Current Situation of the Global Stock Market: A Technical View of Major Indices

Brief

(Image Source: Express Online News)

With so much present economic and political tension, it feels like bear season is ripening and is about to finally come to fruition after a long and steep bull market. Off late, cycles seem to be lasting longer. The last proper bear market was in 2008–09 and lasted a little longer than a year. The ensuing bull market is the longest in history having broken the 10 year mark. This is with the exception of a small correction in August 15 owing to the Chinese ‘Black Monday’.

But just yesterday the Dow Jones Industrial Average officially breached into ‘correction’ territory. Now while a correction is imminent, can this downturn lead to an economic recession? Just to be clear, we are talking about a recession and not a depression. An economic recession is a slowdown and a depression is setting the economy back to 0. A recession usually lasts for less time and has less dire consequences. Recessions are caused by events like the collapse of a big institution (Lehmann Brothers). The fundamental difference is in a recession, government response can immediately start to amend the situation but in a depression, the natural course of destruction must be allowed to complete.

With so much political tension and debt in the economy, it seems more likely, day by day that we will see a significant recession in the coming years. Investor confidence has finally come down from the sky and people are starting to realize markets may be saturated.

As per FINRA data, this chart put together by WolfStreet.com shows the level of margin debt in the economy. It is the highest right now since the 2008 recession.

(Image Source: WolfStreet)

This is a sign that investor confidence was exuberant and at unjustifiably irrational levels. The recent initiation of a correction sequence has scared the same over-leveraged investors straight.

Leaving this aside, I’ve seen a similar trend emerging in the major indices and I feel its necessary people have at least this little piece of information before taking major investment decisions. All charts displayed below are based on simple trend lines and Elliot Waves. Whether you believe Elliot Waves exist or not, you should understand market cycles are 100% factual and this is the essence of an Elliot Wave move.

FTSE 100

The London Stock Exchange index has seen incredibly volatile times since 2008 but has quite easily managed to keep up with the global bull run. I see the FTSE breaking the bottom trend line in the near future. There are quite a lot of fundamental factors to support this assumption. FTSE companies earn a majority of their revenue from abroad. With Brexit and political uncertainty that followed, the British Pound has constantly been on a nosedive with no end in sight. Since a majority of revenue is from outside the UK, when money is sent back or repatriated to the UK, converting to Pounds reduces the overall profit or earnings. This means UK companies will earn less due to the depreciation of the Pound. This will lead to a decline in stocks by any means, even if you think we haven’t reached the top of the cycle yet.
The bottom trend line is quite close and I can see a touch and short bounce upward before it actually breaks the bottom trend line and initiates a proper correction.

DJIA

Just looking at this chart should show you just how bullish America was. The chart almost looks like the steps in an ancient temple where each step is 3 feet long and 2 feet high. A double top seems to have occurred and just on Friday the Dow slipped below its bi-monthly low of 24220. This has led to a strong suspicion that the Dow is running out of steam, just like General Electric!

A hit of the bottom trend line is almost a 15% correction from the current level. With so much political and economic uncertainty in the US, it seems very likely that we see a correction of this magnitude. It seems like at the very least, a 3 move corrective Elliot Wave cycle is already in play (generic ABC move as show in the chart). So from this, it seems likely that the US and China find no solution to their trade disputes, several societal issues continue to plague to United States and interest rates may also play a colossal role here.

Nikkei 225

The steepest inclines can be seen on the Nikkei despite average growth in Japan. They were recently boosted by the US-China trade war having ramped up their exports to China. The Nikkei is showing an almost identical 2018 to the DJIA. Both charts have very visible double tops that went a little past before correcting.
With Nikkei’s steep gains, it only seems plausible that they go downward the same way. The Yen appreciated against the dollar till the announcement of the trade war. This is was when the dollar started to gain strength and overpower every other currency. Euro, Pound, Yen, Swiss Franc and every other currency lost strength to the US dollar.
The red bottom trend line is most certainly going to be hit but as per the way the Nikkei rose so steeply, it seems to me like hitting the blue trend line is very much a long term possibility. The harder you rise, the harder you fall.

S&P 500

Not much to explain here except that it’s identical to the DJIA chart. High correlation visible and shows that the picture of the total US market and the Dow is very much in line. The double top on the trend line coupled with a major psychological level at 3000 leads to a gloomy outlook for the S&P. The minimum move would be the bottom of the trend line, but like most corrections, we are likely to see it break much below and post a low for this cycle.

Conclusion

A View of the NIFTY (India) Bottom Trend Line Held Since 2008

Just take a step back and look at the different charts. We are seeing uncanny correlation in where the different indices are in their cycles. This goes from Asia to London to the USA. A quick look at the Hang Seng (Hong Kong), Nifty 50 (India), DAX (Germany), CAC40 (France), or the S&P TSX Composite (Canada) paint the exact same picture. While it is the norm for the American markets to be the main driver that all other markets are connected to and react to, this level of market cycle correlation isn’t normal correction behavior. This is signaling something big coming. It might be 4 months and it might be 2 years, but the markets are behaving far too irrationally for this to be justified as corrective moves. In my opinion, this is the time to start considering other investment alternatives like Gold, Silver, commodities, and most importantly cryptocurrency. Stocks are a sound form of investment but with the level of global uncertainty hanging over their heads, it seems like the time is not ripe to start pushing money lump sum into the market. That being said, people investing through Systematic Investment Plans (SIP) in mutual funds or ETF’s should continue to do so. The strain on your pocket is minimal, but as prices go lower, you acquire more units of the fund and that will certainly help hasten your long term investment goals.

Something large is at play; China and the US embroiled in a trade war, France rioting at tax hikes, the UK and their scandalous Brexit plan, the war against terrorist organization all over the Middle East region, and Russia’s questionable decisions on international policy are just a few examples of a lot going wrong too fast. It is extremely naïve to think that all of this happening at once is a coincidence. It is a string of events like this that cause economic slowdowns or even meltdowns. Anybody that has their money in traditional assets like stocks and debt instruments must keep a close eye on markets and the events unfolding across the globe. Within the blink of an eye, one event can cause a landslide and send markets into turmoil. Keep your eyes peeled and your mind open.