As the next crisis erupts, the mainstream media is going to respond with shock and horror but the only real surprise is that this ridiculous bubble lasted for as long as it did. The truth is that a market decline is way overdue. Below are several indications why that is the case.
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Every time we have seen a “leadership reversal”, a “Hindenburg Omen” and a “Titanic Syndrome signal” all appear simultaneously there has been a market crash. The downward trend that has been developing over the past week appears to be accelerating. Just take a look at this chart. Could we be right on the precipice of a major move to the downside?
These three readings haven’t occurred simultaneously since 2007, when the financial crisis was getting underway. It happened before that in 1999, right before the dot-com crash. That’s not very welcome company…You can see the other times in recent decades when these three signals have appeared simultaneously on this chart right here. Once again, past patterns do not guarantee that the same thing will happen in the future, but if the market does crash it should not surprise anyone.
If you are not familiar with a “Hindenburg Omen” or “the Titanic Syndrome”, two bearish market-breadth readings, or what constitutes a “leadership reversal”, here are their definitions:
- Hindenburg Omen: A sell signal that occurs when NYSE new highs and new lows each exceed 2.8% of advances plus declines on the same day. On Tuesday, they totaled more than 3%.
- Titanic Syndrome: A sell signal triggered when NYSE 52-week lows outnumber 52-week highs within seven days of an all-time high in equities. Stocks most recently hit a record on November 8.
- Leadership reversal: When companies setting new 52-week lows climb above the number hitting new highs.
Central Bank Support Ending
10 days ago, I published an article entitled “The Federal Reserve Has Just Given Financial Markets The Greatest Sell Signal In Modern American History” in which I pointed out that this stock market bubble was created by unprecedented central bank intervention, and now global central banks are reversing the process that created the bubble in unison. There is no possible way that stock prices can stay at these absolutely absurd levels without central bank help, and if global central banks stay on the sidelines a market decline would seem to be virtually inevitable. What the fundamentals have been telling us is that, in the absence of central bank support, we should see the markets start to decline, and that it is quite likely that a painful recession is on the horizon.
Yield Curve Flattening
Meanwhile, we are also witnessing a very alarming flattening of the yield curve between the 2-year yield and the 10-year Treasury yield, which have been moving closer together. The curve dipped to 68 basis points Tuesday, a 10-year low. Hogan said 70 has become a line in the sand, and when it falls below that traders get nervous. A flattening curve can signal that the curve will invert, which historically means a recession is on the horizon. If the yield curve does end up inverting, that will be a major red flag.
As the next crisis erupts, the mainstream media is going to respond with shock and horror but the only real surprise is that this ridiculous bubble lasted for as long as it did. The truth is that a market decline is way overdue.
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