the other US major indexes? At some points, the FANG index was 30~40% higher than the biggest, most mature industries within the US.  In late 2018, everything contracted a bit – including the FANG index.

As or right now, the FANG index has risen nearly 274% from October 2014.  The S&P has risen nearly 60% over that same time.  The NASDAQ has risen 140% and the S&P 500 Info Tech Index rose 180%.  The reality is that capital has poured into the technology sector, FANG stocks and various other US stock market indexes chasing this incredible rally event.

(source: https://www.theice.com/fangplus)

This Netflix Weekly chart highlights what we believe are some of the early signs of weakness in the FANG sector.  The sideways FLAG formation suggests NFLX has reached a peak in early 2018 and investors have shied away from pouring more capital into this symbol while the Technology index and FANG index have continued to rally over the past 8+ months.

This Weekly Custom FANG Index chart highlights the rally that took place after October 2018 and continues to drive new highs today.  This move on our Custom FANG index shows a very clear breakout rally taking place which is why we believe more foreign capital poured into the US markets as the US/China trade deal continued to plague the global markets and as BREXIT and other economic issues started to weigh on economic outputs.  What did investors do to avoid these risks?  Pour their capital into the hot US technology sector.

Another chart we like to review is our Custom Technology Index Weekly chart.  This chart shows a similar pattern to the FANG chart above, yet it presents a very clear picture of the excessive price rally and rotation that has taken place over the past 5+ months.  The real risk with this trend is that investors may start to believe “it will go on forever” and “there is no risk in these trades”.  There is a very high degree of risk in these trades.  Once the bubble bursts, the downside move may become very violent and shocking.

A reversion event, bubble burst event, in the technology sector as a result of the economic collapse in China and throughout other areas of the world may break this rally in the technology sector at some point and may push investors to re-evaluate their trading plans.  Until investors understand the risks setting up because of the Coronavirus and the potential for a 20%, 30%, even 40% decrease in economic activity and consumer spending may finally push global investors to really think about the true valuations within the FANG/Technology sector.

We writing this article to alert you to the very real fact that “what goes up – must come down” at some point.  Pay attention to how this plays out and what may cause global investors to suddenly change their opinion of the Technology sector.   A pullback in this sector may result in a -40% to -50% price reversion.

We believe the economic collapse and humanitarian crisis that is unfolding in China may be enough to put a massive dent in future expectations for 2020 and 2021.  You simply can’t have a major global economic collapse in this manner without having some type of cross-over event.  As we learned in 2008-09 with the US credit crisis – when a major economy collapses its assets and financial markets, the ripples spread across the globe.  China may become the next financial crisis event for the new decade.

Join my Swing Trading ETF Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

Is The Technology Sector Setting Up For A Crash? Part III

FANG stocks seem uniquely positioned for some extreme rotation over the next 6+ months.  The continued capital shift that has taken place over the past 5+ years has driven investment and capital into the Technology sector – much like the DOT COM rally.  The euphoric rally in the late 1990s seems quite similar to today.

The biggest difference this time is that global central banks have pushed an easy-money monetary policy since just after 2000.  The policies and rallies that took place after 9/11 were a result of policies put in place by George W. Bush and Alan Greenspan.  Our research team believes these policies set up a  process where foreign markets gorged on cheap US Dollars to expand industry and manufacturing throughout the late 1990s and most of the early 2000s.  This process sets up a scenario where the US pumped US Dollars into the global markets after the 9/11 terrorist attacks and foreign markets gobbled this capital up knowing they could expand infrastructure, industry, and manufacturing, then sell these products back to the US and other markets for profits.  Multiple QE attempts by the US Fed continued to fuel this capital shift.

It wasn’t until after 2008-09 when the US Fed entered a period of extreme easy money policy.  This easy money policy populated an extensive borrow-spend process throughout most of the foreign world.  Remember, as much as the US was attempting to support the US markets, the foreign markets were actively gorging even more on this easy money from the US and didn’t believe anything would change in the near future.  China/Asia and most of the rest of the world continued to suck up US Dollars while pouring more and more capital into industry, manufacturing and finance/banking.

This process of borrowing from the US while tapping into the expanding US markets created a wealth creation process throughout much of Asia/China that, in turn, poured newly created wealth back into the US stock and real estate markets over the past 7+ years.  It is easy to understand how the trillions pushed into the markets by the US Fed created opportunity and wealth throughout the globe, then turned into investments into US assets and the US stock market.  Foreign investors wanted a piece of the biggest and most diverse economy on the planet.

This foreign investment propelled a new rally in the Technology sector, which aligned with a massive build-out of technology throughout the world and within China.  Remember, in the late 1990s, China was just starting to develop large manufacturing and industry.  By the mid-2000s, China had already started building huge city-wide industry and manufacturing.  But in the late-2000s, China went all-in on the industry and manufacturing build-out.  This created a massive “beast” in China that depends on this industry to support finance and capital markets.  This lead to the recent rise in the global and US markets as all of this capital rushed around the globe looking for the best returns and safest locations for investment.

FANG stocks have taken center stage and the recent rally reminds of us the DOT COM rally from the 1990s.  Could the Coronavirus break this trend and collapse future expectations within the global markets?  Is it possible that we are setting up another DOT COM-like bubble that is about to break?

THE WEEKLY CHART OF APPLE (AAPL)

This first Weekly chart of Apple (AAPL) shows just how inflated price has rallied since August 2019.  The share price of AAPL has risen from $220 to almost $320 in the last 6 months – an incredible +49%.  We attribute almost all of this incredible rise to the Capital Shift that took place in the midst of the US/China trade war.  Foreign capital needed to find a place to protect itself from currency devaluation and to generate ROI.  What better place than the US Technology Sector.

THE WEEKLY CHART OF FACEBOOK (FB)

Facebook has also seen a nice appreciation in value from the lows in late 2018.  From the August 2019 date, though, Facebook has seen share prices rise about +25% – from the $180 level to the $225 level.  Although many traders may not recognize the Double Top pattern set up near the $220 level, we believe this setup may be an early warning that Technology may be starting to “rollover” as capital may begin searching for a safer environment and begin exiting the Technology sector.

THE WEEKLY CHART OF GOOGLE (GOOG)

Google (Alphabet), GOOG, is another high-flier with share prices rising from $1200 to $1500 from August 2019 till now – a +28% price increase.  We can clearly see that GOOG is well above the historic price channel set up by the rotation in late 2018.  We believe resistance near $1525 will act as a price boundary and may prompt a downside price rotation associated with the rotation away from risk within the Technology sector.  Any downside move, if it happens, could prompt a price decline targeting $1350 or lower.

CONCLUDING THOUGHTS:

Remember, we are warning of a change in how capital operates within the markets.  The Capital Shift that has continued to drive advancing share prices in Technology may be nearing an end.  It does not mean the capital shift will end, it just means this capital may rotate into other sectors in an attempt to avoid risks and seek out returns.  We believe this is a real possibility because we believe the Coronavirus in China is disrupting the markets (supply/manufacturing and consumer spending) by such a large factor that we believe capital will be forced to identify new targets for returns.  In other words, we believe the Technology Sector may be at very high risk for a price reversion event if this “black swan” event continues to disrupt the global markets.

Let’s face it, a very large portion of our technology originates and is manufactured in China.  In fact, a very large portion of almost everything we consume is manufactured in China.  Heck, the cat food I buy every week is made in China.  If this Coronavirus continues to force China to shut down large sections of their nation and manufacturing while it continues to spread, then the only real outcome for the rest of the world is that “China manufacturing capabilities will be only 10~20% of previous levels” (if that).

Once supply runs out for most items originating from China, then we are going to have to deal with a new reality of “what are the real future expectations going to really look like” and that is why we are preparing our followers and friends the Technology sector may be one of the biggest rotating sectors in the near future.

Join my Swing Trading ETF Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

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Technology Sector Setting Up For A Crash? Part II

In the first section of this article, we highlighted three key components/charts illustrating why the “rally to the peak” is very likely a result of a continued Capital Shift away from risk and into the US stock market as an attempt to avoid foreign market growth concerns.  This method of pouring capital into the US stock market is a process that is driving incredible asset rallies in the US technology sector.  Already the US technology sector (FANG and our Custom Technology Index charts) are up almost 15% in 2020.  How long will it last and when will it end?

Recently, China has revised the Coronavirus data with a sharp increase in infection cases – now over 40,000.  We believe the true number of infections in China are currently well above 250,000 from video content and other data we’ve researched.  We believe economic data originating from China for January and February 2020 will show a dramatic 60% to 80%+ decrease in activity for many of the major cities.  Satellite technology suggests manufacturing and consumer activity in most major Chinese cities is only a fraction of what would be considered normal – 10% to 20% or normal levels.

This means the manufacturing capacities in China have collapsed and that supply to the rest of the world will collapse as well.  This means major electronics manufacturers and suppliers will suddenly quickly experience shortages and outages very shortly.  This is why we believe the technology sector may come under severe pressure over the next 6+ months and why we believe the “high-flying” technology sector may be one of the biggest sector rotations of 2020.

Just how much of a “collapse” are we talking about?  How can anyone attempt to quantify the true scope of this potential “black swan” event and how it may result in sector rotation?

Let’s start with some of the basics.  First, the global economy has been focused on Chinese manufacturing and production of goods for more than the past 20+ years.  Over the past 10 to 15+ years, the Chinese economy has become the central hub of manufacturing and supply for some of the largest economies on the planet.  At this point in time, nearly every nation on the planet relies on China in some form for some essential goods that support their local economies.

This image showing the size and scope of global economies may highlight just how interconnected we really are.  The Chinese economy is 15.4% of the total global economy when taken as a whole compared to other global economies.  Yet, China supplies a very large number of these other nations with cheap goods, essential components for industry and manufacturing as well as a very large number of everyday essential items for consumers.  So, when we attempt to consider a “shut-down” of the Chinese economy as they attempt to deal with this virus, try to think about how long it would take for the supply chain to dry up and then what?

Source: visualcapitalist.com

Try to take a moment and think about the total scope of what we’re dealing with in regards to this Corona Virus outbreak.  Take a minute to review this graphic from InvestmentWatchBlog.com showing some of the “Best” US firms and how many rely on China for manufacturing/supply of critical components or generate a large portion of their revenues from China.

Source: investmentwatchblog.com

It has been over 45 days since the end of 2019.  China knew about this virus fairly early in December 2019.  So, in reality, it has been over 75 days since this outbreak first started. The data accumulated by Johns Hopkins CSSE started on January 20, 2020.  Since that time, China has experienced a more than 4000% increase in new Corona Virus cases – that is only about 21 days.  The number of infected has risen to well over 64,000 and we believe that number (reported by the Chinese government) may be only a fraction (1/8th to 1/6th) of the real infected rate.

Source: gisanddata.maps.arcgis.com

Not all technology companies rely on China to supply products and software.  Many technology companies have strong core business enterprises that are independent of Chinese manufacturing.  Yet we continue to believe the disruption in manufacturing and supply from China will disrupt forward earnings data enough to potentially send the technology sector much lower than current levels.  Additionally, if capital rushes out of technology in search of a more suitable opportunity – where will that capital find a new home?

What happens if this “shut down” of the Chinese economy lasts for more than 6+ months and what happens to the world economy as a result of this virus outbreak?  In Part III of this research article, we’ll try to share our insight a bit further and attempt to show you where real opportunity exists as this rotation plays out.

Join my Swing Trading ETF Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

Is The Technology Sector Setting Up For A Crash? Part I

One thing that continues to amaze our research team is the total scale and scope of the Capital Shift which is taking place across the globe.  For almost 5+ years, foreign investors have been piling into the US stock market chasing the stronger US dollar and continued advancement of US share prices.  It is almost like there is no other place on the planet that will allow investors to pool capital into such a variety of strong assets while protecting against foreign capital risks.  Yet the one big question remains – when will a price reversion event hit the US stock market?

So many researchers, even our team of researchers, believe we have found the keys to unlocking when the price reversion event will take place.  Time-honored technical analysis techniques have set up very clear triggers that were negated by higher prices and continued upside trending.  What is certain at this point is that the Capital Shift is going to continue until it stops – at some point in the future.

Our research team decided to take a look at the FANG index and the individual symbols that make up that sector to see where the real strength and weakness exist.  Our goal was to attempt to understand how and when a potential price reversion event may take place and how this event may be correlated to the global contraction event related to the Coronavirus spreading across the planed while paralyzing certain economies.  Could the Coronavirus event be the catalyst that sets off a breakdown in the technology sector?

There are three components we want to start our focus on in this, Part I, of this research article.  First, the very real possibility that we are “rallying to a peak” at some point in the near future.  Second, the Custom Volatility Index highlighting continued overbought price action and the very real potential for a breakdown in price from these inflated levels.  Lastly, the FANG index itself suggesting we are very near to upper price boundaries after capital has poured back into the US markets in early 2020.

These three components suggest a market that is full of over-enthusiastic optimism and capital that has poured into the US stock market chasing gains that were clearly expected as 2019 came to a close.  Yet, in early 2020, a new risk suddenly became known, the Coronavirus, and this risk has already begun to devastate China’s economy and economic activity.  What happens if this sudden collapse in economic activity spreads over the next 30+ days and how will it change future expectations in the US stock markets?

CUSTOM TECHNOLOGY INDEX WEEKLY CHART

This Custom Technology Index Weekly chart highlights what we clearly believe is the “rally to the peak” type of price action related to the continued Capital Shift taking place in the global markets.  The breakout to the upside in November 2019 prompted a concentrated pooling of capital into the US markets.  After the end of the year, when institutional investors started engaging in the markets again, it was rumored that more than multiple-billions reentered the markets in early January 2020.  It is obvious when you look at this chart.

By the second week of the new year, capital continued to pour into the technology sector – pushing it higher by nearly 15% in less than 45 days.  That is an amazing rally to start off 2020 and could possibly be the “rally to the peak” process we’ve been hinting about.

CUSTOM VOLATILITY INDEX WEEKLY CHART

This Custom Volatility Index Weekly Chart is something we use to determine how overbought or oversold the US stock market is in relation to historical VIX weighted price ranges.  When this index is above the GREEN middle range, the US stock market is reaching into extremely bullish trending and overbought territory.  When this index is below the GREEN middle range, the US stock market is reaching extreme bearish trending and oversold territory.  The GREEN middle range is a neutral zone for trading.

Obviously, as VIX spikes and price levels collapse, we can see this Custom Volatility Index falling to levels below 6.0.  As price trends higher with moderately low VIX levels, we continue to see this Custom Volatility Index hover above 12~14.  The downside rotation in the US stock market (the -600 pt Dow day) pushed this Custom Volatility Index from near 22 to 14 – a big reversion event on this chart.  Now, the current level is back above 18 and pushing higher – the rally to the peak is setting up.

FANG WEEKLY CHART

Lastly, this FANG Weekly chart highlights the concentration of capital that has pushed the technology sector, and particularly the FANG stocks, much higher in 2020.  The reality of the situation is that until forward expectations, guidance or global economic functions change, this rally will likely continue for some time.  Our concern is that global market expectations could change very quickly in relative terms because of global economic functions and contractions related to the Corona Virus.

We recently authored an article suggesting that the entire Belt Road sector could become a risk factor if China is pushed into a very deep economic crisis.  China’s banking sector recently underwent a stress test where China’s economy dipped below expected GDP levels.  Nearly 15% of China’s banks will become insolvent if GDP drops below 5.5%.  Nearly 50% of China’s banks will become insolvent if GDP drops below 4.5%.  What happens if China’s GDP drops to 0.5% for a 4 to a 6-month span of time and the Chinese economy sputters in recovery after this Coronavirus event settles?

What happens to the Belt Road Initiative and the projects/relationships China has with those nations if, all a sudden, China enters a “Credit Crisis” in excess of $5 to $6 trillion US dollars.  Bloomberg recently reported that China Home Sales plunged 90% in the first week of February.  You don’t have to be a genius to understand the risks associated with that type of plunge in a key economic growth component.

If our research team is correct, this “rally to the peak” will continue in the US for as long as risk factors stay mildly calm for the US.  Once risk levels elevate across to a point where the US investors and economy may become threatened, then traders will likely begin to bail out of overvalued sectors, like Technology, and into safe-haven investments.  It is critical that skilled traders be prepared for this move because when it happened, it may happen very quickly and violently.

Join my Market Timing Signals Alert Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site to learn how to take advantage of our members-only research and trading signals.

Shipping Rates Plunge, Commodities and Stocks May Follow

An almost immediate reaction to the Coronavirus outbreak in China and throughout most of the world has sent shock-wave through the global markets – particularly seen in Shipping and Oil.  The actions within China to attempt to contain the virus spread include shutting down entire cities and setting up mass quarantine events.  It is estimated that as many as 8+ million people were quarantined within cities in China throughout the Chinese New Year.

Chinese President, Xi Jinping, warned recently that the Coronavirus, and the efforts to stop it, may greatly reduce the Chinese economy over the next few months.  The Chinese President urged top officials to refrain from “more restrictive measures” to contain the virus.  It is our opinion that more restrictive measures are essential to efforts to contain the spread of this virus and that further contraction in the Chinese economy, as well as other economies, are almost set in stone at this point.

Information we’ve received from some friends living in China and Hong Kong suggest travel is very restricted, face masks are very scarce, people are staying inside their homes and surviving as family units within very close contact with one another.  They are scared, trapped and unable to do anything other than try to wait this out.  Imagine what this is doing to the local economies, shops, offices, and businesses?

Reflectively, global shipping rates have collapsed over the past 30+ days as one of the first signs of the contraction in the global markets.  As of December 31, 2019, both Tanker and Dry-Bulk rates were hovering near $14,000 per day.  Now, this rate is near $2500 per day – a -82% decrease.  As you consider the broader aspects of this massive decrease in shipping rates, consider the global contagion event that may setup if the Belt-Road region is adversely hit with the Corona Virus.

Source: Bloomberg.com

SEA SHIPPING SECTOR ETF – DAILY CHART

Shipping stocks are taking a beating. Factories are shut down, the product is not being shipped, and even product ready to be shipped many don’t want to take delivery for the time being.

From a short term standpoint, this sector is looking oversold, but depending on how much the virus spreads we could see another 20% from the current price.

CHINA’S BELT-ROAD INFRASTRUCTURE PROJECTS

China’s Belt-Road Initiative consists of massive infrastructure, port, and other projects throughout Europe, Asia, India, Pakistan, Iran, Turkey, Russia, Africa, and other nations.  These projects have been initiated over the past 5+ years and are well underway.  We believe the spread of the Coronavirus may follow a path along with the Belt and Road projects and potentially infect a larger number of individuals over the next 30+ days than originally expected.  If this virus moves into the Middle East or Africa, containment may become very difficult.

The reality is that Shipping and Commodities could see a dramatic price decline as this virus outbreak continues over the next 60+ days.  Reports are already starting to hit the news wires that Autos and manufacturing supplies are starting to pile up and ports in China.  Without a functioning manufacturing sector and workers to keep everything running, China’s economy will grind to a halt very quickly.

This translates into lower Oil prices, lower raw material prices and higher metals prices.  A capital shift will continue to take place throughout the world where capital will move away from risky environments and towards more secure investment environments.  Thus, capital will move away from Asia, India, the Middle East and potentially Europe and towards the USA, Canada and possibly Mexico.  Everything depends on what happens over the next 60 to 90+ days with regards to this virus outbreak.

MONTHLY CRUDE OIL CHART

This Monthly Crude Oil chart shows how quickly Oil rotated lower in January 2020.  Currently, Oil is trading near $50 per barrel and may break lower towards the $44 to $46 price level before finding any real support.  Overall, our research team believes Oil may reach as low as $35 to $36 ppb before reaching a bottom.  You can read our earlier research here: https://www.thetechnicaltraders.com/oil-begins-to-move-lower-will-our-predictions-come-true.  Within that research post, dated November 19, 2019, we highlighted our earlier predictive modeling research from July 2019 suggesting Oil would break substantially lower in November 2019 and again in February 2020.  We predicted this downside move in Oil nearly 8+ before it happened.

Transportation Index Monthly Chart

This Transportation Index Monthly chart highlights the sideways FLAG formation setting up in the US Transportation sector.  If the US market breaks lower as a result of lower global economic activity, we believe we will see the Transportation Index fall very quickly to levels below $9,500.  A breakdown in the Transportation Index would be an early warning sign that the US economy is headed towards a recession or contraction event.  Global shipping has already confirmed this event is taking place – yet the US Transportation sector has not shown much weakness.

Traders need to be very aware of the risks in the markets and the continued Capital Shift that is taking place throughout the planet.  Capital is running away from risk and pouring into more stable markets.  The ultimate risks to the global economy are for those nations where debt/economy levels are fragile, to begin with – which is why we highlighted the Belt Road project.  If China enters a protective mode where the Chinese Central Bank attempts to bail out Chinese companies/initiatives, we believe the Belt Road project could become a great risk.  And we believe this could happen very quickly given the current market environment.

The dynamics of global markets are changing very quickly.  It is time for traders to prepare for bigger volatility and large range sector rotation.  Follow our research, learn how we can help you stay ahead of these bigger moves in the markets.  2020 is going to be a fantastic year for skilled traders – you just have to stay ahead of the risks and be prepared to take advantage of the opportunities as they are presented.

Join my Swing Trading ETF Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

2020 – A Close Look At What To Expect

Quite a bit has changed in the global markets and future expectations over the past 4+ weeks.  Q4 2019 ended with a bang.  US/China Trade Deal, US signing the USMCA Continental Free Trade Agreement, BREXIT and now the Wuhan Virus.  On top of all of that, we’ve learned that Germany and Japan have entered a technical recession.  As Q4-2019 earnings continue to push the US stock market higher – what should traders expect going forward in 2020?

Volatility, Sector Rotation, and Continued US Stock Market Strength.

Our researchers have been pouring over our charts and predictive modeling tools to attempt to identify any signs of weakness or major price rotation.  There are early warning signs that the US Stock Market may be setting up for a moderate downside price rotation within the first 6 months of 2020, but we believe the continued Capital Shift that has been taking place over the past 24+ months will continue to drive foreign investment into the US and North American stock markets for quite a while in 2020 and 2021.

The interesting component to all of this, which should keep investor’s attention and really get them excited, is the chance that some type of foreign market disruption may take place in 2020 and 2021.  There are a number of things that could potentially disrupt foreign market expectations.

First on the list is this virus event in China (that seems to be spreading rapidly).  Second would be the news that Japan and Germany have entered a recession.  Further down the list is the very real possibility that many Asian and foreign nations could see a dramatic decrease in GDP and economic activity throughout much of 2020 and 2021.

It is far too early to make any real predictions, but traders need to be aware of the longer-term consequences of global markets entering a contraction phase related to a confluence of events that prompts central bank intervention while consumers, financial sectors and manufacturing and industrial sectors are pummeled.  Imagine what the global markets would look like if 25% to 55% of Asia, Europe, and Africa see a dramatic decrease in economic output, GDP and financial sector activities (on top of the potential for massive loan defaults).  It may spark another Credit Crisis Event – this time throughout the Emerging and Foreign markets.

A massive surge in US stock market valuation has taken place since the start of 2020.  It is very likely that foreign capital poured into the US stock market expecting continued price advancement and very strong earnings from Q4 2019.  This valuation appreciation really started to take place in early 2019 and continued throughout the past 14+ months.  We believe this valuation appreciation is foreign capital dumping into the US markets to chasing the strong US economic expectations.

We believe this surge into the US stock markets will continue until something changes future expectations.  The US Presidential election cycle would usually be enough to cause some sideways trading in the US stock market – maybe not this time.

The fact that Japan and Germany, as well as China very soon, have entered an economic recession would usually be enough to cause some sideways price rotation in the US stock market – maybe not this time.  The potential wide-spread economic contraction related to the Wuhan virus would normally be enough to cause some contraction or sideways trading in the US stock market – maybe not this time.

There is still a risk that price could revert to middle or lower price channel levels at any time in the future.  We’ve highlighted these levels on the charts below.  Yet, we have to caution traders that the foreign markets may be setting up for one of the largest capital shift events in recent history.  If any of these contagion events roil the foreign markets while the US economic activity and data continue to perform well, then we could be setting up for a massive shift away from risky foreign markets/emerging markets and watch global capital pour into Safe-Havens (metals/miners) and pour into the US stock market (US, Canada, Mexico).

We’ve authored numerous articles about how the foreign markets gorged themselves on debt after 2009 while easy money policies allowed them to borrow US dollars very cheaply.  We’ve highlighted how this debt is now hanging over these corporations, manufacturers and investors heads as a liability.  The recent REPO market activity suggests liquidity risks already exist in the global markets.  If these liquidity issues extend further, we could see a much broader market rotation within the US and foreign markets.

DOW JONES INDUSTRIAL AVERAGE – QUARTERLY CHART

Currently, the US stock market appears to be near the upper range of a defined price channel.  Near these levels, it is not uncommon to see some downside price rotation to set up a new price advance within the price channels.  This INDU chart highlights the extended price channel trend, originating from 2008, and the more recent price channel (yellow) originating from 2015.  Any breakdown of these channels could prompt a much broader downside price move.

S&P 500 – QUARTERLY CHART

This SPY chart highlights the extended upside price trend in the US stock markets.  The SPY has recently breached the upper price channel level.  It may be setting up a new faster price channel, yet we believe this rally in early Q1 2020 is more of a reaction to the very strong 2019 US economic data and the continued capital shift pouring capital into the US markets.  A correction from these levels to near $275 would not be out of the question.

TRANSPORTATION SECTOR – QUARTERLY CHART

This Transportation Index (TRAN) chart presents a very clear price channel and shows a moderate weakness recently in this sector.  The fact that the TRAN has consolidated into a middle range of the price channel while the other US stock market indexes continue to push higher suggests the valuation advance in the US stock market is mostly “capital chasing strength of the US economy” than a true economic expansion event.

2020 will likely continue to see more volatility, more price rotation, more US stock market strength and further risks of a reversion event.  We believe forward guidance for Q1 and Q2 will be revised lower as a result of these new global economic conditions originating from Asia, Europe, and Japan.

If the virus event spreads into Africa and the Middle East (think Belt-Road), then we could see a much broader correction event.  In the meantime, prepare for weaker future earnings related to the shut down of industry and consumer sectors throughout much of Asia.

If this “shut down” type of quarantining process extends throughout other areas of the world, then we need to start to expect a much broader economic contraction event.  Minor events can be absorbed by the broader markets.  Major events where global economies contract for many months or quarters can present a very dangerous event for investors.

Overall, we may see another 20 to 40+ days of “sliding higher” in the US stock market before we see any real risks become present for investors.  This means you should start preparing for any potential unknowns right now.  Plan accordingly as this event will likely result in a sudden and potentially violent change in price trend.

Join my Swing Trading ETF Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

Is The Coronavirus Bullish For Stocks?

Earnings volatility has certainly been big.  Tesla pushed the markets much higher early this week and the US stock markets have continued the upward momentum after the State Of The Union address and the acquittal of President Trump on Wednesday.  Still, we continue to believe this rally may be a “fake-out” rally with respect to the fallout from the Wuhan virus.  Certainly, foreign investors are continuing to pour capital into the US stock market as the strength of the US Dollar and the strong US economy is drawing investment from all areas of the globe.

We believe the scope of this parabolic rally in the US stock market should actually concern skilled traders.  Markets just don’t go straight up for very long.  The last time this happened was in the 1970s and 1980s.  Very minor volatility during that time prompted a big move higher in the US stock market that set up the eventual DOT COM collapse.

Oil, Shipping, Transportation, Consumer, Manufacturing, and Retail will all take a hit because of the Wuhan virus.  We’ve, personally, received notices from certain suppliers that factory closures in China will greatly delay the fulfillment of orders.  Our opinion is that nations may have to close all or a majority of their cities, ports, and activities in Asia for at least 90+ days in order to allow this virus event to peak and subside.  We don’t see any other way to contain this other than to shut down entire cities and nations.

The US Fed and Central Banks are doing everything possible to continue the economic growth and stability of global economics.  Yet, the reality may suddenly set in that without risking a global virus contagion, nations may be forced to actually shut down all non-essential activities for well over 90+ days (possibly even longer).  If you could stop and consider what it would be like for half of the world, and many of the major manufacturing and supply hubs, to shut down for more than 3 to 6 months while a deadly virus is spreading.

Repo lending continues to show that liquidity is a problem.  We believe this problem could get much worse.  Skilled traders need to be prepared for a sudden and potentially violent change in the direction of the global stock markets.

$TNX – 10 YEAR US TREASURE YIELD DAILY CHART

30 YEAR TREASURY BOND PRICE – DAILY CHART

There is now a solid wall of inversions in all the treasury notes and bills.  The 10-year yield is inverted with 6-month and shorter durations.  The 30-year long bond dipped below 2.0% for the third time and is just 6 basis points from a record low.

Prepare to capitalize on this “crowd behavior” in the near future.  Right now, the US stock market is pushing higher as Q4 earnings drive future expectations.  Yet, be prepared for the reality of the situation going forward.

This Wuhan virus may present a very real “black swan” event.  At the moment, the US stock market appears to want to rally as earnings and economic data continues to impress investors.  Overall, the real risk to the markets is a broader global economic contagion related to the Wuhan virus and the potential it may have on foreign and regional economies.

Next week is going to be critical for many things I feel. Virus contagion growth, factory closures, Oil breakdown follow through, equities breakout follow through, and the precious metals pending move.

We locked more gains this week with one of our positions as we rebalance our portfolio holdings for these new big trends to emerge. If you want to know where the markets are moving each day and follow my trades then join my ETF Trading Newsletter.

Chris Vermeulen
www.TheTechnicalTraders.com

Broad Market Sector Rotation Starts In 60+ Days – Part I

We have been writing about the strong potential for a deeper market rotation in the US and global markets for well over 60+ days.  In fact, our researchers predicted an August 2019 breakdown date based on Super-Cycle patterns that, eventually, pushed into 2020 as the US/China trade negotiations and other global news kept global markets in a low volatility bullish trend throughout the end of 2019.

We’ve highlighted some of our research posts over the past 30+ days to help illustrate the technical and price patterns that our research team has identified and shared.

December 20, 2019: WHO SAID TRADERS AND INVESTOR ARE EMOTIONAL RIGHT NOW?

December 16, 2019: CURRENT EQUITIES RALLY SIMILARITIES TO 1999

December 2, 2019: NEW PREDICTED TRENDS FOR SPX, GOLD, OIL NAT GAS

Technical Analysis is based on the premise that price reflects all news and expectations the instant that news or data is known.  A common term in Technical Analysis is “Bias”.  This is when the price trend is substantially more Bullish or Bearish by nature or expectation.  Bias occurs when investing conditions mostly eliminate risk (for the Bullish side) and opportunity (for the Bearish side).  When traders feel they can enter trades without any real risks (trading Long) or when they feel there is no opportunity for the markets to rally (trading Short), then a BIAS exists in the markets.

When the global markets rotate and volatility extends to much higher levels, the markets change from a “Biased Trend” to what Technical Analysts call “True Price Exploration”.  When this happens, price begins to operate under the price principles of Gann, Fibonacci and Elliot Wave theories where price attempts to rotate to new lows or highs in an attempt to “seek out” clear support and resistance levels before establishing a new longer-term “Biased trend”.

We believe the global markets are about to enter a very volatile period of sector rotation.  Certain sectors may see a much deeper price exploration than others.  For example, consumer product manufacturers focused on US and European markets may see very limited risks compared to the Industrial Supply sector where a global economic slowdown could really hurt their future expectations.

These two Market Sector Maps (source www.Finviz.com) highlight the change in the direction and scope of these changes over the past week and the past 30 days.

THIS FIRST SECTOR MAP IS A 1 WEEK SECTOR MAP

THIS SECOND SECTOR MAP IS A 1 MONTH SECTOR MAP

Pay very close attention to the sectors that were moderately or strongly weak in the 1-month chart and continue to weaken in the 1-week chart (Financial, Property, Telecommunications, Telecom Services, Healthcare, Biotech, Basic Materials, Industrial Goods, Lodging, Resorts, Travel, Hospitality, Food, Packaging, Textile.  The list is rather impressive and it suggests this Coronavirus has somewhat panicked the markets and consumers.  Yes, many of these consumers will continue to go out for food, entertainment, and other essentials – but what if 15% to 25% of them cut back on these activities and decide to stay home more often and watch movies or play games?

I remember in 1990 when Desert Storm started.  Just before this war started, the US economy was clicking right along.  I remember that within 10 days of the war starting, things started to change on the roadways and markets.  I also noticed a change in consumer spending with a friend’s computer gaming distribution company.  All of a sudden, consumers slowed their external purchasing activities and focused more on protectionist activities.  We believe this same type of event is going to quickly unfold within the US and other nations as this Corona Virus extends over the next 30+ days.

This is why I believe the volatility of price and market sector rotation will continue for at least 60+ days as the globe attempts to contain and eliminate the risks associated with this virus.  We understand the risks in the US and Canada are very small at the moment, but that has not stopped shoppers from emptying the shelves at the local hardware and pharmacy stores for “surgical masks” and supplies.  Trust us, people are already well into the protectionist-mode and are preparing for what may happen over the next 30+ days.

This creates an opportunity for technical investors and traders.  This potential for deeper price rotations and extended opportunities resulting from an end of bias volatile price exploration allows us to target very quick and exciting trades.

In part II of this research post, we’ll highlight three specific sectors we believe are poised for great trade setups as a result of the volatility and rotation in the global markets.  Join us in our quest to create incredible profits from these bigger trends – visit www.TheTechnicalTraders.com today.

Chris Vermeulen

Corona Virus and Manufacturing Shutdowns Will Affect Companies

A technical trader talks about this week’s large price swings, Coronavirus, and how to trade this volatility.


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