The Market Crash That Never Arrives

She tricks me into thinking, I can’t believe my eyes. I wait for her forever, but she never does arrive.
— The Cars, “All Mixed Up”

It must’ve been around 1979. The local radio station in Richmond Virginia — XL102 — had one of those “rate it” segments where they’d play a newly released song and listeners would call in and say whether they liked it or not. I heard two songs that year that changed my life. The first was “Let’s Go” by The Cars. The second was “London Calling” by The Clash. 

I liked The Cars song. It was a nice twist on standard pop music. But “London Calling,” wow. Really and truly unlike anything I’d heard. I loved it. 

Of course, this was Richmond, Virginia. Most of my friends were listening to southern rock, like Lynyrd Skynyrd and Blackfoot. When I played “London Calling” for them, ooo boy, they did not like it. At all. 

But I was hooked. Within two years, I was wearing combat boots all the time, a leather motorcycle jacket, and playing bass in a punk rock band called Graven Image. (In fact, here’s a video of Graven Image playing in a Richmond bar called Hard Times. I was 17, I think.)

There weren’t very many punk rockers in Virginia in the early 1980s. Three in my high school, I think. We had to put up with a lot of jeering, name-calling, even physical threats. I learned to go against the crowd with confidence. 

Anyway. Hated as they were in Virginia in 1979, both The Cars and The Clash are now recognized as pretty great bands. I gave up my music career, but the do-it-yourself and think-for-yourself spirit has served me very well in the newsletter business.

Sure, I read analyst reports and economist papers. And I read company reports, too. But I have my BS detector turned up full blast. I run my own numbers, think outside the box, and come to my own conclusions. So I’m often way out in front on emerging investment trends.

I was recommending Bank of America in 2010, when most people thought it was on the verge of bankruptcy. Starbucks at $22 a share, when people thought Dunkin’ Donuts would be a serious challenger. I told my readers Boeing would double in price three years ago, when it was trading around $120.

Waiting for the Crash That Never Arrives

These days, truly independent thinking is getting more and more rare. Political discussions are now boiled down to “you’re either with us or against us.” Over the weekend, a college professor publicly stated on Twitter that Hurricane Harvey was instant karma for Texans’ having voted Republican. Are you freaking kidding me?

People died. They lost their homes, places of employment… and you’re going to say they deserve it because of the way they voted? 

Quite frankly, that kind of thinking scares the hell out of me. Google dominates the internet. One company controls basically all the content that’s out there. If you can’t find it with a Google search, well, hey, it must not exist.

Facebook will spoon-feed you the opinions and news that you like, so you will never have to be confronted by an opinion that might challenge your beliefs. How different is that from those college campus “safe zones” that we get so fired up about? 

Investing is now dominated by indexing, or passive investing. Just buy a little bit of everything, and it will be fine. It’s getting to the point that analyst and the like don’t even want to take the risk of telling you which companies are better investments. All tech is good, all retail is bad. This type of thinking will have you throwing out the babes and buying the bad apples. 

OK, rant over, time for me to move on…

Yesterday, I weighed in on the technical side of the market with my Real Income Trader subscribers. You know I’ve been a bit worried that the stock market has gotten ahead itself lately, valuations are on the high side, and there’s been increasing talk about an imminent correction…

What’s Ahead for the Market

Here’s what I had to say yesterday: 

The S&P 500 has been giving off bearish signals for a couple weeks. It is currently trading below its 50-day moving average (MA). Now, because of the way the companies within an index are weighted, the index itself doesn’t always provide a perfect picture of the health of the stock market. Unfortunately, somewhere around 450 members of the S&P 500 are below their 50-day MAs. 

If you followed second-quarter earnings, you may have noticed that earnings beats were not met with enthusiasm. More companies (73%) beat expectations by a wider margin (total earnings were 6% better than expected) than their five-year averages. But companies that beat didn’t get the usual pop higher. In fact, if you look at the two days before earnings and the two days after, stocks that beat earnings expectations were down by 0.3%. 

That’s strange behavior — companies usually get rewarded for beating expectations. Why would they sell off on good news? Conventional wisdom says that when stocks sell off on good news, it suggests that investors don’t see things getting any better, and maybe they get worse. 

Starting on August 15, we got a series of better-than-expected economic data: retail sales, manufacturing surveys, and sentiment surveys all looked good. Housing data was just OK. Durable goods was really the only thing that didn’t look good (it wasn’t terrible, just not great). And yet the S&P 500 is ~25 points lower than its August 15 close.

Now, let’s look at a couple trends on the S&P 500 chart…

So, the slightly curvy blue line is the 50-day MA. I added the trend line in red, and, as you can see, the S&P 500 was riding them both higher. As I noted earlier, the index is now below the five-day MA and its rising trend line. Not by much, but it is below, and that’s potentially significant. 

Now, I outlined a wedge or pennant formation with green lines, at the far right of the chart. Two things to note here: One, wedges are continuation patterns. But you have to wait for the break to be sure which way it will go. And two, the price action (indicated by the yellow highlighted bar at the far right of this chart) is trying to get back into the wedge. 

So, how do we interpret this action? If your bias is bearish, then it probably looks like the trend is broken and a bigger decline is imminent. If you’re bullish, you’d say that, because the S&P 500 is still above its 200-day MA, the long-term trend is intact. So this continuation pattern should resolve with a break higher. I think we have to side with the bulls in this one…

Because a look at a one-year chart shows a couple other instances where bearish-looking wedges resolve to the upside…

OK, no more lines on this chart, it’s starting to get cluttered. The bottom line is that we should be on the lookout for a break higher. The high for the S&P 500 is 2,490, about 45 points higher.

Investors have been waiting for the crash forever, but I don’t think it arrives right away.

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Wealth Advisory on Youtube

The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.