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The market put in a strong performance over the last couple of days. But like a broken record, major U.S. stock market indices could baby-step into new highs only to reverse gains in as little as a day, as they have done repeatedly this year:
And it was just a few days ago that the market once again looked as if it would unravel, based on the way leading stocks and major averages were behaving. Both the S&P 500 and Nasdaq were under their respective 50-day moving averages, while the Russell 2000 was under its 200-day line. But very shallow corrections followed by weak rallies to new highs have been the way of the market, especially this year. The S&P 500, since it was formed in 1957, has never had more shallow corrections than it has had so far this year.
As the market continues to push on a string, here are six warning signs this QE-induced sovereign debt bubble may burst sooner than later:
- Gold has been in an uptrend since July. It has been in an overall uptrend all year. Gold is the fear trade. When serious problems arise, money tends to flow into gold.
- The U.S. dollar has been in the steepest downtrend all year since 2010. The USD is the world’s main fiat currency. The massive amount of global debt at present may be finally weighing on fiat currencies such as the dollar.
- Despite the GDP number coming in ahead of expectations at 3.0% versus estimates of 2.7%, the odds of a rate hike by the end of the year based on Fed futures actually dropped from 38% to 36%. The odds used to be above 50%. A reluctance to hike suggests a weaker economy and thus less headroom.
- Money printing via QE continues at record levels.
- The situation with North Korea remains on edge, as China plans to use NoKo as a proxy, because it is in China’s strategic interest to pressure the US and its allies without triggering a war between China and the US. As China rises in power, it will economically surpass the US within the next few years.
- Some leading stocks have managed to hold their own, while others remain below their 50-DMAs. Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN) are attempting bounces off of or back up toward their 50-DMAs, while Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) remain near new highs. Chinese names have been pummeled, though a few have managed to buck market weakness. Small caps are bouncing after showing material weakness. The Russell 2000 is making its way back above its 50-DMA but has lagged the larger-cap Nasdaq all year. The Russell 2000 is considered a risk-on index, but since it has been lagging for several months, this suggests institutions have been less willing to risk capital in smaller names. This has been true since 2014, as the QE sovereign debt bubble continues to grow to colossal proportions.
But this bubble could continue to grow well past expectations. Market wizard Tom Basso suggested the bubble was close to bursting way back in 2012 when he was interviewed by Michael Covel of Trend Following. For those who don’t know, Basso was one of the originals interviewed in Jack Schwager’s book Market Wizards. Basso said QE would eventually lead to a serious bear market of a magnitude greater than 2008 with a sustained period of elevated volatility. While we agree with this assessment, the question is when. With all the major foreign central banks continuing to print money at record levels, they may be able to continue to kick the can down the road for a while longer. But, as Tom Basso said, trend followers will hugely profit from such a major market correction when it comes, but because it may be well beyond what the world saw in 2008, it may not be a happy victory if the state of the world is left crippled.
Meanwhile, we have armed readers with timing strategies by buying the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY) via the 620 MACD buy signal. Just prior to spiking volatility, which is accompanied by a spiking UVXY, buy signals emerge for the ETF. The profits made on true signals more than outweigh the tiny losses on false signals.
And as always, you are advised to keep stops tight, take profits when you have them in context with a stock’s chart, and remain fluid in your approach, since this market can go from bear to bull to bear to bull on a dime.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UVXY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.