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How to Avoid This Flock of Black Swans at Record Market Highs

Stocks in this article: DIA GLD IWM IYT QQQ SPY

NEW YORK (TheStreet) -- "Black swans" are supposed to be rare, almost unpredictable disasters. But now they're flocking over a black hole. Today I update my recent ideas on the markets and the Fed: "Stock Market Charts Are Positive, But Investors Should Beware" and "Treasury Yields Are Rising; the Fed Will Hike 'When Doves Cry.'" Let's look at my outlook for the markets and Federal Reserve policy, and define those black swans.

Here is a list of the black swans that are flying above the stock market black hole:

  • The price of gold (GLD) has been on the rise since the beginning of 2014 as an alternative asset to stocks and bonds.
  • The price of crude oil has been declining since June 13, peaking at $107.68, which is a sign of a weaker-than-expected economy.
  • There are several hot spots of geopolitical tensions headlined by the Middle East.
  • Big banks remain in the cross-hairs of Attorney General Eric Holder's investigations of mortgage-related lawsuits.
  • A major bank in Portugal missed an interest payment on a debt.
  • Continued data from many regions of the world show weaker than expected economic growth.

So how will this affect the markets?

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The weekly charts remain positive but overbought for four of five of the major equity averages with weekly closes above the five-week modified moving averages, now at 16,813 for the Dow Jones Industrials (DIA), 1,942.32 for the S&P 500 (SPY), 4,332 for the Nasdaq (QQQ) and 8,095 for the Dow Transports (IYT).

The Russell 2000 (IWM) will provide a negative divergence given a close today below its five-week MMA at 1,167.31. The index closed Thursday down fractionally year to date.

The five major averages set new multiyear and all-time intraday highs as July began. On July 3, highs were set at 1,7074.65 in the Dow Industrials, 1,985.29 for the S&P 500, 4,485.93 for the Nasdaq and 8,298.17 for the Dow Transports. The Russell 2000 peaked at 1,213.55 on July 1.

If all five major average close below their five-week MMAs, the "Black Hole" lurks -- with downside risk to at least my semiannual value levels at 16,301 for the Dow Industrials, 1,789.3 for the S&P 500, 3,972 for the Nasdaq, 7,423 for the Dow Transports and 1,139.81 for the Russell 2000.

And below the semiannual value levels are the black hole annual value levels -- at 14,835 and 13,467 for the Dow Industrials, 1,539.1 and 1,442.1 for the S&P 500, 3,471 and 3,063 for the Nasdaq, 6,249 and 5,935 for the Dow Transports and 966.72 and 879.39 for the Russell 2000 later in the year.

One of the black swan events would be sooner-than-expected Fed rate hikes. Wednesday's release of the latest minutes from the FOMC implied that quantitative easing would end in October, as I predicted on July 1. I stand by my prediction that the federal funds rate will begin to rise at the June 2015 FOMC meeting.

Up next: my trading profiles for three ETFs that represent the Dow S&P 500 and Nasdaq 100.

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