Time to Short the Averages

Key Points

• Stocks struggle as the Fed continues to tighten monetary policy.
•  Key supports are breaking in the major indices.
• The S&P 500 has broken its 10-year trend line.

You can read the full blog, with charts, here: https://www.brtechnicals.com/time-to-short-the-averages/

A Disconnected Fed

The stock market is struggling to find buyers. Slower growth seems inevitable in 2019, but the Federal Reserve continues to tighten monetary policy. I have been warning that monetary policy is one of the biggest risks to stocks since the Fed’s bond rollover program begun.

There is a disconnect between the markets and the Fed. This is because the market is forward looking while the Fed is backwards looking. The primary metrics the Fed looks at measured inflation and measured unemployment. They tighten policy, then look to see if it caused any problems. Inevitably, they will tighten until they see something break.

Already Short

Our portfolios have been mostly in cash since October, but we have begun to deploy some of that cash into short positions. Rather than outright shorting stocks, we are using inverse ETFs. These ETFs move in the opposite direction of the index they track. We have already purchased RWM and SH.

The Russell 2000

The Russell 2000 has led the stock market down. It peaked a month before the large cap indices, and was the first to break its February and October lows, which is when we went short. Since, the index has been in a free-fall.

The S&P 500

We opened our short in the S&P 500 with SH after the index fell below its February lows. Additionally, the index fell below a key level at 2,500. This was more than just a psychological whole number support. It was also the support from the ten year-old trend line.

The trend line break effectively ends this bull market. Only 6.2% of stocks are above their 50-day moving average while only 15.8% of the index are above their 200-day moving average. The momentum has shifted to the downside, and the index is likely to continue its fall.

Future Shorts

We are also looking to short two other indices: the Nasdaq-100 and the Dow Jones Industrial Average. Both of these indices have just broken their February lows and look ready to short. For these we will be looking to buy PSQ and DOG.

The Technical Portfolio

Our goal with this newsletter and blog is to find long-term trades that can help us beat the S&P 500. Right now, those trades are coming from the short side as the stock market struggles to find buyers. The combination of the negative economic outlook and bearish technical indicators tells us the bears are out in force. 

Without the help of monetary or fiscal stimulus, the market is predicting a recession is coming. Investors are betting lower liquidity and tighter monetary conditions are going to push the economic growth down.

Unfortunately for the U.S. economy, it seems it is going to face some trouble in the near future. There doesn’t seem to be any positive catalysts waiting to help prop up the markets or the economy. A looming trade war, slower growth, and a tightening Fed may be enough to push this aging economic cycle into a recession.

Submitted December 25, 2018 at 06:05PM by BR-Technicals http://bit.ly/2EPkWGX