Stock Market Looks Like It Has Topped

Since August, I’ve been tracking the liquidity flood in the markets, and while I’ve been marveling (and taking potshots) at it, I’ve also been challenging myself to remain open to the possibility that even heroic levels of liquidity might fail and the stock market could fall.

In this article I will explore that other side.

In a normal world, reality would win, and the stock market’s engineered (fake) rally would come due for a correction.  In that more realistic world, my downside target would be somewhere near the prior low, which, on an intraday basis for the S&P 500, is a biblical 666.

That would be some 40% lower than currently.  I hold this target for no other reason than that old highs and lows get tested (more often than not).  I simply don’t believe that the current economic data supports stocks at their current levels.

No matter how much liquidity the Fed pumps into the system, there’s only so far things can go due to pure liquidity alone.  Eventually there has to be some alignment with reality, even if that’s temporary and brief.

One of the people who pretty much got the stock market right over the past few years was Meredith Whitney, who recently said, “I haven’t been this bearish in a year.”

S&P Chart Looks Toppy

The S&P 500 chart has a number of technical divergences and signs that strongly suggest that it’s going down soon.

Beginning at the top, the Momentum Indicator (MACD) has been heading down even as the market has been heading up.  This is normally a pretty good indicator that the stock market is going to be heading down.

Also note that volume has been heading down (big time) on this latest advance as well, which is another poor indicator of strength.

Lastly, at the bottom, the Stochastics indicate that the market is in overbought territory (being above 80), which is another indicator pointing to a possible decline.

All in all, this is not a strong picture for the stock market right now.

Stock Market Fundamentals

Earnings for the S&P 500 companies have been said to be “beating estimates,” but it bears noting that estimates have been lowered and re-lowered to such an extent that “beating estimates” no longer has any meaning whatsoever.