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Part III – Crunching Some Numbers – Virus, Market Crash, Rate Cuts

In this section of this multi-part research article related to the potential economic destruction of the Covid-19 virus event across the global markets (Part IPart II).

We’re going to peer into data related to the GDP and other factors of the US economy.  Remember, the US economy is the largest single economy and consumption component in the world.  As we suggested in our earlier research, the US and China (combined) account for about 30% of the total global GDP each year.  The top 12+ GDP nations on the planet account for just under 80% of the total annual GDP for the globe.  What happens if economic activity and global GDP collapse for the next 24+ months because of the Covid-19 virus?

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The second thing we want to discuss is the real potential for economic interruption within the global markets.  As of today, the US has declared an emergency status and many states and cities have already started to shut down schools, sporting events, entertainment venues and many other aspects of the US economy.  Additionally, a travel ban has been set up in an attempt to prevent the spread of the Covid-19 virus and the potential of an uncontrolled global contagion.  We believe these travel restrictions will stay in place for at least 60+ days and we believe the spread of this virus will continue for at least another 45+ days before potentially “leveling off”.

The third thing we want to discuss is the economic fallout that is resulting from this Covid-19 event.  It has clearly become evident that exporting a large portion of our manufacturing capabilities to China and other nations puts the USA in a very dangerous situation.  China has threatened to withhold vital medical supplies and other items from the USA over the past few weeks as China attempts to blame the USA for initiating this virus event.  Simply put, America will not be held hostage by China under any circumstances.

Additionally, we believe other mature economies and nations are also starting to reconsider many policies and manufacturing processes related to this event.  Although we don’t have any real proof that this Covid-19 virus event originated in a Chinese lab in China, the very first instance of this virus was documented in China in November 2019 and didn’t really spread to any other country until well into 2020.  It makes perfect sense this Virus originated in China and spread throughout the Chinese New Year to other nations.

Debt and Banking capabilities become a real issue at times when consumers shift spending and economic habits.  Large sectors of the economy become “at-risk” very quickly.  The way our researchers put it is “isolated economic events may cause certain economic events to unfold, but extended economic events put greater pressure on even mostly healthy corporations and enterprises as lack of revenues and a shift in consumer activity can result in a broad market collapse”.

So, here we have the setup of the economic event and now we can speculate about the consequences.  Our researchers believe the immediate needs of all nations is to attempt to contain this virus event and to reconsider policies and manufacturing processes/locations to eliminate risks related to hostile countries.  Is it worth it to save a few pennies to manufacture something while putting your entire nation at risk when an event like this happens?

The funny thing about all major events, like this, is that usually cause people and nations to “shift gears”.  Remember after 9/11 how America shifted away from certain policies and came together to support our military against terrorists around the world?  Remember after the 2008-09 credit crisis how the US took immediate steps to attempt to prevent this type of financial event from happening again and how consumers were “shell-shocked” to re-enter the marketplace after the fallout?  This same type of social constriction happens all over the world as consumers/people act in a flock-mentality.

WHAT DO OUR RESEARCHERS BELIEVE IS THE MOST LIKELY OUTCOME FOR Q1 AND Q2 OF 2020?

We took the past 73 years of quarterly US GDP data and attempted to run two rolling Standard Deviations on them.  The first, a 12 quarter (roughly three years) rolling Standard Deviation.  The second, a full 10-year rolling Standard Deviation.  The purpose of this was to determine how volatile past economic events have been related to these standard deviation ranges.

There have only been a few economic events that meet any of the criteria similar to the Covid-19 virus event.  The closest was the 2008-09 Credit Crisis.  All other events were isolated US types of events related to bubble events and Federal Reserve functions.

1957-1958: a collapse in GDP growth (below the 12 QTR StdDev) took place where GDP contracted by nearly 10 billion (-2%), then almost immediately rebounded back to 2x StdDev growth by 1959.

Mid 1960 to mid-1961: GDP growth collapsed to below 1x StdDev range, at one point almost stalling in Q1 1961, then immediately rebounded back to 2x StdDev growth by the end of 1961.

Q1 1982 to Q1 1983: GDP growth stalled to levels near 0.5 StdDev range for a period of 12 months before slowly rebounding back to 1x+ levels by late 1983 into 1984.

Q3 1990 to Q4 1991: GDP growth stalled to nearly 0.6 of the StdDev range, then rebounded back to 1.5x StdDev range by Q2 1992

Q4 2000 to Q3 2002: The Dot Com bubble and the 9/11 terrorist attacks resulted in an extended contraction in GDP expansion throughout this time.  By Q4 2001, GDP growth was only 0.53x the StdDev range.  Growth finally rebounded in late 2002.

Q1 2008 to Q1 2010: The Credit Crisis really took a toll on GDP.  Throughout most of 2008, GDP levels were still positive and above 0.5x the StdDev range.  Yet in Q3 2008, everything turned negative and GDP reached an extreme (-2.088x) StdDev range in Q3 2009.  Gdp rebounded back to 2x StdDev range in Q1 2010.

Q3 2015 to Q3 2016: This was an election year GDP contraction.  GDP continued to grow, but fell below the 1x StdDev range that seems to be very consistent.  Q4 2016 returned to levels above 1x StdDev.

What this shows us is that a -2x StdDev range is not uncommon and that a bigger move could take place with the right global economic setup.  A 3x or 4x GDP reversion (downside collapse) is also not out of the question if certain circumstances setup to present such an event.

IN CONCLUSION

This lengthy article and extensive research, our researchers do believe a 2x to 3x GDP reversion event is on the immediate horizon.  Given current data points and the fact that we’ve had little “transition” from previous growth phases to this potential new contraction phase, we believe the GDP contraction for Q1 2020 is likely going to be -10% or more from previous levels.  We believe Q2 GDP contraction may actually be higher (-12% or more).  This will be the result of China’s contracting and quarantining economy as well as the fallout from the continued spread of the Covid-19 virus throughout the rest of the world.

We believe Q4 2020 may result in a positive GDP quarter before further GDP contraction takes place in early 2021. We believe this will likely be the result of extended global economic malaise, global banking issues, global credit, and corporate earnings issues and the possibility that a global asset revaluation event may be taking place (similar to the 2008-09 Credit Crisis event).  This time, though, we believe it will be foreign markets engaging in a Credit Crisis and asset revaluation process that will drag the US economy into a 2021~2023 slump.

A 2x StdDev GDP event right now would be a collapse of $1.65T.  A 3x StdDev GDP event right now would be a collapse of $2.486T.  A 4x StdDev GDP event (God forbid), right now would be a collapse of $3.316T.  Remember, it is not really the size that matters – it is the length of time this contraction takes place.

Be prepared for some really ugly earnings data in Q1 an Q2 of this year, then we’ll figure out if our expectations were accurate or not and what we should be doing to plan going forward.

The type of market condition I think we have entered could be here for a long time, and it’s going to be a traders’ market, which means you must have a trading strategy, plan your trades, and trade your plan. It’s amazing how simple a few trading rules that are written down on paper can save you thousands of dollars a week or month from locking in gains or cutting losses.

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As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com

Crunching Some Numbers – Our Researchers Share Their Data – Part II

Continuing our earlier multi-part research post related to our extensive number crunching and predictive modeling systems expectations going forward many years, (Part I) this second part will highlight some existing data points and start to discuss the concepts of what the Covid-19 virus event may do to the immediate global economy.  Remember, in the first part of this article, we shared research related to the US Fed Funds Rate (FFR) and how the Covid-19 virus event may create an environment of economic malaise over the next 12 to 24+ months as well as potentially disrupt the population and deficits over a 5+ year span.

This type of event is very similar to war (think WWII) in the sense that consumer spending changes, population growth, and levels change, GDP changes and deficits change for all involved.  Our researchers modeled the GDP levels from 2017 will now with the intent of attempting to identify probable outcomes of GDP output throughout the world over the next 5+ years.  Throughout these types of events, a massive capital shift takes place where consumers within areas impacted by war shift their spending and purchasing habits to address the immediate real needs of their attempted survival.  Speculation vanishes.  People only spend on things they are confident they can afford to risk their money on.  Anyone who is able to take advantage of the displaced or disparaged has a real opportunity to create some real gains if they don’t become the next displaced or disparaged individual.

Here is some data we used to model what we believe will happen over the next 2 to 5+ years as a result of the Covid-19 virus event.  We are using this global data as a basis for our modeling going forward and attempting to align 2018 and 2019 data with that reported by the St. Louis Federal Reserve data.  Our objective is to attempt to identify the scope and extend of any potential change in economic cycles going forward and to prepare our friends and followers of what to expect.

This data illustrates the scale and scope of the total global GDP output of all the nations on the planet for 2017.  It is important to understand that China and the United States are the two biggest GDP producers of all nations.  Between the US and China, both nations produce roughly 40% of the world’s total GDP annually.  When you consider all nations producing more than $1.5T in annual GDP on this graphic, these 12+ nations (including OTHERS) produce nearly 78% of the world’s total GDP annually.

The nations that make up this list of top GDP producing nations are:

These nations (and the group of nations listed as OTHERS) total almost 80% of total annual GDP across the entire planet.  Keeping in mind that we are attempting to model the Covid-19 virus event, which nations are likely to be the hardest hit on this list?  Obviously China, Japan, Germany, Italy, South Korea, and the United States are all prime targets of the Covid-19 virus event.  Brazil, Canada, France, India, and Others are secondary targets for GDP disruption.  Yet, their proximity to the price candidates makes them fairly easy targets for future GDP disruption related to the Covid-19 virus.

The point we are trying to make by illustrating this is that 80% of the world’s total GDP is at risk over the next 24+ months related to shifting consumer spending, central bank activities, asset valuation levels and much more.  We’re not talking about 4% or 5% of the world – we’re clearly showing you that 80% of the world’s total economic output is within the cross-hairs of this virus event.

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Our modeling suggests the 2017 GDP levels presented by the image (above) and the subsequent yearly REAL GDP levels presented by the St. Louis Federal Reserve deliver this data as a basis for our modeling system.

Our attempted modeling of the Covid-19 virus event across global economies is based, in part, on what happened in the 2008-09 Credit Crisis event.  Throughout that span of time (2008 to 2009), US GDP fell -3.36% over 12 to 16 months.  The difference between this Credit Crisis event and the Covid-19 event is that the Covid-19 event appears to be disrupting a broader segment of economic sectors across dozens of nations/cities all at once.  Whereas the Credit Crisis event resulted in somewhat isolated asset and economic contractions related to banking, insurance, credit, and assets – the Covid-19 virus event appears to be much broader in scope and consequences.  Our researchers believe the Covid-19 virus event will reach nearly every segment of the global economy in some way or form – causing some type of economic disruption either in supply, demand or overall consumer activity related to the sector/economic component.  Therefore, we believe the scope of the contagion event related to Covid-19 will be, at a minimum, 2x to 3x the scale and scope of the Credit Crisis.

We’ve come to the conclusion that the disruption to earnings, revenues, expenses and other economic factors across a broad spectrum of global economic outputs may look something like this.

This image has an empty alt attribute; its file name is image.png

We believe Q1 and Q2 of this year will be a disaster for almost all nations.  We believe there is a chance Q3 and Q4 2020 may see a moderately strong recovery (or the start of a recovery).  We believe winter 2020 and into 2021 may bring further influenza type illness and may begin the process anew.  Or, we believe the recovery process may be somewhat stalled in 2021 as we believe the fallout from the previous year may still be taking place across multiple asset classes and corporate level and banking/insurance level industries.  We believe that by mid-2022 and early 2023, the global economy will begin to find a solid foundation for future economic growth and that global GDP may begin to move higher overall.

We are basing our modeling process on the information we have gained from our experience in the markets and from living through the 2008-09 Credit Crisis event.  Far too many people fail to understand the contagion event process that takes place when consumers abandon traditional spending patterns as income levels become more “at-risk”.  As we’ve suggested many times in previous articles, consumer spending and the “flock mentality” is not something to underestimate.  Current GDP levels are calculated mostly by consumer spending activity.  Think about what that means going forward.

Here are some St. Louis Federal Reserve data charts that we used in attempting to model these results.

A potential further decrease in M2 (velocity of money) throughout this Covid-19 virus event is very likely.  This is one of the primary reasons we believe this event may last more than 24 months in total span.  We believe the continued decline of the M2 velocity level is a very strong indication that historical levels of economic activity (1965 through 1995) simply are not present in today’s global economic world.  This complicates how money is used within the global market – it is being engaged as active money transactions by a -30% ration than 1995 levels. If M2 continues to decline, we believe the consequence of this move will relate to an even slower recovery from the Covid-19 virus event.

In the next part of this article, we’ll explore the real data points and outlier expectations of the 2020 Covid-19 virus event.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com

Stock Market & Flu Breakdown Metrics – Where’s The Bottom?

The end of February was brutal for traders that were not prepared for the breakdown in the US stock markets.  The breakdown in price actually started on February 20th and 21st.  Most traders didn’t pay attention to these minor downside price rotations in the Technology sector (NQ) and the Financial sector.  The early downside price rotations in key sectors gave traders a bit of a warning that the markets were starting to shift away from the earnings-driven rally that had set up the recent peaks.

The other item that concerned the markets was the spread of the Corona Virus into Italy, Iran and other areas without known contact to areas of the virus origin.  Obviously, there had to be some process of contact for the virus to spread – but there are concerns now that the virus could be active within various societies throughout the incubation period and spreading to people in densely populated cities in these areas.  The idea of a “super spreader” event becomes very real if societies are not able to identify and contain the sources of these transmissions.

The fear that gripped the markets last week had been telegraphed for many weeks with the news and speculation that China and Asia were going to be hit with much weaker economic data in Q1 of 2020.  Almost anyone with a bit of common sense should understand the economic complications associated with quarantining millions of people for well over 30+ days would destroy economic activity in China. Even environmental data (NASA) suggests the Chinese economic activity has collapsed in 2020.

(Source: https://earthobservatory.nasa.gov)

It is time for skilled traders and investors to come to the realization that a Deflationary Recession is very likely given the scale and scope of the Corona Virus spread.  Although the numbers pale in comparison to the common Flu/Cold, the economic implications are far more severe.  As the virus spreads into the Middle East, Europe and Africa (think Belt Road Initiative) and early signs that it has already spread into parts of South America, one has to begin to wonder if this event could be something similar to Plague or Pandemic events of the past?

(Source: https://gisanddata.maps.arcgis.com)

As skilled traders, we need to try to stay ahead of these events, attempt to predict where risks and opportunities will arise and work to protect our assets while attempting to trade within these market events.  What happens if this event turns into an extended downside price rotation?  What happens if, collectively, the global central banks can’t support the markets as consumers globally move away from traditional spending and shopping activities?  What are the longer-term implications of this event as it unfolds?  Could this Virus event turn into a Global Deflationary Depression?

There are a few positives we need to report originating out of the US and Israel.  News of a potential vaccine produced by a Texas firm and an Israeli firm has been announced over the past 10+ days.  Both firms believe they will be able to engage in human trials of these vaccines within a few weeks.  Our advanced technology and computerized modeling systems allow us to respond to these types of virus events much faster than ever before.  If these vaccines are successful and can be distributed in mass throughout the globe, we may see this virus event come to a sudden positive conclusion.

The other good news is that the Corona Virus appears to be far less deadly than even the common Flu or Cold.  Currently, the reported numbers are (roughly) 87,000 infected and 3,000 deaths.  That results in a 3.4% mortality rate.  The 2019 mortality rate for pneumonia and influenza was 6.9% (Source: https://www.cdc.gov/).  The reality of the situation on the ground is that we will know more about these data points as we progress further in time.  Numbers change as the total scope of the issue is determined.

As skilled traders, our objective is to protect capital and identify opportunities for profits.  As horrible as it may seem to look at this global event and try to find ways to profit from it – that is really our main objective.  We’ve been getting calls from friends and clients asking us “should I buy airlines and other sectors right now?  This seeming like an incredible opportunity to buy into this weakness?”.  Our answer is a bit more complicated as we are attempting to predict the future event and we don’t believe the bottom has setup/formed yet.  The simple answer is “NO, you should not be buying into this weakness until we know a bottom has setup and risks to the global economy are more settled”.

Still, there are different opinions from institutional and private investors regarding the total scope of this event.  UBS recently issued a BUY for “rich clients” to take advantage of this drop in prices in Chinese and Emerging Markets (Source: https://finance.yahoo.com).  We don’t agree with this analysis quite yet – unless you have a very deep threshold for risk and potential losses.  Our research suggests the bottom will likely complete in May or June of 2020.

This ES chart highlights the downside rotation in price last week and the fact that our Dynamic Rotation modeling system is still suggesting the Weekly trend has not changed to Bearish from Bullish.  The fact is this downside price rotation is still above the YELLOW dashed line which represents trend support.  The Daily chart of the ES, below the Weekly chart, shows the Dynamic Rotation modeling system has already changed from a Bullish trend to moderate Bearish trend.  Because of this, skilled traders need to immediately protect open long positions and consider adjusting their portfolio allocations in preparation of extended downside price moves.

Our researchers believe the ultimate support level on the ES chart is near the $2590 level.  Price may pause near the $2975 level as this level coincides with previous tops in the market and identifies as moderate support.  Yet, we believe the ultimate support level is really near the $2590 level and that is the price this downside move will initially target.

This NQ chart also highlights the immediate downside price rotation in the NASDAQ and how the Weekly chart has yet to confirm any new Bearish price trend.  The Weekly chart still shows confirmed bullish price trends and suggests the recent downside price rotation was within volatility ranges.  The Daily chart has already changed from a Bullish to moderate Bearish trend.  Again, this suggests skilled traders should immediately attempt to lock in profits and prepare for any further downside price trends.

True support on the NQ chart is currently $6575.  This suggests the NQ has another 2000 points to fall (-23.5%) before any real price support will be found.  Be prepared for this move.

This SPY chart more clearly shows the scope of the downside price rotation.  The Weekly chart has already changed from GREEN to YELLOW – indicating a change in rotation price trend from Bullish to NEUTRAL on the Weekly chart.  The Daily chart shows a trend change from Bullish to Moderate Bearish (Pink) to BEARISH (Red).  This suggests the SPY price reaction has more clearly illustrated the risks of this downside price move and suggests extended downside trending may continue.

Our ultimate support level for the SPY is near $262 – another $35 lower (-11.75%).  If these ultimate support levels are reached, the total downside price rotation for all of these charts would total more than -20%.  Certainly more than a simple 8~10% correction.

This is why we believe skilled traders need to pay attention to our recent research and understand the total scope and scale of this move.  We’ve already been warning our friends and followers of the potential risks setting up in the markets.

February 24, 2020: HAS THE EQUITIES WATERFALL EVENT STARTED OR A BUYING OPPORTUNITY?

February 19, 2020: IS THE TECHNOLOGY SECTOR SETTING UP FOR A CRASH? PART III

We can’t make this warning clear enough for all of you right now – prepare for deeper downside price rotation and prepare for the potential of a Deflationary Recession event over the next 6+ months.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.

I urge you visit my ETF Wealth Building Newsletter and if you like what I offer, join me with the 1-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next financial crisis. Join Now and Get a Free 1oz Silver Bar!

Chris Vermeulen
www.TheTechnicalTraders.com

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.

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

A Combination Topping Pattern Is Setting Up

Our research team has highlighted a number of technical and other factors that point to a very real potential of a major market top setting up across the global markets.  We’ve highlighted a number of research articles over the past 30 to 45 days that clearly illustrate our interpretation of the US and global markets.

Our research team believes the Coronavirus outbreak in Wuhan china will cripple economic expansion and consumer economic activity in China and much of SE Asia over the next few weeks and months.  If the virus spreads into India, it could quickly target large portions of India’s economic capabilities.  We are very early into this potential pandemic event.  The growth rates reported by China suggest only a 2~3% death rate, yet an almost exponential growth rate for the number of invested.  It started off below 100 about 10+ days ago and is now almost ready to break 10k.

Skilled traders must understand that the world is far more inter-connected economically and via transportation than it was even 50 years ago.  More people travel to various parts of the world more often than ever before.  More goods and services travel back and forth across oceans and continents than ever before.  This inter-connected world is actually quite small when you consider a student or vacationer can travel more than halfway around the planet in less than 35 hours, access two or three major transportation hubs (airports) and have direct contact to dozens of people and indirect contract to thousands of people within that span of time.

January 23, 2020: JANUARY 2018 STOCK MARKET REPEAT – YIKES!

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

December 16, 2019: CURRENT EQUITIES RALLY SIMILARITIES TO 1999

Our concern is, quite literally, that the growth of the number of infected people related to this Coronavirus is only just starting to explode.

One analyst we were watching on TV suggested waiting for a -5% price correction in high-value US equities before attempting to buy back into this weakness.  Knowing that any type of global pandemic even could continue to expand for many months, years of decades, we believe a large number of these analysts are failing to understand the total scope of this potential event.

Our research team believes the next 6 to 12 months will become very telling regarding the real economic contraction resulting from the Coronavirus spread.  We believe the initial measures governments and world organizations are taking will shrink economic opportunity by at least 10 to 20% for certain nations.  If the virus explodes into Africa, or the Middle East, or North America, then we have another set of problems to deal with.  At that point, the economic ramifications could result in a 30 to 50% contraction in certain segments of the US and Global economy.

Let us try to explain our thinking…

No, people will not stop buying toilet paper, toothpaste, food, and other essential supplies, but they will likely slow their purchases at Starbucks, Movie Theaters, Social Events, Traveling to unknown areas and shopping in large exposed areas (big box stores).  Anything that is perceived as a risk will be viewed as potentially dangerous and unwanted.

Consumers and Businesses are like flocks of birds or schools of fish, they all seem to turn to follow the others and move as a single group or “beast”.  If consumers start to pull back as this issue extends, we expect the “beast” will follow this trend until the risk is minimized.

Even though the US economic numbers from Q4 are still landing with very strong numbers – remember this data does not include any real data from the current quarter.  Everything looks really good if you ignore the threat of the Coronavirus going forward (which is rather foolish).  Q1 and Q2 2020 could become a completely different set of numbers.

January 29, 2020: ARE WE SETTING UP FOR A WATERFALL SELLOFF?

We believe the waterfall even that we highlighted earlier this week is still a very valid interpretation of the global market future reaction throughout most of Q1 and Q2 of this year.  We don’t see any real alternative other than price contraction as long as the Coronavirus continues to wreak havoc across the planet.  If the virus is suddenly contained and diminishing, or cured, then we believe the global perception will change back to positive very quickly.

We believe the first waterfall event is already taking place.  We believe the second waterfall event will produce a downside price move targeting recent support near $307 on the SPY.  We believe any further breakdown of the price below this support level will prompt a downside price move targeting the $260 level.  These rotations will come in waves or waterfall events and could target various sectors of the US and global markets.

Pay attention to what the Transportation Index is doing as this outbreak continues.  Slowing consumer activity means essential items will still be in high demand, but big-ticket items, cars, luxury, and vacations may see a dramatic slowing in sales and activity.  Even homes and apartments may slow in sales.  People tend to become very protective and secure in these economic modes.

The Transportation Index may initially fall to levels near 10,200 before finding any real support.  Then a further downside move may target longer-term support near 8,500.  Below that level..  well, let’s just say that below that level and we could be well into a very serious Bearish contraction phase of the global markets.

Take this time to reposition your assets and protect your value.  You can always redeploy your capital when you feel the time is right to jump back into the markets.  We believe the next 60 to 90 days will become very informative relating to the spread and capabilities of this virus and our ability to fight it.  Don’t let this volatility be something like 2009 when you look back and say “I should have known better”.

Join my ETF Trade Alert Newsletter – 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 to learn how to take advantage of our members-only research and trading signals.

The Wuhan Wipeout – Could It Happen?

News is traveling fast about the Corona Virus that originated in Wuhan, China.  2744 cases and 80 deaths confirmed globally according to Bloomberg and the National Health Commission.

In most of Asia, the Chinese New Year is already in full swing.  Hong Kong, China, Singapore, Malaysia, India and a host of other countries are already starting to celebrate the 7 to 10 day long New Year.  Millions of people have already traveled hundreds of thousands of miles to visit family throughout this massive celebration.  We are certain that hundreds or thousands have traveled to all parts of the world by now.  The potential for exponential growth in the threat from this virus could be just days or weeks away.

Far too many people are too young to have any knowledge of the 1855 Third Plague Pandemic that originated in China.  This outbreak quickly spread to India and Hong Kong and claimed 15 million victims.  It lasted until the 1960s when active cases of the Plague dropped below a couple hundred.

If we consider the broader scope of this issue, we have to take into consideration the results it may have on the broader global economy, commodities and consumer activity as skilled traders.

The world is much bigger than it was in 1855.  We have more technology, more capability and faster response capabilities related to this potential pandemic.  Yet, we also have a much greater heightened inter-connected global economy, currency, and commodity markets.  What happened in China can, and may, result in some crisis events throughout the planet.  It is not the same world as it was in 1855. (Source: history.com)

It is far too early to speculate on any future economic outcomes related to this potential outbreak, but it is fairly certain that China, most of Asia, India and potentially Africa could see extensive economic damage related to a contraction in consumer and industrial economic demand as a consequence of this outbreak.  Once the Chinese New Year ends, in about 10 to 15+ days, people will return back to their home cities and we’ll begin to understand the total scope of this problem.  If the problem continues to be isolated in China, Asia and within that general region, then we may see economic consequences isolated to these regions.  If not, then we could see a much bigger and broader global economic consequence setting up.

The 1855 Plague Pandemic lasted for nearly 100 years and wiped out 1.25% of the total global population.  This was at a time when there was limited transportation options and global economics was a much smaller component of the total global economy.  Everything is somewhat isolated at that time. In today’s world, a similar type of event could wipe our 1% to 5% of the total global population before we have any means to attempt to control it.

Bill Gates believes this outbreak could kill more than 30 million people within 6 months (Source: businessinsider.com)

It is time to get real about this and prepare for how the global markets will interpret this potential outbreak.

We’ve been warning that the market was “Rallying To A Peak” recently and believe this outbreak has changed the minds of traders.  This could the catalyst that breaks the bullish trend for quite a while.  Skilled traders will be trying to get ahead of this rotation in the markets and attempt to deleverage risk.  As retail traders, we should be doing the same thing – deleveraging risk, buying metals, trimming open long positions and hedging into inverted ETFs.

DAILY ES CHART

This Daily ES chart highlights a very real support level near 3050 that also aligns with the longer-term Moving Average.  A downside move like this would represent a -10 to -11% downside price reversion and take us back to December 2019 price levels.  It could happen very quickly.

TRANSPORTATION INDEX CHART

This Transportation Index chart highlights a potential downside price reversion of -11% to -12% – targeting the 9,750 level.  We’ve recently authored an article about the weakness in the Transportation Index and how we believe it could be setting up for a downward price move.  If a breakdown move like this happens in TRAN, it would suggest a massive contraction in the global economy is taking place.

DOW JONES (YM) DAILY CHART

This last YM chart highlights support near 28,000 which would be an immediate downside target if the Dow Jones Industrials revert lower.  And, again, this would put us back to December 2019 price levels.  If this 28,000 level is broken, then we start looking at levels closer to 26,000 (roughly -20%).

CONCLUDING THOUGHTS:

Right now, consider this situation as you are a captain of a ship sailing into a storm.  You can either prepare for it and navigate through it to the best of your ability or ignore the warnings and hope for the best.  It is far too early to panic at this point, but a certain degree of “preparation” is certainly in order.

We’ll know more in about 7+ days as we learn how far and how wide this problem has actually extended.  In the meantime, watch your investments.  Protect your assets.  Prepare for the storm.  Best case, you can always reposition your capital for clearer skies in a few weeks.

As a technical analysis and trader since 1997 I have been through a few bull/bear market cycles, I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.

Join my Wealth Building Newsletter if you want winning ETF swing trade alerts every month? Then ride my coattails as I make money while others will struggle and lose money as the markets correct and become more volatile.

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.