Two Bearish Technical Signals to Watch

Recently, we got a call from a semi-panicked, paid subscriber of The Sevens Report who asked us to send her another copy of the morning email because she had accidentally deleted the original!

She needed it because in an hour she was having a critical meeting with a “big” client, and she knew, that reading the Sevens Report before the meeting would increase her chances of growing her “wallet share” of this big client because we know what closes those bigger, more sophisticated clients is telling them something they aren’t hearing somewhere else, and that’s what subscribers to The Sevens Report get, each and every day at 7 AM.

Subscribers know they will have the knowledge they need to discuss any market topic a client may bring up, whether its

  1. Stock market valuations
  2. Which sectors are outperforming
  3. Which region of the world offers the most opportunity
  4. What the Fed is going to do next
  5. Where interest rates are headed,

Or most importantly right now,

  1. Why China is causing so much volatility in US stocks and how to protect portfolios against currency wars or a Chinese economic “hard landing.” 

I created this report because I know that most financial advisors and professionals are not glued to blinking screens from 9:00 – 4:00 each day.

They are discussing the financial goals of their clients and mapping a financial course to reach those goals.  Most of their time is spent building and fostering relationships, not analyzing Fed commentary, studying the yield curve, digging through an oil inventory report or monitoring Chinese economic policy!

The most successful advisors use tools like the Sevens Report to stay ahead of the markets (stocks, bonds, currencies and commodities) and to make sure their clients are positioned to both outperform while also being protected from any financial “storm” that may blow up.

And that’s why we believe the Sevens Report is the Best Value in Macro Analysis.

Specifically, we take complex macro-economic concepts (like Chinese economic policies, implication of rising interest rates, GDP reports, FOMC Statements, etc.) and tell you:

1) What you need to know,

2) What will move markets, and

3) What will make those events positive or negative for stocks and other asset classes. 

Every morning at 7AM we deliver this information, so you can show your clients you’re on top of the markets with a plan to outperform, regardless of the environment.

Turning to the markets, despite the rebound in stocks yesterday, markets are still at a key tipping point, and we wanted to provide some analysis on the precarious technical situation that exists in the markets right now.

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Market Technicals Are Turning Bearish (Sevens Report Excerpt)

We believe that the best macro analysis is done by using both fundamentals and technicals.  So, in addition to monitoring economic fundamentals, we also monitor medium term technicals and blend the two to generate market conclusions, and it is a fact that while fundamentals in this market remain “ok,” market technicals are turning decidedly more negative.

There are two specific bearish technical signals that have recently occurred.

First, Dow Theory turned bearish, and second, the it traced out a “Death Cross.”

Bearish Signal #1:  Dow Theory Turns Bearish

Dow Theory is considered by market technicians as the “granddaddy” of all market studies and its basic principles serve as the foundation for essentially all technical analysis studies. And there is a reason it is included in professional licensing tests such as the Series 7, as historically it is a very accurate indicator.

As a refresher, Dow Theory is a fairly simple concept where the combinations of “higher highs (peaks)” and “higher lows (troughs)” is considered bullish while “lower highs” and “lower lows” is seen as being bearish.

Importantly, Dow Theory indicates a “bullish trend” or a “bearish trend” when the Dow Jones Industrial Average and the Dow Jones Transportation Averages are in agreement on trend, or otherwise known as “confirmation.”

Dow Transports have underperformed for weeks, but disconcertingly over the past week, the Dow Industrials have “confirmed” the bearish trend in the Transports, indicating that the “official” technical outlook for the stock market is bearish.

This is the first bearish signal from Dow Theory in some time, and again due to its historical accuracy, it is a signal that can’t be ignored. 

Bearish Signal #2:  The Dow Traces Out a “Death Cross”

The “death cross,” as it’s affectionately known, is when the 50 day moving average crosses the 200 day moving average to the downside.  Historically, this has represented a negative shift in the medium term direction of the market. 

Earlier this week, the Dow Jones Industrial Average traced out a “Death Cross” for the first time since August 2011.

Now, we are certainly not shifting our outlook on stocks to bearish based solely on the technical situation, however these signals deserve respect and should be noted by all investors.

It is also worth noting that just because Dow Theory is now bearish, it does not mean that we are in for another Great Depression or Financial Crisis of 2008, as Dow Theory has also often times forecasted a typical market “pullback” or healthy correction, which frankly this market is long overdue for.

Additionally, while the “Death Cross” did accurately predict the collapse of the Dow Industrials ahead of the crisis of 2008, the last “Death Cross’ in 2011 only saw the market fall for a short period, before stocks reversed thanks to Fed intervention (the Fed initiated “Operation Twist” in September of 2011).

With fundamentals generally still positive (low interest rates, decent economic growth, strong home prices) but market technicals turning more negative, it’s another sign that this market is at a multi-year tipping point. 

With so much macro “noise” in the news, technical and leading indicators are now very important.

Paid subscribers to The Sevens Report know the key technical levels we are watching in the S&P 500 (violations of those levels will make us get more defensive from an allocation standpoint) and which leading indicator ETFs we’re watching for signs of market stabilization and a bottom (neither are signaling this dip is over, yet).

They trust us to watch these and other indicators to try and identify when this market bottoms, or when it breaks down – and that is exactly what we are doing for them each and every trading day.

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Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor

We aren’t Market Bears, but we have said consistently that things are going to continue to be volatile in 2015 and we’ve been right!

Over the next few months, the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back) will be able to retain more clients and close more prospects. 

We view the next few months as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every trading day they know:

1) What’s driving markets,
2) What it means for all asset classes, and
3) What to do with client portfolios.

We monitor all asset classes, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can profit from these trends.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.  We don’t.

But, we have gotten this market right so far in 2015, and it’s helping our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility and drop in stocks and bonds has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation. 

That’s our job.  Each and every trading day.

And, we are good at it.

We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.

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Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

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