The Dow and SPX have made it to new all-time highs and made new highs again today. But they're alone in doing so and they were the only indexes to hold in the green today. While this can be viewed as bearish non-confirmation, the stock market is bullish until proven otherwise.

Today's Market Stats

For the past three days we've seen the stock market gap up, thanks to an overnight or pre-market rally in the futures, but then chop mostly sideways for the rest of the day. This is frustrating for traders on both sides since there's been very little to trade during the day. It's much easier (cheaper) to manipulate the market higher with overnight futures than it is during RTH (regular trading hours). Holding long positions is obviously the winning position but the risk is what could happen if the big spike up suddenly loses support, especially if this week's rally is more about opex than "real" buying. It's looking like an effort to get SPX above 2150 for a settlement price (assuming it doesn't start back down before Friday morning).

Many are questioning how the stock market could possibly be rallying so strong on what appears to be very weak fundamentals. Since the spike down into the June 27th low (post-Brexit reaction) there's been much speculation that the central banks panicked and injected a lot of liquidity into the markets to prevent a selloff. After all, this has been their mission for quite some time, now readily admitted by them. They certainly succeeded at their mission (again) with the big spike back up this month.

Citi Research published a chart, shown below, showing central bank asset purchases since 2009 and this year's spike in purchases should put to rest any questions about their involvement in the markets, especially by the ECB and BOJ, both of which have been looking for alternative asset purchases and have made it known that they are buying stocks (ETFs, index funds, etc.).

As the chart below shows, CB asset purchases have risen to their highest level since 2013 and have more than compensated for the withdrawals by EM (Emerging Markets, via reserve liquidations). The spike in asset purchases this year (bold black line on the chart) has clearly helped lift stock markets and can be credited for the new all-time highs for the Dow and SPX (CB asset purchases have been focused on big-cap blue chip stocks). The bond market has also rallied and that's driven yields lower. Knowing the CBs have no intention of relaxing their purchases (look for a big announcement from Japan before the end of this month), this will likely be a bullish factor for some time to come (bears beware).

The global banking system is at risk of a systemic failure and there are a few high-profile banks that are being watched carefully. European bank stocks in particular have been pummeled as investors shy away from the fact that many big banks are already insolvent (like the central banks themselves) and they're too big to bail. Look for more bail-ins like what happened in Greece. The threat is that one big failure, like Lehman Brothers in 2007, could lead to a domino effect since the derivative exposure links many of the banks together. Whether it's banks in stronger Germany or banks in weaker Italy, the result is the same. Italy's banks now have about 17% of their loans that are non-performing (NPL), amounting to about $220B and the number is climbing every month.

There's been an effort to paper over the problem by having the banks simply carry the loans as performing ones. Covenant violation? I don't see no covenant violation and I ain't afraid of no ghosts. Many of these banks, including in the U.S., have less than 3% assets vs. liabilities, which was the position Lehman Brothers was in. A 3% decline in value of their assets basically wipes them out and we have a systemic problem with the amount of debt these banks hold and the increasing level of NPLs. This is one reason why the central banks have opened up the fire hoses of liquidity. Unfortunately their policies are hurting banks by driving yields into negative territory (the amount of negative-yielding government bonds has skyrocketed this year).

So it's a natural question by bears as to why the stock markets around the world are rallying. The question of course requires a logical answer and we know there isn't one, other than liquidity of course. The money goes looking for a home that provides at least some return and is relatively safe. The U.S. fits the bill and could attract money for some time to come. As traders we simply have to go with the flow but it's also important to recognize when the flow could reverse. Our best tool, as deficient as it is many times, is the chart of price action. It's kind of like Churchill's description of democracy -- a chart is the worst tool to use, except for all the others. So let's take a look and see what they're telling us.

S&P 500, SPX, Weekly chart

The big celebration this week is the new all-time high for SPX (and the Dow) and if we view the big sideways consolidation since the April 2014 low and May 2015 high the breakout above 2135 could easily be interpreted as a bullish breakout. Certainly bears would be foolish to short this just because it shouldn't be breaking out. Never trade your bias unless you have some evidence, such as a chart pattern, to support it. I can speculate here that the breakout will turn into a fake-out as a throw-over finish to the big consolidation pattern. But at the moment there isn't any evidence (only suspicion) that the breakout will fail. Back below 2135 would be worrisome for bulls but as long as that level holds it will remain bullish. But bulls cannot afford to get complacent here.

The reason I mention complacency and why the bulls can't afford to be smug with the breakout above 2135 is that there are presently a lot of believers in the bullish case. And when too many believe in something, and place their money on that bet, it oftentimes marks the end of a move (the rally runs out of buyers or a decline runs out of sellers). Looking at the CNN Fear & Greed index, it printed 88 yesterday and 86 today. A high level doesn't mean the top will form here and now but it does offer a reason to be cautious rather than complacent about the rally. The FNG index hasn't been this high since July 2014.

CNN Fear & Greed index

A story by Charles Del Valle, Editor, Strategic Investment, had this to say about some other sentiment measures:

"And a major survey by Investors Intelligence (II) found that more than half of all newsletter investment writers are bullish. That hasn't happened since early 2015. More importantly, the number of folks calling for a major correction has dropped to the lowest level in two years. II concluded that 'the bulls have entered the danger-higher risk zone' and noted that sentiment was likely to shift soon."

The VIX is difficult to judge during opex week because of the influence of expiring options along with opex hedging. But the VIX is another reason for caution now that it has dropped down to the 13 area and is again testing its uptrend line from July 2014 - July 2015 (and here we are in July again). We still have two days before the weekly candle finishes but if it forms a small doji at trendline support it could be the middle candle of a reversal pattern (confirmed with a white candle next week). It can always drop lower but as a trader, is that a bet you'd be willing to take here, especially with the significant bullish divergence at the current low? Just be cautious, that's all this chart and sentiment measures are recommending.

Volatility index, VIX, Weekly chart

SPX made it up to 2155 yesterday and 2156 today and there are two reasons why I'm watching the 2154-2156 area very closely for possible trouble for the bulls. One is a Gann Square of Nine level and the other is a Fibonacci extension level. On the Gann Sof9 chart, a portion of which (lower right corner) is shown below, shows the relationship (on the same radial) between 1810-1812 and 2154-2156. The 1812 and 1810 numbers are the January and February lows, respectively, and 2154-2156 are said to "vibrate" off numbers on the same radial and often mark turning points. Therefore a top to the move off those lows could be 2154-2156. Today's high was 2156.45

Gann Square of Nine chart, bottom right portion

The other reason why 2156 could be important has to do with a Fibonacci extension, which I show on the SPX daily and 60-min charts below.

S&P 500, SPX, Daily chart

A 127% Fibonacci extension of a previous move oftentimes marks a reversal level. The previous move in this case is the June 8-27 pullback and the 127% extension of that move points to 2155.60, which is shown on the next two charts but it's easier to see on the 60-min chart further below. The 127% extension only provides a warning of a possible reversal but it's common enough to pay close attention, especially since this one coincides with the Gann level. Tuesday's high was 2155.40 and today's high was 2156.45. At the same time it's back-testing its broken uptrend line and it left a small doji for today's candle. A red candle for tomorrow would create a reversal pattern but it could continue to "ride up" underneath the trend line before letting go. This has been very common but at the moment it's another reason for bulls to be careful about chasing this higher.

Key Levels for SPX:
- bullish above 2156
- bearish below 2108

S&P 500, SPX, 60-min chart

With the rally from June 27th achieving the 127% extension of the 3-wave move down from June 8th we have a possible bearish EW pattern that calls for a sharp decline to complete a larger 3-wave move down from June 8th. The c-wave of this move would be expected to achieve 162% of the first leg down (June 8-27), which points to about 1948. This would result in a test of the February 1st high at 1947. I show the potential for the rally to continue into tomorrow, potentially up to 2175-ish, and maybe higher into next week (they could gun the market tomorrow to get a 2175 settlement price Friday morning for SPX). As long as it holds support at or above 2135 it will remain bullish. But an impulsive decline below 2135 would give us a bearish heads up.

Dow Industrials, INDU, Daily chart

A similar 127% extension discussed for SPX, but starting from the April high for the Dow, is at 18468. It too could ride up underneath its broken uptrend line from February-May, currently near 18440, as it holds up for opex. A close at or below 18470 into the end of the week would have me feeling bearish into next week (but recognizing that all it will take is a Sunday night rally to jump over resistance Monday morning). A rally that holds above 18470 would be reason enough for bears to go home.

Key Levels for DOW:
- bullish above 18,470
- bearish below 18,000

Nasdaq-100, NDX, Daily chart

Today the NDX created a small bearish engulfing candlestick (for an outside down day with a new high and lower close). Today's high was near 4590 and just shy of price-level resistance near 4600 and only in hindsight will we know if this was a good setup for a reversal back down. A drop below its June 6th high near 4536 would be a bearish heads up since that level should now act as support if there are higher prices ahead of us.

Key Levels for NDX:
- bullish above 4600
- bearish below 4453

Russell-2000, RUT, Daily chart

The RUT is battling its December 2015 high at 1205. It rallied above that high yesterday and today with highs at 1211.77 and 1210.38, respectively, but has been unable to hold those highs and today it closed back below 1205. It's another example of a failure to follow through on a bullish break and it's cause for some concern. But it's not clear yet whether we're seeing just a consolidation near the highs, to be followed by another push higher or if we're seeing the RUT top here and now. The first bearish indication would be an impulsive decline below its uptrend line from June 27th, currently near 1183. But for now the bulls rule.

Key Levels for RUT:
- bullish above 1215
- bearish below 1161

10-year Yield, TNX, Weekly chart

Bonds prices had pulled back off their July 6th highs, which created a bounce for yields, but that reversed today. It's too early to tell if the larger trend will resume (down for yields) but that's the potential as I see it. TNX bounced off support at its July 2012 low at 1.394% (it made an intraweek low at 1.336%, which was an all-time low) and I continue to see the potential for TNX to drop below 1% and perhaps down to 0.5% as global bond yields continue to decline. The more outside investors choose U.S. bonds it will continue to drive their prices higher and yields lower. I know the bond king (Bill Gross) and many very well respected investors disagree with me on this, which makes me nervous, but I'll become a believer in the end of the bull market in bonds when the charts tell me so.

One reason why I think bond yields will continue to decline is because the bond market continues to forecast deflation and not inflation like the central banks want (and are desperately fighting for with all their money creation). As much as the central banks want inflation (it helps pay back longer-term debt with cheaper dollars) it's been a losing battle for them since 1997 when money velocity started slowing. No matter how hard the Fed pushes on that string they can't get people to spend more money. Corporations aren't spending except on themselves with share buybacks and other companies. People are living on less and they haven't significantly increased their debt load since 2007 (as opposed to corporations and governments which have exploded their debt levels) and they're not spending as much. The result, as the chart below shows, is a longer-term slowing in money velocity and once it dropped below the historical average of 1.74, in 2010, it has been one of the surest signs of deflation. Stock markets don't do well in times of deflation but you certainly wouldn't know that, yet. The Fed has been papering over the problem with massive QE and cheap money but it hasn't stopped the slide in MV (nor will it for at least a couple more years). When all of this will catch up with the stock market is the big question.

Money Velocity, 1990-2015, chart courtesy St. Louis Fed and Hoisington Investment Management

KBW Bank index, BKX, Weekly chart

The banks have outperformed SPX off the July 6th lows but BKX has significantly underperformed SPX since July 2015 and especially since the end of May. It will be interesting to see what BKX does with price-level resistance at 66.50, a level that has been S/R since 2013. Along with 66.50 S/R it has its 200-week MA at 66.64 just above. Not shown on the weekly chart, BKX is currently struggling with its downtrend line from June 2nd, where it closed today at 66.12, and its bounce off the June 27th low achieved two equal legs up at 66.21 (yesterday's high was 66.35 and today's was 66.43), for the possible completion of an a-b-c bounce correction. I'll be more impressed with its bounce if it can hold above 66.64.

Transportation Index, TRAN, Weekly chart

The TRAN has had a strong bounce off its June 27th low and has made it up to its June 8th high at 7950 with today's high at 7952. At the same time it's now testing its downtrend line from February 2015 - April 2016, currently near 7930, where it closed today. It has a long way to go to confirm the Dow's new all-time high (its November 2014 high was 9310) but it would be at least bullish if the TRAN can break above its April high at 8149 and following a 3-wave pullback from April it at least has a good shot at another rally leg. That would lend credence to the current rally and it would be a strong reason for bears to go back into hibernation.

U.S. Dollar contract, DX, Daily chart

The US$ hasn't done much for the past three weeks but the sideways consolidation is more bullish than bearish. However, on the daily chart it's overbought and showing bearish divergence against its June 27th high so it's possible we're going to see a deeper pullback before heading higher. I'm assuming it will head back up to the top of its 2-year consolidation range and I expect a lot of choppy price action for the rest of this year.

Gold continuous contract, GC, Daily chart

This week we've seen a reversal of last week's rally in gold but there's no confirmation yet that we might have seen the high, although that's the risk as I see it for those chasing gold higher. As noted last week, I see upside potential to its downtrend line from September 2011 - October 2012, which is near the 1417.50 projection for two equal legs up from December 2015. It would be more bullish above that level. Many gold bulls are bullish gold for fundamental reasons, primarily as a hedge against inflation and/or as an alternate currency. I want to be a gold bull for exactly the same reasons and while I own some gold as a currency hedge I'm not ready yet to dive into a big position. As explained earlier, I think we're still in a deflationary environment, contrary to what the Fed wants, and that we'll likely see lower gold prices if that's true. I'm hoping to become a very long-term bull at the next low (end of the year or in 2017).

Silver continuous contract, SI, Weekly chart

Looking to silver to see if there's a different message for the precious metals, I see the potential for a top for silver following last week's spike into a high. It could press a little higher but I see risk in the 20.27-20.93 area. Two equal legs up from December 2015 is at 20.27 and the 2nd leg of a larger 3-wave move up from December 2014 is 162% of the 1st leg at 20.63 (note the 162% projection for the 2nd leg, which is the same pattern, in reverse, that I'm suggesting we might have for the blue chips). And then a 62% retracement of the decline from August 2013 is at 20.93. This 20.27-20.93 area is likely to be strong resistance but would also mean silver would be more bullish if it can hold above 21.

Oil continuous contract, CL, Weekly chart

Oil's pullback from the high on June 9th has been choppy and could indicate it's just a corrective pullback before heading higher. A rally above 51 would be a bullish move but until that happens I think we're seeing the start of the next leg down for oil, one that could drop it below 20. There's lots of time between here and there to help figure out whether or not it could make a new low or simply consolidate sideways for the rest of the year (kind of like the dollar).

Economic reports

There a couple of economic reports Thursday morning, including PPI numbers, and then a bunch more on Friday, including CPI numbers. Friday we'll get several reports that will indicate how the economy is doing but the market is already showing it doesn't care about the economy. As long as the central banks are shooting drug money directly into the markets' veins it's happy.


The central banks blinked and the markets win again. There's a lot of speculation about how the market was "allowed" to decline significantly following the Brexit vote so as to scare the central banks into injecting massive amounts of money and then the big players got to put that money to work buying stocks at cheaper prices. We know the market is massively manipulated and these "conspiracy theories" tend to look a lot more like real stories than they did for most people less than 10 years ago.

But whatever the reason, the stock market has blasted higher and the blue chips have made new all-time highs. There's some concern that the new highs have not been made with high volume and nor have they seen much follow through. There's a lot of disparity between indexes and bullish sentiment has shot up through the roof. All of these things don't prove a market top is right around the corner but we have enough reasons to be cautious and question why just the blue chips are making new highs.

There is money pouring into the riskier stocks, like small caps, but they have a long way to go to catch the blue chips at new highs. Like we saw back in 2007, the new highs in October, following the ones in July, were being led by techs and small caps. They're suspiciously absent this time. Likely the reason is because the central banks are buying blue chip indexes and ETFs, which adds credence to the idea that the new highs are more central bank driven than "normal" buying. How long that can continue is anyone's guess, and certainly a reason for bears to back off until we see better evidence of a top in place. Keep in mind that we could be in the process of finishing the rally with a blow-off top that could go MUCH higher. You don't want to stubbornly hang onto a short position if that happens.

If the rally is being brought to us courtesy of the central banks, the more funny money that props up the market the more vulnerable it becomes to a disconnect to the downside. A major bank failure and a systemic financial system breakdown could be more than even the central banks can contain. Both sides need to trade very carefully here.

Good luck and I'll be back with you next Thursday (Tom and I will be switching Wednesday-Thursday).

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying