The global economy is in what is known as a Kondratiev Winter, and the stock market is at a tipping point. This is where nominal to incremental highs on the S&P 500 ^GSPC can be exceeded by 2%, but by no more than 4%. We are observing a market failure right now. This is a bull trap!
The S&P 500's rally last Friday saw a big price move on low volume. It resulted in no trend change to the larger bearish patterns. It didn't change the bearish pattern, but it probably does mean that the current rally will last for at least a few more days. There are multiple times in which rallies are reversed during the early part of the following week after a strong U.S. nonfarm payroll report.
Both investors and traders continue to throw money at stocks every time that there is any hint of "manufactured" good news. The majority of stocks on the NYSE are still in downtrends.
On Friday, the Bureau of Labor Statistics reported that 255,000 new U.S. jobs were created. The strong jobs number caused gold prices to drop sharply. Momentum traders could have profited handsomely if they had known about the rogue price spikes taking place in gold just hours before the move.
The labor participation rate rose a mere 0.2 percentage points to 62.8%, and that level is alarmingly low.
After saying that only 11,000 jobs were created in May, the Bureau of Labor Statistics is now saying that the U.S. has now added more than 550,000 jobs in the last two months. These numbers still hard to believe. The "seasonal adjustment" factor mentioned by Zero Hedge likely played a part.
Over the past 120 years, during seven-year bull markets, it has been during the fall of the seventh year when the next major decline in the stock market begins. The S&P 500 is putting in its final top.
We are currently witnessing an extremely aged and overvalued bull market. The S&P 500, despite its recent record highs, isn't that much higher than its May 2015 peak. It has become extremely overvalued and overbought, and momentum is slowly rolling over. Whether one is bullish or bearish, one needs to recognize that any current extremes are unparalleled.
Chart courtesy of StockCharts.com
From now, the stock market is likely to make only a small gain, which will be followed by abrupt and severe losses that could wipe out weeks or even months of upside progress.
We will have to wait for the market sentiment to shift toward risk-aversion, before making any bearish long-term bets using exchange-traded funds. In the current globalized financial system, both investors and traders are making risky and unparalleled bets.
It's easy to visualize the financial meltdown. Many financial entities will have lower profits since low interest rates persist. Historically, low yields squeeze the net interest income of banks and make liabilities harder to meet for insurance companies. Their EPS forecasts should be cut by 5%-7%. The fall in Treasury yields explains most of the cut.
Investors still in the stock market would be wise to continue to use the rallies to sell stock positions.
Market Realistpublished an article on July 25 that shows a chart of flows into and out of major U.S. equity index-based exchange traded funds. The chart showed clearly that money continues to leave the leading indicator stocks (the Russell 2000 and the Nasdaq). It's worth a look.
Meanwhile, CNN Money's Fear & Greed Index recently been showing readings of "Extreme Greed."
Investors have become complacent and greedy. These are perfect conditions for a disaster.
That said, nothing happens exactly when it should in the stock market. The market is constantly trying to get the mass of participants on the wrong side. If it doesn't shake you out, it will wait you out, and it seems to be doing the latter right now.
Huge opportunities are just around the corner for both swing trades and long-term ETF investment positions that shoot up in value sooner than later.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.