When The Dow Breaks
The Fed is in a bind and unable to rescue stock gamblers from their misallocation of capital. Therefore, the latest fantasy narrative is one of a slowing economy bringing Fed rate cuts. Filed under careful what you wish for...
"Wall Street has been in a chipper mood since April’s weaker-than-expected U.S. labor market data breathed new life into Federal Reserve rate cut hopes"
In addition to expectations of Fed rate cuts, stock bulls ALSO expect continuing strong corporate profits in a slowing economy.
Unfortunately, the Fed is unable to respond quickly to the slowing economy because the recent spate of strong inflation reports means they are on the sidelines until they have overwhelming proof that the economy is imploding.
As I pointed out on Twitter, this is the same combination of events that crashed stocks in 1987:
"There were some warning signs of excesses that were similar to excesses at previous inflection points. Economic growth had slowed while inflation was rearing its head. The strong dollar was putting pressure on U.S. exports. The stock market and economy were diverging for the first time in the bull market, and, as a result, valuations climbed to excessive levels, with the overall market's price-earnings (P/E) ratio climbing above 20"
Obviously if the economy slows enough to bring the Fed off the sidelines this year, then this market is currently overvalued, on the way to being extremely overvalued. Bulls want to have it both ways - economy imploding w/ Fed rate cuts AND strong corporate earnings.
Tonight, I created this chart showing a similar technical set-up now (right side) versus 1987 (left side). In the first leg down, stocks became oversold and began to bounce, but the bounce was weak - three wave corrective. When it failed and support broke, the market exploded lower in the most famous one day crash of all time.
Here we see the "Magnificent Seven" Tech stocks (NYSE Fang+ index) are making a double top which is also three wave corrective:
Nvidia - the leading AI/Tech stock, is tracing out the same lower high as we saw with Tesla back at the 2021 market top. This market effectively has no leadership right now.
Complacency is rampant.
