As news wires wheel out stories from Black Monday thirty years ago when the US stock market fell by more than 20% in one day, today's market continues to make all-time highs. Traders get used to this white noise and become somewhat desensitized to the records. Of course, over the long-term traders know that markets can swiftly turn lower as we saw three decades ago.
The current eight-year bull market has feasted on the flood of cheap money from global central banks. More recently, we’ve had a series of upbeat quarterly earnings reports from the major blue chips to keep the Dow above 23,000. On Wednesday night, for example, IBM’s stronger-than-expected earnings report drove its shares nearly 9% higher and with it, the tech sector.
Of course President Trump has had a hand in the stock-market's advance, dangling his tax-cut carrot. If passed, the repatriation of up to $200 billion is expected to be directed to share buybacks and lower tax rates, which would boost bottom-line earnings.
Aside from the positives, though, it's always best to look at price action and look for meaningful signs of price exhaustion and trend reversal. Bears in the market believe sufficient evidence includes:
- Prices trading outside the upper Keltner Channel
- RSI divergence on various timeframes and above seventy five
- Decisive and clear sign of range expansion to the downside
- Break below daily ascending trend channel
As you can see below, futures on the S&P 500 tick most of the boxes. The last piece of evidence is more conservative and would need more pronounced confirmation.
What is clear in this bull market, however, is that the ‘buy-the-dips’ mentality has been prevalent whenever we have had a move lower. Some would also argue that the market has not experienced a delusional phase or a blow-off top. For sure, the 30th anniversary of that fateful day in October 1987 brings the vagaries of the market into sharp focus for traders and investors alike.