Sven Henrich: My 2019 stock-market outlook

Cataclysmic action within the fourth quarter left traders shell-shocked, as U.S. shares plummeted and over 90% of dollar-based asset courses fell for all of 2018.

Macro monsters from commerce wars, Brexit, slowing financial progress, a droop in global property prices, political uncertainty, yield-curve inversions, deficit explosions, technical breakdowns, and so on., are lurking in all places, leaving traders blindfolded whereas they attempt to navigate extremely unstable market waters in seek for a safe vacation spot in 2019.

As we discovered in 2018, extremes can develop into extra excessive, long-term traits matter, patterns matter, divergences matter, technical disconnects matter and now we’re coping with the aftermath and their implications.

My fundamental market message for 2019: Pay shut consideration and keep absolutely knowledgeable. There are numerous advanced transferring technical and macro pieces driving markets and the global financial system that make for a foggy outlook for the year forward.

Wall Street tends to deal with a vacation spot when it initiatives increased year-end target prices. Indeed, as in 2018 and in 2008, Wall Street is again projecting increased prices for this year. While increased prices are all the time a chance, my focus on this report is on the journey slightly than the vacation spot, as I anticipate wild price swings throughout the 2018 vary (2,340-2,941 factors within the S&P 500 Index

SPX, +0.70%

) and presumably a a lot decrease vary nonetheless to come back.

My intention right here is to focus on some choose macro- and technical-risk components which have each negative and constructive implications for markets.

Let’s begin with the ugly. The largest danger for traders: That it’s completely different this time — and never in a great way. Why completely different? Because we face the prospect of a significant market high in place and a coming recession, however this time central bankers have loads much less ammunition at their disposal in contrast with earlier financial cycles. Meanwhile, debt is increased than ever, by far. Here we’re 10 years into an growth and global progress has been slowing dramatically, and markets are extremely harassed.

The European Central Bank (ECB) remains to be on negative rates of interest, the Bank of Japan (BOJ) remains to be printing and the U.S. Federal Reserve, as an alternative of taking advantage of the chance in the course of the progress restoration, launched into its slowest interest-rate increase cycle in historical past. During Janet Yellen’s tenure, the Fed tinkered a lot too cautiously, missing the chance to construct a bigger buffer to cope with the subsequent downturn. Only three months after confidently projecting a four-rate-hike schedule for 2019, latest market turmoil already brought on Fed Chairman Jerome Powell to cave and ship dovish jawboning indicators to markets on Jan. 4, the timing of which is following the historic script I outlined in “The Ugly Truth.”

In my December warning, I outlined six indicators to be careful for, one among which was the bull market pattern line. That pattern line broke in December, together with others I highlighted in “Shattered Trends”:

The reversal in yields and the breaking of the bull market pattern in context of an unemployment cycle reaching its historic cycle restrict overtly raises the likelihood that this bull market is over and should repeat the cycle of earlier market tops.

If that is so and a recession certainly unfolds into 2019/2020, a lot decrease danger ranges have to be considered within the months and years forward:

The 2000 high noticed a recession following into 2001, with markets bottoming in 2002. The whole retrace from the lows of the 1990 recession to the 2000 high ended on the 0.618 fib. An equal technical transfer now would suggest an eventual transfer again towards the 2000 and 2007 highs with the 0.618 fib sitting at 1,535. For reference: The 2008 monetary disaster reversed greater than 100% of the advance from the 2002 lows to the 2007 highs. So if anybody thinks such a transfer is unattainable, it certainly is the historic reversal report of the previous two bubbles.

Except this time central banks have a lot much less ammunition.

And be clear: Wall Street will not be publicly forecasting this technical state of affairs. But let me additionally level out that Wall Street didn’t forecast the 2002 and 2009 lows both.

If you view this potential state of affairs via the lens of provide and demand, perhaps the most important concern right here is one among demographics. Baby boomers are coming into retirement age. Many are in search of security and have skilled the ache of the monetary disaster and most certainly won’t need to gamble on residing via one other large downturn. Indeed, we noticed report redemptions in December following report passive-ETF inflows in early 2018. As market liquidity has been dropping steadily over the previous year, we just witnessed the brutal impact of redemptions on prices throughout one of many ugliest Decembers in latest market reminiscence. It serves as a significant warning signal.

Now, before everybody panics and expects quick doom and gloom, let me state clearly: Even if there’s a high in place and markets are turning right into a full bear market, know that even bear markets supply large price-range alternatives, even to the upside. Hence, my focus is on the technical journey, versus a selected vacation spot at this juncture.

The full information have but to disclose themselves, and I’ll tackle just a few of these under.

Note this correction was no bizarre correction; actually, it was a rare correction, and I’ll spotlight this with a chart of the $BPSPX, the bullish proportion index of the S&P 500:

Note that in December, $BPSPX hit ranges not seen because the monetary disaster, a selloff deeper than the 2011 and 2015/2016 corrections. Hence, I would like everybody to be clear on this: This was a significant, large correction that stopped exactly on the weekly 200 transferring common (MA), a key historic pivot.

As I outlined just before Christmas in “Imbalance,” markets had been overshooting to the draw back and focusing on key assist ranges and, therefore, a bigger rally into January was to be expected. Indeed, the action thus far has been carefully following the 2000/2001 script. That rally again then in the end resolved to the draw back.

Really necessary: During the three earlier events of markets correcting into the weekly 200 transferring common (2008, 2011 and 2016), markets engaged in a double-bottom course of, that means that the lows had been retested in some unspecified time in the future with a decrease low. During the bull market pattern, these retests served as main lows before embarking on a journey to new highs.

In 2008, the next rally off of the retest produced a decrease excessive that led to an eventual breakdown under the weekly 200 MA.

Hence, for 2019 this can be a crucially necessary technical dynamic to look at within the weeks and months forward.

Retest or not, given huge oversold circumstances, there are causes to anticipate massive rallies in 2019 so long as markets can maintain price strikes above the weekly 200 MA.

Let’s have a look at a few of these causes.

One of the important thing causes is the VIX

VIX, -2.43%

In “Yearly Candles,” I highlighted the significance of yearly charts and technical reconnects off historic extensions. Charts of the NASDAQ 100 Index

NDX, +1.02%

and the FAANG shares had been just too prolonged to the upside and demanded a technical reconnect. Those reconnects look a lot better now, however nonetheless haven’t absolutely reconnected and, therefore, the potential for a retest of December lows with a brand new low is a really possible state of affairs in some unspecified time in the future in 2019.

But it’s the VIX that particularly suggests rallies to come back and an no less than a brief calming of the waters can even be a part of the market’s make-up in 2019:

Note in each single year, bull market or bear market, the VIX will in some unspecified time in the future not solely reconnect with this yearly 5 EMA (exponential transferring common), however it is going to additionally dip under it. We noticed that even in the course of the bear markets in 2001/2002 and 2008/2009. As of now, in early 2019, the VIX has but to reconnect with its 5 EMA. So right here’s a prediction: VIX will relax in some unspecified time in the future in 2019 and even dip under its 5 EMA.

But be clear: The panorama for volatility has modified:

As you’ll be able to see within the chart above, VIX has damaged above a number of wedge patterns. In January 2018 it broke above its 2016/2017 wedge, then based mostly above it in the course of the summer season, then broke above its new wedge in October before forming a bull flag. This January we noticed the VIX retreat again to its bull flag sample as markets rallied, aiming for MA reconnects. So be clear: Volatility has structurally damaged increased and can possible remain elevated for fairly a while. As lengthy because it remains in bullish buildings, it might probably technically resume its path increased.

For now markets are looking for stability and eager to reconnect with key transferring averages. As of now, the S&P 500 remains under its weekly 100 and 50 MAs and its day by day 50 and 200 MAs. At some level in 2019, markets will need to reconnect with these transferring averages; therefore they are going to be key to look at. Note all these transferring averages, in addition to open gaps above, will pose resistance. As do any damaged pattern traces. In the chart above I additionally indicated some reversal fibs which may be of curiosity.

So bear in mind there will probably be numerous resistance forward, not solely technically, but in addition supply-driven as there are many trapped consumers above who search to interrupt even. Those resistance factors will probably be a key problem for markets in 2019, they usually might show turning factors if a bear market is to unfold.

Only a sustained shut above the day by day 200 MA and the weekly 50 MA can provide traders consolation that perhaps a significant low is in play and markets can head to increased pastures.

Let me crystallize the market’s dynamic problem for 2019 utilizing one key inventory for example: Apple

AAPL, -0.22%

Last week the corporate’s inventory discovered assist at its 0.50 fib close to its weekly 200 MA. During the latest bull run, the weekly 200 MA was key assist, together with a closely oversold weekly RSI (relative power index), which then produced rallies into the weekly 50 MA before going to new highs. Currently that weekly 50 MA is at 187. Hence, technically talking, a transfer towards that MA reconnect within the months forward would represent a technical rally target.

The firm just issued a significant income warning and cited the commerce battle with China as one of many key causes for its struggles. How a lot of the global slowdown has been exacerbated by commerce wars I’ll go away for others to debate, however be clear: Companies such as Apple would profit drastically from a constructive decision to the commerce battle. And it’s not just Apple. As Trump financial advisor Kevin Hassett said final week:

“There are a heck of numerous U.S. companies which have numerous gross sales in China which can be principally going to be watching their earnings be downgraded … till we get a cope with China,” Hassett mentioned on CNN. “It’s not going to be just Apple.”

And that’s precisely proper. Hence, a constructive commerce battle decision would possible spark a significant rally and could function the set off for a transfer as much as the weekly 50 MA on Apple, for instance.

Failure to achieve a constructive conclusion, in fact, would go away the negative overhang and could very a lot be the set off for the S&P 500 to interrupt under its weekly 200 MA, as outlined earlier. Hence, commerce wars are key to look at in 2019.

But Apple is also symptomatic for bigger points past commerce wars. Fact is, the corporate’s progress in iPhone gross sales, its fundamental product line, has stalled. People are upgrading telephones in slower intervals as telephones have develop into costlier and the incremental advances in expertise are just too little to supply a compelling motive to improve each year.

What’s that say in regards to the expertise cycle typically? The excellent news for Apple, and different players might, in fact, be 5G, which is just across the nook. As protection will develop into accessible within the subsequent few years, it is going to supply a significant motive for individuals to improve. But that’s not occurring in 2019 but.

Fact is, slowing global progress will not be solely pushed by commerce wars; slowing progress is structurally pushed and, therefore, it’s critically necessary for traders to maintain an in depth eye on bigger macro drivers.

In a perhaps excellent news/unhealthy information kind of means, one of many key gadgets to keep watch over is Industrial Production (IPI):

As comparable as charts are to earlier market tops, IPI has thus far not proven a reversal, which makes the current market breakdown inconsistent with earlier market tops. Yield curves apart, a coming recession could be signaled by a reversal in industrial manufacturing. So preserve an in depth eye on December’s information when it comes out. Should we see a break decrease, it might be an ominous signal. A blip? Or the start of one thing bigger? We might want to see and consider the proof because it is available in. As lengthy as information factors such as industrial manufacturing can present a constructive trajectory, the latest correction might set fairness prices on an upward restoration trajectory.

As I mentioned on the outset: Pay shut consideration and keep absolutely knowledgeable. There are numerous transferring components right here, however they may present loads of alternatives for active traders/merchants.

In January we’ll see company earnings reviews and outlooks, which will probably be carefully scrutinized. The fourth-quarter market correction has taken a number of the extra out of markets as valuations and market caps have dropped dramatically in some instances and key market sign indicators nonetheless present vastly oversold circumstances.

Buybacks remain a think about markets as a supply of liquidity, however they had been clearly not sufficient to prevent the breakdown in markets, as redemptions overwhelmed that remaining supply of synthetic liquidity. The Fed just despatched a dovish sign indicating policy makers stand able to react and modify their balance-sheet discount schedule, and markets rallied laborious on this.

In abstract, my outlook for 2019: Technical concerns counsel a coming reconnect with key transferring averages within the weeks and months forward in addition to an no less than momentary calming within the VIX. However, a retest of the December low is a definite chance at some stage. A sustained break under the weekly 200 MA would set markets on the historic path of earlier market tops. To the extent {that a} decision in commerce wars can convey a few resurgence in optimism and delay a global recession, markets might discover a option to break above the important thing transferring averages, establishing for a constructive 2019.

A horrific final result for market members could be if even a constructive decision to commerce wars can not change the structural business cycle realities and a global recession ensues as evidenced by slowing manufacturing, revenues and earnings. And then all of us could be confronted with the scariest unknown monster of all: A coming downturn with central banks by no means having normalized policy and loads much less ammunition of their coffers in comparison with earlier downturns.

Sven Henrich is founder and the lead market strategist of He has been a frequent contributor to CNBC and MarketWatch, and is well-known for his technical, directional and macro evaluation of global fairness markets. His Twitter deal with is @NorthmanTrader.

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