The market has suffered through a few down days over the last week, but after Monday’s sharply lower opening it has quickly snapped back, even turning green by mid-afternoon. The S&P 500 Index is now 3% below its all time high, but still up some 3.5% for 2017 and 11% since the election.
Does the recent action represent a “healthy pullback” and another chance to buy the dip before resuming a new march higher? Or is it the beginning of a larger and longer correction?
Sven Henrich, better known by his Twitter and blog handle as Northman Trader, thinks it will be the latter. He was on CNBC last week to offer some sobering thoughts and doubled down on his bearish view over the weekend, with a post entitled “The Final Wave” in which he expressed his view, “From our perspective, these markets remain completely uncorrected in any historic sense since the 2009 lows and, whether one wants to acknowledge this or not, a recession is coming and we’re moving from a “buy the dip” to a “sell the rip” environment” as he concludes we “are in the final wave of this bull market. ”
Now before getting to Northman’s explanations, and his plenty of data and charts to bolster his argument, I should point out he has been bearish for well over a year now and has made equally strong cases in prior posts. So, I’m not convinced he’s going to be right this time either. But he does always present good research in a well thought out manner, and any good trader or investor should always be willing to listen to opposing views to help find potential flaws in their own thesis or market outlook.
Here’s an excerpt with a link below to the complete write up—which it’s worth viewing for all the charts and links to his prior bearish calls:
This week I had an opportunity to speak with Brian Sullivan on CNBC’s Trading Nation (see also Media) and discuss a couple of charts. In the interview I mentioned that from our perspective we are in the final wave of this bull market: “We’re coming from a point of view that we’re in this kind of final wave of this bull market, and the market is transitioning from a ‘buy the dip’ to kind of a ‘sell the rip’ environment”.
I wanted to expand on the interview and the charts in a bit more detail to give additional context. To regular readers it’s of course not a surprise that I am structurally bearish and I had outlined the case in detail in February in The Coming Bear Market with a clear view that tops are processes.
And before I get any grief from “wavers’ for using the term “wave” I use the term as an allegory and not a technical term. I’m not a “waver” nor do I declare myself to be one :-).
Why a final wave of the bull market?
I won’t run through the details here, but the key arguments summarized briefly:
a. Vast technical disconnects on key index and stock charts demanding reversion, or reconnects with key moving averages. For example $NDX managed to be 21% above its annual 5 EMA this week. I’ve outlined them here in Disconnects.
b. Structurally high debt loads are in essence pre-programing the next recession as consumers are already showing increased growth in credit card defaults, subprime auto loan and student load defaults before rates have even substantially increased and overall loan growth is slowing. These issues will limit consumer spending if productivity growth and real wage earnings can’t expand. As of now disposable income growth is slowing.
There are a number of data points that show concerning trend changes already on this front. I’ve outlined some of these in March Macro Charts.
c. Sentiment has radically shifted since the election lows from the “most hated bull market” to vast optimism as reflected by numerous surveys but most importantly fund flows into passive ETFs. As I’ve outlined previously retail has loaded in long at very high valuations based on promises of more free money in the form of tax cuts, infrastructure spending and deregulations to come.
In November I’ve outlined my view that many of these promises would turn out to be Empty Promises as structural realities would demand answers.
— The Option Specialist