Multi-decade triple top points to decline in US equities

WITH the major US equity indices such as Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq 100, breaking record highs, one would expect the broader market to be performing similarly well.

However, looking beneath the surface with the Value Line Geometric Index (VLG), a very different story emerged. We found the market is structurally weak. VLG is a better gauge of the health of all the stocks rather than just the large caps.

VLG is derived from an equally weighted index of 1,675 companies from the Amex, NYSE, Nasdaq and OTC market. On the other hand, the DJIA, S&P 500 and Nasdaq 100 are market weighted indices where the big boys dictate the performance.

Most equity indices started rallying extraordinarily since Nov 8, 2016 after President Donald Trump won the US election where they essentially broke out into new record highs.

For instance, the S&P 500 has advanced 16 per cent from the 2015 peak while the VLG is still stuck in limbo as it improved only 2 per cent from the 2015 peak.

To make matters worse, the S&P 500 has surpassed the global financial crisis (GFC) high by 57 per cent while the VLG has hardly moved anywhere from the GFC peak.

In other words, the major indices are only being held up by a few big boys such as the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks while the broader market is still lagging behind.

A clear resistance was formed back in the dot-com bubble era at 509 points where the VLG had a hard time breaking through. The subsequent rally from 2003-2007 was stopped perfectly at the 509 resistance area where the GFC high was established.

Moreover, the recent price action in 2015 further confirmed the importance of the dot-com and GFC 509 resistance area as the VLG entered into another period of correction due to the 509 ceiling, leading to the VLG shedding 27 per cent.

Since the start of 2017, the VLG has finally broken above the 509 critical resistance area showing some glimmer of hope, but the bullish momentum appears weak. A newly formed resistance at 529 points eventually capped the bullish move.

Put differently, the performance of VLG has been flat for the year as it moved in a ranging manner between the 529 range high and 509 range low while the year to date (YTD) performance of S&P 500 and Nasdaq 100 are 19 per cent and 8 per cent respectively, showing a great divergence.

What's interesting now is the new attempt to reverse the trend around as sellers aim to break below the crucial 509 range low.

More confirmation of the bearish view will be formalised once the VLG closes below the 509 range low and 10-month moving average on a monthly basis.

Notice how the dot-com and GFC peaks were signalled by significant bearish price action; bearish engulfing bar during dot-com peak and bearish outside bar during GFC peak.

Bearish engulfing/outside bars are bearish reversal candlestick patterns that suggest a future bearish trend.

The current situation is very similar to the previous two episodes where price is currently showing a bearish engulfing bar.

If the VLG manages to close with a bearish engulfing bar below the 509 range low at the end of August, we could expect the VLG to make a turnaround and possibly establish a similar top like the one during the dot-com and GFC eras.

In summary, we do expect the major indices to turn down with the VLG once the bearish confirmation appears.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only and should not be construed as investment advice.