When the Levee Breaks

Sep 8, 2019

Led Zeppelin: When the Levee Breaks

“If it keeps on rainin’, levee’s goin’ to break
And all these people have no place to stay”

This song reminds me of what I am seeing in the stock market. Many long-term
negative breadth and momentum divergences that are screaming caution. The market can only hold it’s head above the sea of negative divergences for so long until it succumbs to the pressure, the result being the next major stock market correction. And this one could be a doozy.

Of course, the market has not rolled over yet. It has been hanging tough for the past 20 months by bouncing around within a sideways consolidation pattern. That consolidation pattern could end up being one big topping pattern. Only time will tell.

There are numerous breadth and momentum charts that are displaying long-term negative divergences, which act as an early warning signal that the market is not healthy and risk is elevated. The chart below could be the most obvious red flag out there.

Transport stocks are much more dependent on the economic environment than the average stock and historically have led the stock market down ahead of major market declines that were the result of an economic slowdown. With that in mind, let’s take a look at a long-term chart of the Transportation Index going back to 1990.

Here is an explanation of the drawings:

The red and green arrows notate when the Transportation Index diverged negatively with the S&P 500.

Long-term trends are notated with green trendlines for both indexes.

Vertical orange lines signal a trendline break for the Transportation Index and black vertical lines signal a break in trend of the S&P 500.

I have noted losses associated with these three past corrections.Each of the past three noted market declines was preceded by the Transportation Index leading the market lower. Recently, the Transports peaked in September 2018 and are currently in a downtrend; whereas the S&P 500 hit all-time highs July 2019. Also, the S&P 500 has broken a major long-term trendline and is now retesting that trendline from below, which is a typical chart pattern.

As I mentioned in previous updates, all these negative divergences are just warning flags. Currently, the S&P 500 is in an uptrend as defined by higher-highs and higher-lows. However, risk is high and a break in price has the potential to be the beginning of the next major market correction.

I believe that if the S&P 500 falls below the levels that I laid out in my September newsletter: House of Cards, that could be the point in time where the proverbial levee breaks.

Now is the time to reevaluate your retirement account allocations, not later after you have incurred substantial losses.

If you are worried about how your retirement accounts are allocated, shoot me an email and we can schedule a virtual meeting to review your holdings and investment strategy.

Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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