Wealthbuilder Stock Market Brief 9th February 2018.

Technical Analysis Note.

This week’s “flash crash” has inflicted some technical “damage” on the market but nothing too
serious, for the moment. However, some caution is warranted.

To gauge where the markets go from here I believe it important to focus on how the Dow
Transport Index behaves, as it is the weaker of the two main Dow Indices. (As was the case in
1998 and 1999, just before the tech crash of 2000). Currently it is trying to consolidate around its
100 Daily Moving Average but I suspect new lows will be tested before too long. Remember
technical analysis 101: “when significant moving averages become points of resistance rather
than points of support you are in a bearish trend.”

Accordingly, please note: if the 9,440 price level is broken on the trannies the next key price
point will be 9,029. Should this level fail, the Dow Transports will be in a bear market. How the
Dow Industrials will react in the event of such an occurrence will be fundamental to world stock
market behaviour for the rest of 2018/2019.

My major concern now is not simply market technical reality but the functionality of the New
York Stock Exchange itself. What the “flash crash” of last Monday has shown us is that there is
no real liquidity in the stock market, period. (It fell 800 points in 6 minutes). In many ways it is
becoming increasingly obvious that the NYSE is no longer fit for purpose. Too much power has
been given to Algo and Quant trading entities to the detriment of market making professionals.
How this new system”” is going to operate in a true bear market is anyone’s guess. Should a real
bear trend develop, given what we have just experienced, a “recession” could be priced into the
market within days or weeks instead of months and years. Under such circumstances it is quite
possible standard sell stop execution and normal retail trading will not operate effectively, thus
exposing active traders and investors to massive uncontrollable losses. See this note that
appeared in the “Wall Street On Parade” blog, by Pam Martens and Russ Martens yesterday:

“The U.S. Senate Banking Committee needs to get its act together and immediately schedule
hearings on the trading outages that occurred at numerous discount brokers and mutual funds
on Monday. According to thousands of on-line complaints, customers of major firms like TD
Ameritrade, Fidelity, Vanguard, and T. Rowe Price could not access their accounts using the
firms’ websites and thus could not place sell or buy orders as the market dove 1,597 points in
mid-afternoon, then partially recovered to close down 1,175 points.”

Complaints against Fidelity included this one from a client named Lee Yih:

“The Fidelity Active Trader Platform finally loaded after 80 minutes of trying. I put in 4 orders,
but nothing. No indication of orders received, no indication of an execution. I do have the order
numbers, however. The website should not be giving the appearance it is up, when orders
entered are swallowed up and we do not know where we stand. I called them and waited for 32
minutes on hold before giving up.”
Given this “crisis of market functionality” investors and traders who have benefited greatly from
this bull market, which commenced in March 2009, might consider going to 100% to cash right
now thus avoiding the inevitable train wreck I see coming down the tracks. The recession
catalyst I see will be the FED forced to raise interest rates quickly due to imported inflation as a
result of an ever weakening dollar. Rising interest rates will destroy sovereign fiscal policies
worldwide and force growth crushing personal taxation increases. In other words austerity will
return with a vengeance.

This market position exit strategy may mean losing some profits from future hyperbolic market
action but it means one is liquid and in pole position to take advantage of any “flash recession”
and the inevitable eventual “flash recovery”. It is now obvious we are living in an altered trading
environment.

Chart: Dow Transports: Daily.

Chart: Dow Transports: Weekly.

Chart: Dow Industrials: Daily.

Chart: Dow Industrials: Weekly.

Charts: Courtesy of StockCharts.Com

Source: “Wall Street On Parade” 8th February article by Pam Martens and Russ Martens,
.

© 9th February 2018 Christopher M. Quigley.

www.wealthbuilder.ie