This time may be different

The US stock market has been in a bull run since 2009 for 6 years non-stop and in the past 4 years, it has not experienced a 10% correction even once. This kind of uninterrupted bull run for so many years has only occurred 3 times in the history. Over these years, there have been quite a few instances when the market looked like to fall off but only came back even more strongly. Needless to say, this kind of bullish behavior has made easier for people to be more complacent and think this time will be no difference that the market will keep going up. I’m not so sure and I think this time may be different. You see, almost all the factors that are not conducive to continuing uptrend are lining up at the moment, arguing for a significant correction: non-confirming Dow Transports per the Dow theory, breakdown of the junk bond sector, a record high level of the margin debt in the NYSE, and a sharp increase of the 10-year Treasury yield. After all, it is certainly overdue for a more severe correction, even though I also agree that this bull market is far from over. What makes me more concerned is the technical setup for S&P 500.

As you can see in the chart, S&P500 is in as ascending wedge for a few years with consistent negative divergent MACD, a bearish trend.  It is now breaking down from this wedge as well as its 50 DMA. Its 9 DMA is crossing its 50 DMA from above, a bearish cross. It is now facing a short-term downward trendline as well as the middle line of its Bollinger Bands, both around 2111. After a rather strong bounce up yesterday, it was trying to break through this resistance at the opening but failed to do so at closing. Unless there is any significant positive news that may come out suddenly, I don’t think S&P500 will be able to break out to the upside. Instead I think it is more likely it will resume its downtrend from here and start a 10% or so correction in the next few weeks.

This is really not the time to be heroic. BE CAUTIOUS! Buying some SDS may help hedge against your portfolio if this correction indeed is materialized.