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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
July 19, 2021
Stock Market Outlook: a reversal to the downside.
Preview from my weekly report*
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Stock prices reversed to the downside last week after Fed Chair Powell failed to ease growing concerns about the Fed's monetary policy. The stage for a decline was already set: for many weeks technical divergences have been multiplying, indicating increasing risk. More normal, two-way, up-and-down stock price action, with more typical 5%, 10%, or even 20% downside corrections, very well might lie ahead.
The stock market has been driven by easy monetary policy. The Federal Reserve has been working overtime pumping fiat currency money into the financial system by purchasing $120 billion of bonds every month ($40 billion in mortgage bonds and $80 billion in Treasury bonds). There never has been anything like it. This inflation of the U.S. dollar fiat currency, which is simply created out of thin air by the Fed and backed by nothing, is showing up in the prices we pay: the Consumer Price Index jumped up 5.4% and the Producer Price Index soared 7.3% over the past year. If this continues, some analysts say the Fed may be forced to consider tapering asset purchases sooner than planned.
Here is an expert explanation of exactly how the Fed creates inflation. "The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services." -- Ben Bernanke, 14th Chair of the Federal Reserve, from 2006 to 2014
Investor sentiment indicators have warned of bullish complacency and unsustainable overbought Greed for many months. A substantial majority of bulls implies potential vulnerability to a downside stock market price reversal or sideways correction/consolidation.
Probable Potential Reward appears less than Probable Potential Risk for the stock market. Stock prices have run far ahead of quantifiable reality. Stocks are overbought and overvalued relative to traditional measures: sales, earnings, dividend yields, and book value. Stocks are priced for an extremely optimistic future, ignoring all potential bumps in the inherently unpredictable road ahead. History shows that overly high stock prices are followed by low returns, and overpaying for stocks is not profitable.
Our full report reviews indicators that we monitor every day and offers clear and unbiased guidance on the following each week:
Global stock markets
The Defensive stock sectors
The Health Care sector
The Cyclical sectors
The Technology sector
The Financials sector
U.S. bonds and notes
Commodities (Oil, Metals, Agriculture)
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Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my Money Management Rules.
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