Stock Market Outlook

Now, the doors for another short-term swing to a new high are closed. All indexes made strong moves lower last week and are close to completing a 5-wave impulse down. A small bounce and one more swing lower are needed, after which a bigger bounce could commence.

But something really rare happened on Friday. Remember I mentioned mid-this week that a bounce might be approaching soon, based on many things and individual stocks I look at. First, there was a geopolitical selloff on Thursday late evening (Israel-Iran), but it was quickly reversed on Friday's wee hours. So what happened on Friday?

Friday was interesting. The Dow was positively diverging from the Nasdaq and S&P 500. At about midday, DJI was up 300 points while NDX was down about 300 points, with a very positive NYSE A.D line, about 5:1. At the end of the day, DJI was up over 200 points while NDX was down over 300 points, and SPX was down almost 0.9%, while the NYSE A/D line was still above 2:1 with about 2/3 of up volume!

In my 30+ years following the markets, I have not seen an instance of SPX being down 0.9%, with the NYSE A/D line positive about 2.1:1. I'm not sure if it ever happened before. If it did, it must have been very rare. Many stocks wanted to rally for a couple of days, but the decline in NDX and SPX was largely dominated by Magnificent 7, NVDA, AAPL, and META. Not to mention SMCI, also part of the S&P 500, which was down almost 25%.

So the question is whether most stocks will prevail to yield a bounce or whether several extremely overvalued stocks could keep putting pressure on the market to drive it from oversold to more oversold. Some major crashes occurred from very oversold conditions. I am not predicting that, and I discussed the nuances of this market in the premium content. Long story short, there is a good chance of some bottoming action and a bounce in May before further downside this summer into typical October lows.

Can we expect a “Black Swan” event this year? I do not know; they are unpredictable.

Market data as of close on 19 Apr. 2024.

SOX – A Clear Bearish Picture

I mentioned how important SOX (and NVDA) is for the market. We pointed to bearish signals over the last several weeks.

 Late last week, SOX made a violent move, breaking the last relevant channel trend line and 100D MA, with 10D EMA (defining an ST trend) pointing strongly down.  It temporarily paused on the gray down channel DTL.

It can be counted as a very bearish EW pattern that started with a series of 1-2s. It should be completing orange (3), then it still needs to complete green micro ((3)), pink iii, blue (iii), black ((iii)) and ((v)). I expect black ((v)) to complete at around Oct’23 low, +/-.

Sentiment

Whenever the public gets very optimistic about stock prices in the next year, it gets disappointed. We have previously published very high optimism for AAII, NAAIM, and other surveys. It should not be different this time.

Rare Market States

In the last several months, I point to several extreme market states that happened only 2-3 times in the past 100 years:

• Extreme ratios of QQQ to DIA, and QQQ to IWM.

• Extreme ratio of SOX to SPX.

• Extreme ratio of SPX to VIX.

• Top 10% of stocks in market capitalization represented about 70% of the total market capitalization.

After each instance, the stock market dropped significantly, especially in extremely overvalued sectors.

Yesterday, I ran into another rare extreme case on X (see below): a 50% market correction when the yield curve was inverted for more than 500 days! Have you heard of the Latin saying “History Magistra Vitae Est?” History often rhymes if it does not repeat exactly. Could a 50% drawdown happen just like that, or is a ”Black Swan” event needed to facilitate it?

The SPX daily cycle composite signals some sideways to up action next month, similar to what we showed last week. In view of Elliot Wave counts, SPX may complete wave. . .

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