Volatility Is Back... Here's What It Means for the Market
Editor's note: It doesn't matter why the bull market will crash... All that matters is when.
Over the past couple weekends, we've featured several essays from Ten Stock Trader editor Greg Diamond. Greg uses a "technical analysis" investing approach – meaning he studies past market trends and human behavior to determine what could happen next.
Put simply, Greg has noticed startling similarities between what's happening in today's market and what happened from 1998 to 2000. In particular, he says key stocks aren't keeping up with major indexes... the market's history is repeating... and a massive crash is coming.
Today's Masters Series is adapted from the December 6, 2021 and January 3 Weekly Market Outlooks for Ten Stock Trader subscribers. In this essay, Greg takes another look at the market's behavior at the turn of the century and today... and examines price divergence in several important sectors...
Volatility Is Back... Here's What It Means for the Market
My theme for 2022 is simple – volatility...
The market hasn't been very volatile for quite some time... really, since the crash in 2020. The rally since has seen modest corrections, and stocks keep grinding higher.
So what will happen? Why would I think stocks are going to shift course and become more volatile this year? Will it be due to a policy error by the Federal Reserve? Inflation? Politics? War? A "black swan"?
Truthfully, I have no idea as to the what or the why. As I tell my Ten Stock Trader subscribers often, the only thing I care about is the when.
Recently, I made a bold prediction that we could see the end of the bull market in February or March 2022.
In last Saturday's Masters Series, I compared the price action of industrial giant Caterpillar (CAT) with tech leader Microsoft (MSFT) in 2000 and now. The time cycles are repeating, which warns of trouble ahead.
But there's more...
For much of last year, I noted in Ten Stock Trader that the Nasdaq 100 Index is replicating the exact same price action from back in 1998 to 2000. Let's take a look and see if that still holds water.
Here's the Nasdaq 100 right now...
From the COVID-19 crash, the index rallied 100%. Then, there was a consolidation earlier this year and a breakout... and a small consolidation followed by another rally. It's experiencing another one right now, which the market is currently about to break out of with the Nasdaq 100 likely to make new highs soon.
Now, here's the chart of the Nasdaq 100 from 1998 to 2000...
It's the exact same price action... The red arrow marks where we are along the timeline.
So yes, the two time cycles still hold water. This further adds to my conviction that the market won't continue in a nice smooth uptrend in 2022.
I've said it before and I'll say it again... prove me wrong, Mr. Market.
If this market is not replicating what happened back in 2000, it's going to have to prove it to me. Prove to me that the four worst words in investing – this time is different – won't take this bull down.
So far, everything is on track and following along perfectly... which means I can't ignore it, and the bull market is running out of time.
In the short term, based on this chart and others, I'm still bullish. But the clock is ticking...
Next, let's look at one more long-term chart in the technology sector, but not in the Nasdaq. This is the VanEck Vectors Semiconductor Fund (SMH)...
When analyzing this chart, I'm using something called Elliott Wave Theory ("EWT"). While there can be a learning curve to understanding all of the nuances, the basic principle of EWT is that markets tend to make five-wave moves up and down before a reversal takes place.
This is what's happening in the long-term chart of SMH above. The larger waves are labeled, with the final Wave 5 in progress. The five waves in parentheses mark the final five waves within the bigger five-wave move from the March 2020 low.
Without getting too technical, when you start to see multiple five-waves on top of one another, it means the move is coming to an end.
In this case, the bull market from the March 2020 low is forming five large waves and is coming to an end – a big reversal is on the horizon.
As you can see, there's still room for stocks to run higher. But the important thing is this Elliott Wave count lines up with the Nasdaq 100 charts from earlier and the Caterpillar versus Microsoft price action I detailed last weekend.
So looking at 2022 from a technical perspective, there are lots of clues lining up that tell me to be very cautious this year...
When bull markets reach their tipping point, certain stocks and markets tend to give a warning well ahead of time – usually a few months, if you know where to look.
The way to think about this is money flows start to dissipate in some markets, but not in others. When some stocks that were participating in the bull market can't keep up, it's a problem. The bull market begins to crack.
Technically speaking, this creates price divergence and warns of trouble ahead. For example, an important fund made a large reversal recently – the iShares Russell 2000 Fund (IWM), which tracks small-cap U.S. stocks.
IWM did absolutely nothing all year except trade in a tight range. Last month, it broke out of this range... but failed miserably, as you can see above. Not only did it fail, but it then broke below support and below the 200-day moving average ("200-DMA").
This is a bearish setup now. I'll be keeping an eye on this market heading into 2022. If it makes a lower high while other stocks and indexes keep making new highs in the months ahead, that will likely be a warning signal.
Next, let's look at Caterpillar. Similar to IWM, this stock is in a bearish position...
Caterpillar has had two lower highs since topping out last summer. From a fundamental perspective, its price action is a warning sign. As I explained last Sunday...
What's even more concerning is that Congress passed the trillion-dollar infrastructure deal in November, and Caterpillar still can't keep up with the major indexes. Money should be pouring in to building projects... And the fact that a stock like Caterpillar can't keep up is concerning.
The last problem I'll highlight isn't a stock – it's oil. Oil powers the world of transportation, and it's always important to watch as a leading indicator of good times and bad.
Oil is also mapping out a much larger five-wave count, similar to what I outlined in the SMH chart earlier...
The green numbers are the pattern leading into a fifth-wave top. Again, this will likely mark a significant top and reversal along with stocks.
Even more important is the relative strength index ("RSI") at the bottom as oil climbs into this fifth-wave top...
See how the RSI is sloping down while prices are rallying? This is called "negative divergence," and it leads to a decline in prices. We saw this with oil (and stocks, for that matter) back in 2018 and 2019. I'm expecting a similar move when oil makes its final top in the next few months.
This doesn't bode well for stocks, either. In short, we must be aware of the problems that are clearly showing up in some markets – they're telling us to be prepared for what lies ahead.
Regards,
Greg Diamond
Editor's note: In early 2020, Greg used his unique trading strategy to predict the March pandemic crash weeks before it happened. Now, he says you must get ready for a "bloodbath" in 2022...
According to Greg, the massive crash he's predicting this year could rival the 2008 financial crisis and the 2001 dot-com bust... But for those who take steps to prepare, it could also be the biggest moneymaking opportunity in seven years.
Greg shared all the details in an urgent broadcast last week – including the exact date he believes stocks will plummet... and how you could have doubled your money 26 different times if you'd followed his recommendations since he first joined Stansberry Research. Watch the free replay right here.