Dire Indicators Signal a Stock Market Correction Is on the Way

Stock-Market-Correction
iStock.com/Paperkites

Stock Market at a Dangerous Crossroads

It has become increasingly frustrating to witness the resurfacing of selling capitulation in the stock market in what has so far been a hazardous year for bulls.

But while I’m not ready to throw in the towel and accept that the bulls are losing steam, I do feel the easy money in the stock market has already run its course.

We could see another year or so of upside moves in the stock market, but the increased macro uncertainties will surely make it difficult to not want to give in.

Here’s what is at stake at this time:

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  • China Deal or No Deal
  • Yield Curve Inversion
  • Tariff War

The stock market applauded after President Donald Trump and President Xi Jinping decided on a trade war ceasefire at the G20 meetings.

The problem is there was a lack of details on the actual agreement. Trump subsequently admitted there was no formal deal except a 90-day window for negotiations between the world’s two biggest economies.

Trump later referred to himself as a “Tariff Man” and the stock market grew despondent and threw up. The Dow cratered around 1,600 points on Tuesday, December 4 and its low point on Thursday, December 6. The Nasdaq broke below 7,000 intraday on Thursday.

Chart courtesy of StockCharts.com

But the tariffs don’t appear to be working as the U.S. trade deficit with the world surged to a 10-year high in October.

The Dow retreated below its 50-day and 200-day moving averages in the process and entered into negative territory on the year.

Chart courtesy of StockCharts.com

I can hear Santa’s sleigh scrambling away.

The major declines on Tuesday and Thursday were also exacerbated by the massive computer algorithm trading that likely sent sell signals to the program as the Dow was selling and breaking below key moving averages.

And then add in the yield curve inversion on December 4, when the yield on the three-year Treasury note broke above the yield on the five-year Treasury note.

The inversion hints at a slowing economy, but I would be more concerned if the two-year yield edged above the 10-year yield. The current spread is 11 basis points.

Analyst Take

So here we are: The Nasdaq and Russell 2000 are in correction territory. Both indexes are displaying a bearish death cross pattern.

Whether the stock market can pull off some magic in the final three weeks of the year is growing more uncertain.

As an investor, it’s time to be more prudent, especially on the long side until the market risk factors are dealt with.