Hey Trader,
The S&P 500 jumped about 140 points today. CNBC is already getting excited about a new bull market.
I’m not buying it. Bull markets don’t die of old age.
Three conditions kill bull markets when they line up:
- Higher inflation
- Higher interest rates
- Lower growth
Two of those boxes are already checked.
Friday’s jobs report showed 165,000 new jobs against roughly 65,000 expected. More jobs push wages higher.
Higher wages feed inflation. That puts a rate hike back on the table.
The market isn’t pricing that hike in at all.
Rates matter because a stock’s value rests on cash it’ll earn years from now. Higher rates shrink what those future dollars are worth today.
Lower growth would check the third box. Right now, only software shows it.
If tech growth starts slipping too, we’ve got a big problem.
I’ll walk you through each one and show you how to check it yourself. By the end, you’ll know whether today’s rally deserves your money.
Let’s start with the one that’s about to hit consumers’ wallets next year.
Box One: Inflation Is Coming Back
Inflation is the first of three conditions that kill bull markets. It’s already here.
Look at what’s happening in healthcare. KFF is one of the leading healthcare research groups.
KFF projects Medicare drug plan premiums could jump 50% next year. That’s good for drug makers like Lilly, AstraZeneca and GlaxoSmithKline.
It does nothing for the consumer. Every extra dollar spent on prescriptions comes out of somebody’s back pocket.
Consumer spending makes up about 70% of the economy. Squeeze it, and the whole market feels it.
Then add Friday’s hot jobs report. Stronger hiring puts upward pressure on wages.
Higher wages push prices up even further. That data alone should put you on your heels.
I don’t see any chance inflation comes down from here. The Fed’s going to be waiting forever if it doesn’t figure this out.
Box Two: Rates Won’t Bail You Out
Higher interest rates are the second condition that can kill bull markets. Rates have dipped lately.
Don’t read too much into that dip. Money ran to bonds when the market sold off last week.
That was a risk-off move that lasted about 24 hours. Rates aren’t coming down much farther.
I expect them to stay under pressure. After that jobs report, a rate hike is right back in play.
You can check this yourself in a couple of minutes. Pull up FedWatch, which shows the odds the market assigns to each Fed move.
If rate hikes start showing up there, take it seriously. A hike could take this market down another 300 points.
Box Three: Watch Where Growth Slows
Lower growth is the last condition that can kill bull markets. It’s the only box that isn’t fully checked yet.
So far, only software shows it. That slowdown explains why so many software stocks came down rapidly and then settled in.
The rest of technology isn’t showing slower growth yet. That could change if growth mean reverts.
Mean reversion means a number drifts back toward its normal level. For tech, that means growth falling back to earth.
If that happens, all three boxes get checked. We’d have a big problem on our hands.
Higher inflation, higher rates and lower growth are the kiss of death. Together, they kill bull markets.
How I Track What Can Kill Bull Markets Right Now
The conditions that kill bull markets only matter alongside the chart. I start there.
The S&P 500 is basically sitting at an all-time high. It barely corrected 5%.
That’s a massively overbought market. An overbought market invites more buying until the institutions start to sell.
If the S&P 500 rolls over below 7,350, I see risk all the way to 6,300.
That chart alone tells me I can’t buy. The three boxes tell me this is a very dangerous buy.
Today’s rally doesn’t change my mind. Short sellers buying back their bets drove most of it.
I read money flow for a living. Short covering tells me this rally is phony.
So I used today’s pump to sell some United Airlines and Delta. I’m using strength to get out.
Before you buy any rally, check the three conditions that kill bull markets:
- Check inflation. Watch whether jobs and wage numbers keep beating expectations.
- Check rates. See whether rate hikes are showing up in the FedWatch odds.
- Check growth. Watch whether the slowdown in software starts spreading into the rest of tech.
I warned you on Wednesday not to trust this market. The next day, it dropped 350 points.
If you worked for me and bought today, I’d fire you. This rally hasn’t earned your money.
It’s November, and portfolio managers want to window dress the year. Window dressing means propping up holdings so the year-end statements look good.
If you’re a portfolio manager, I get it. If you’re not, use any strength to lighten up.
Rotate into stocks that can play catch-up. Leave the overbought leaders to the crowd chasing CNBC.
When the chart and the fundamentals both say don’t buy, I don’t buy.
Charts only show you part of the picture. If you just study charts, you’re playing without an edge.
That catches up with you eventually. Knowing what can kill bull markets gives you an edge the chart crowd lacks.
Sitting out the crowded names doesn’t mean sitting on my hands. Quiet stocks still set up while everyone stares at the leaders.
My Burn Signal alerts fire on stocks nobody’s talking about. One of the signs I check tracks money moving in or out before the price does.
That’s the same money flow I read every day. It’s how I spot a setup before the crowd shows up.
Every alert gives you the ticker and the signs that triggered it. You also get a stock play and an options play.
Alerts come about twice a week. You decide how to trade each one.
If you try 10 trades in your first 90 days and you’re not satisfied, you get your membership fee back. You’re also covered by a 30-day money-back guarantee.
Professor Jeffrey Bierman
Creator of the Genesis COG System
