ELAM: Welcome to the stealth bear market

The 1973-74 bear market never crashed by declining a double-digit percentage in one day. Instead priced just drifted down for two years from 1,051 to 577 in two years.

Dennis on the 1973-74 bear market

All our warnings in this space the last few weeks and months are coming true.  The market is not advancing, but has been in distribution since the first DJIA high of 26,600 in January 2018.  The yield curve has inverted with the 10-year note paying less interest than a three-month T-Bill. Since 1974, this indicator has successfully predicted every recession. Stocks are down for the fifth week in a row. As noted here, various energy service shares are already trading at or near the March 2009 low. Our prediction that the negative social mood (political) would eventually transit to Wall Street is also coming true.

The Dow Transports and Russell 2000 Small Cap indexes are market leaders. Both have turned their daily trends down. Transports have collapsed 10 percent from the mid-April high. The Russell 2000 has had a similar fate; the trend is now down. It is not too soon to speculate a return to the late December lows in both these indexes. The technology XLK is also falling out of bed.

Investors have rallied defensive sectors like utilities and REITs. But utilities fell yesterday as did REITs. The same is true for the consumer staples ETF XLP down over 2 percent the last two days.

The DJIA ended at 25,126 down 221. That is enough to suggest after a modest move back, the down trend is likely to resume. Crude oil has dropped $1.74 to $57.40. The problems are excess supply coupled with the fear of world economic slowdown over trade wars.  Trump is not going to budge China. China has now contracted for control of the Greek port of Piraeus and now is angling to control Israel’s Haifa. What is the Israeli PM thinking?

Recall our warning that the China Belt and Road (transportation) Asian Infrastructure Investment Bank (finance) and thrust into the South China Sea reflects a long-term winning strategy — for China.

The XLE Energy ETF is already half-way back to its December low. The XES Energy Service ETF is a mere 80 cents above that same low.  Energy is leading the entire stock market lower.

Expect volatility, but overall energy prices and stocks look to be trending lower into the fall.