End Game For U.S. Stocks

Last week's rally in most major U.S. stock indexes served to abort preliminary monthly chart sell signals that were triggered the previous week in my computer trading system. Please see last week's column to gain more insight into the mechanics and potential ramifications here.

So where do we stand now?

In the interest of full disclosure, despite last week's rally I am still short the S&P 500 and the Russell 2000 in my managed accounts. Monday's gap down opening (on 032717) was a meaningful trading low, but I remain convinced that a major stock market top is forming and that the next big move will be to the downside.

Here are just a few potential negatives on the immediate horizon:

1. The Trump Administration's tax reform efforts will meet with the same fate in Congress as its attempt to repeal and replace "Obamacare".

2. The "Russian Story" and all its implications relating to the 2016 Presidential Election and potential ties to the White House is NOT likely to disappear anytime soon. In fact, the current investigations by the Congress and by the FBI are likely to expand in size to dwarf and undermine almost every attempt by the Trump Administration to enact meaningful legislation across the board.

3. The current U.S. economic recovery, which dates back to 2009, is now on borrowed time, and a fairly significant slowdown lies immediately ahead. While the upcoming recession is not expected to result in negative GDP for more than two or three straight quarters, there are possible scenarios that could unfold where the negative economic consequences would be much worse.

4. Central bank tightening in the U.S. and China right now doesn't bode well for the so-called "reflationary" trade which has served to create historic bubbles in financial asset prices, especially in the United States.

5. Evidence of a major top in bank stocks is clear (see official monthly chart sell signals in March for US Bancorp (USB) and Wells Fargo (WFC) below.

6. Official monthly chart sell signals in March for Amgen and CSX don't bode well for two major sectors of the U.S. economy (biotechs and railroads - please see monthly charts below).

7. Populist political movements throughout the world, especially in Europe, increase the odds of harmful government protectionist economic policy actions that will almost certainly doom financial asset prices on a global basis.

8. I worry most about a potential "Black Swan" event relating to a major terrorist strike in one of the G-7 countries, which might then trigger a massive over-reaction by one or more of the major global military powers with probable involvement and support from the Trump Administration and the U.S. military.
9. Saudi Arabia's Aramco IPO is expected to be the largest IPO in history at potentially more than 4x the record-sized Alibaba offering. Early reports indicate a $2 trillion valuation for Aramco. If a 5% stake is offered, then this IPO would total $100 billion as compared to the $25 billion Alibaba offering. While this massive negative "liquidity event" is not expected to unfold this year, Aramco could be listed on the NYSE as early as Q-1 in 2018.
10. And the most important potential single negative for financial asset prices immediately ahead relates to recent comments from two key U.S. Federal Reserve officials regarding the Fed's $4.5 trillion balance sheet. In 2008, the Fed's balance sheet held less than $1 trillion. Since then, several "quantitative easing" measures have resulted in open market bond purchases by the Fed of more than $3.5 trillion. While the Fed claims it hasn't expanded its balance sheet since early last year, all funds from maturing bonds and interest payments received by the Fed on its massive bond portfolio have been regularly reinvested in the marketplace. Influential NY Fed President William Dudley said recently that the Fed is now considering NOT reinvesting these funds which would then result in a natural draw down of the Fed's balance sheet. And St. Louis Fed President James Bullard recently went one step more aggressive here with a suggestion that the Fed may actually begin outright liquidation of its bond portfolio! In my view, the financial markets have yet to discount the staggering negative liquidity ramifications of ANY plan to downsize the Fed's massive balance sheet and its $4.5 trillion bond portfolio.

Bottom line: Don't fight the Fed! Potential U.S. Tax Reform from the Trump Administration is doomed! The Russian Story will dominate the news for President Trump's entire term! Current record high valuations in U.S. share prices fail to discount the increasing probability of a "black swan" event that could easily result in an overnight downside gap of 5% or more!

CSX Monthly Chart with Computer-based Buy & Sell Signals

Dow Jones Transportation Average Monthly Chart with Computer-based Buy & Sell Signals

US Bancorp (USB) Monthly Chart with Computer-based Buy & Sell Signals

Wells Fargo Corp (WFC) Monthly Chart with Computer-based Buy & Sell Signals

AMGEN (AMGN) Monthly Chart with Computer-based Buy & Sell Signals

Russell 2000 Index ETF (IWM) Weekly Chart with Computer-based Buy & Sell Signals

Outlook for the U.S. Stock Market & For President Donald Trump

I don't think it would be a stretch to conclude that the so-called "Trump Bump" has run its course in the financial markets and that traders and investors will now look to a new set of drivers for U.S. stock prices ahead.

President Trump's agenda of (1) Healthcare (Repeal & Replace), (2) Tax Reform ("Trickle Down" Tax Cuts for Corporations and the Upper Class), (3) Immigration (Lockdowns, Bans, Border Walls), and (4) Infrastructure Repair & Rebuild is in disarray, and that the majority Republican Party in Congress is now split beyond repair and can not govern effectively.

Donald Trump's Russian connection will dog his presidency for his entire tenure in the oval office, cast doubt on his legitimacy, cloud his legacy, and maybe even take down his entire administration. The Democrats in Congress are emboldened by Friday's failure by the Republicans in the House of Representatives to pass the latest version of "Repeal & Replace" healthcare legislation. President Trump seems to have taken this defeat in stride and now claims that Tax Reform will be next up on his "agenda" and will command his full attention and any remaining clout his office may hold.

Stock market bulls are counting on Trump tax cuts to justify current sky high valuations and to serve as a potential catalyst for even higher prices immediately ahead. Unfortunately for bulls, Trump's failure to repeal and replace Obamacare casts serious doubt that ANY substantial tax reform legislation will ultimately be passed in Congress, as the Republican majority splinters in disarray and individual Congressman actually begin to distance themselves from the White House with a close eye on the 2018 November re-election cycle and self-preservation.

How much does all this matter in forecasting U.S. stock prices ahead?

Even though I've personally witnessed and participated in 40 years of fluctuations in financial asset prices, and even though I think that I am better than most at reading the tea leaves that determine future prices, my confidence in the usual fundamental and technical analytical tools for most market watchers is significantly less than where it was a decade ago. I now feel that the only edge that I have in "beating the market" is my computer trading system and its relatively reliable buy and sell signals.

While daily chart signals that are generated every day in my system are always interesting to review and dissect, the more reliable signals come from weekly and monthly chart algorithms within my program.

Interesting official weekly chart sell signals in Google, NetFlix, Lockheed Martin, Illinois Tool Works, and Raytheon, (among others) were triggered this past week, but the real story today is the emergence of a significant number of potential monthly chart sell signals that are unfolding right now. With five trading days left in March, preliminary monthly chart sell signals have been triggered in the following stocks, indexes, and ETF's: Russell 2000 Index (see chart below), Philadelphia Bank Index (BKX), Dow Jones Transportation Average (see chart below), BAC, C, COF, CSX, GM, GS, IWM, IYT, JPM, KEY, LUV, MS, PRU, USB, & WFC. 

If there is no meaningful rally in the prices for the above listed vehicles, then these monthly chart sell signals will become official. If there is a rally, then some or all of these preliminary sell signals could be aborted. However, the more interesting picture here for me is the fact that EVERY major U.S. stock market index is currently in "trigger" mode for a potential sell signal on the monthly charts within my computer trading program for the month of March 2017! If there is a meaningful decline in U.S. stock prices next week, very rare (and very reliable) monthly chart sell signals in major indexes like the Nasdaq Composite, the S&P 500, and the NY Composite will be triggered!!

In the interest of full disclosure, I am short the Russell 2000 and the S&P 500 using my favorite double-short trading ETF's, the TWM's and the SDS's.

For you review, I have included two monthly charts below. Both reflect all the buy and sell signals generated by my computer trading system.

Dow Jones Transportation Average Monthly Chart

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals