Precursor to a selloff… sounds like a macabre song title. The bulls probably hope that’s all it is instead of the lyrics to the market’s newest hit song.
The U.S. stock market has been what’s commonly known as a BEAST since the lows of the Great Recession in 2009. Time after time, it has responded to downside pressure (each precursor to a selloff if you will) with (sometimes surprising) resilience eclipsing old highs to create new ones… time after time after time.
Some Wall Street analysts suggest “not this time.”
The technical analysis crew at Citibank published a report last week with a chart of the October 1987 stock market debacle compared to the current market. What they saw apparently gave them the “chills.”
The chart (reproduced below by and courtesy of Business Insider) shows price action of charts in different time periods that look reasonably similar to each other.
The leader of the team goes on to say that he’s also concerned about:
- Brexit and the problems facing continental Europe like the whole Deutsche Bank tab with the US government
- the anti amicable election in the US
- rumors and reports of European banks removing some of the props holding those markets up by reducing bond purchases and thus reducing the amount of “easing” that’s been thrown at the market and finally
- the extreme short term volatility popping up across multiple asset classes
Over at Bank of America (I can’t bring myself to add Merrill Lynch… even just the initials take too long to get out) a technical analysis team using Elliott Wave analysis has reached pretty much the same conclusion and issued a Red Alert for an imminent selloff in stocks. Now before you run screaming to the hills at the mere mention of the name Elliott Wave and precursor to a selloff in the same sentence, take a look at the chart topmost on this page. As you can see, price is hovering just above support… perhaps ominously so. Here’s a look at the Dow Jones Industrial Average Daily chart.
Price has been hanging around the 2015 high for weeks now… but looks ready to finally take that drop.
Taken altogether, it’s entirely possible that we’re indeed on the front end of a precursor to a selloff. After all, the statements above re Brexit, the US election, etc. are enough to make the market look heavy.
Or maybe this is just another pause before price initiates its next leg higher.
P.S. Here’s a broader look at the markets and some interesting individual charts as of 12 October 2016.