Last Friday there were news about the administration considering delisting the Chinese stocks.  The market  sold off immediately, but it managed to climb back off the lows around 3pm.  The market has been really resilient against the headline risks in September.  Is it the calm before the storm or is it because the funds are being considerate of the quarter end closing?

Last Wednesday we sent out a private email note about the 10-year treasure yield has bottomed in early September.  If it goes as the last two recession scares like what happened in 2012 and 2016, the stock market should rally from here.  We are waiting for the month end closing yield for confirmation.  The 10-year treasure yield needs to close above 1.737% on September 30th.

While we are waiting for the 10-year treasure yield data, if we look only through the lenses of the stock market, we believe this is the calm before the storm.  The stock market will break down in the triangle in the weekly chart.  The reasons are plenty:

  1. The general market topped in January 2018.  The FANG stocks topped in September 2018.  The super growth cloud software stocks topped in July 2019.
  2. The super growth cloud software stocks have experienced 30-40% correction off the July top so far.  On average, during a market correction, these growth stocks may need to correct about 70% before a bottom can be called.
  3. The FANG stocks are in bear market territory.
  4. Small caps are not participating.
  5. The near record stock indices are being helped by the defensive sectors.  Defensive stocks are never the true leaders of a lasting bull market.

Technically, the S&P 500 cash index has been contained in the triangle for the last 7 weeks.  It needs to close above 3013.59 on September 30th to imply a technical reversal of trend to the upside for now.  This is an extremely confusing time with so many macro events that could potentially swing the market in a big way.  Volatility will pick up again in October and November. The market will probably whipsaw back to back until April 2020.

In cycle terms, it is 7 weeks since the early August low, which is in top timing band.  It is a hair away from falling below the lower triangle line on the weekly chart.

If indeed the super growth stocks can experience a 70% correction, that would be a great buying opportunity.  We believe the next bull market is going to be bigger and there will be a tech bubble.

Keep your powder dry and be patient!