Markets Rolling Over Update

A couple of weeks ago, I released a report claiming that I thought the markets would likely top out around May 8th. If you missed that report, you can see it by [clicking here](https://www.reddit.com/r/options/comments/1t3jz9f/time_to_make_some_bearish_bets/). Clearly, markets moved higher again last week, but are we at a top now, or should we expect stocks to continue with this rally? There are an endless number of ways to measure if a market is cheap or expensive, so I thought I would share a few more factors that I am monitoring. Let’s begin with interest rates… https://preview.redd.it/s76isfbn7w1h1.png?width=1420&format=png&auto=webp&s=b513f0baeefb9867014a089af7a4f807e92c40a6 Higher interest rates make borrowing more expensive for companies, which tends to slow investment, reduce profit margins, and slow down customer spending. This makes other investment types more attractive relative to stocks, causing people to shift their money away from the market and towards other safer income-producing products. As interest rates rise, this also makes the US dollar strengthen as dollars are now worth more. This means selling stocks becomes even more attractive as the dollar becomes a defensive position. In the short term, stocks can still continue to rise, especially in mega-cap technology names, where people tend to follow a herd-like mentality. That is likely what we are witnessing right now, with tech stocks carrying the entire market higher. This is exactly why the advance-decline, which I posted in my original report, which shows that the majority of stocks are selling off while a few mega cap names are carrying the entire load. Unfortunately, for the bulls, rallies under these conditions are usually short-lived. Rising interest rates eventually catch up and put pressure on economic growth by increasing financing costs, which trickles down into housing, compresses margins, and weakens demand. These are all negatives for stocks. One of the best places to see whether this process is beginning is in small-cap stocks. Here is IWM… https://preview.redd.it/lbgfpi3o7w1h1.png?width=1420&format=png&auto=webp&s=64a8bc26b4470a40dfce8687ce999fe170cb567a Small caps peaked almost precisely around the time I said the market would peak in my previous report. We can also see clear negative divergence developing, with price action moving higher while both the RSI and ROC moved lower during the same period. This setup follows because small caps are typically more sensitive to interest rates and domestic economic conditions. Now let's take a look at regional banks… https://preview.redd.it/cctiq5uo7w1h1.png?width=1420&format=png&auto=webp&s=3acf0a3aa3fad9fabe671f3a7caf1f403d1b3aed Rising rates are putting pressure on regional banks and their loan portfolios. What we are seeing overall is a market being carried higher by only a handful of technology and AI-related stocks, while much of the broader market already peaked around the May 8 time window, which aligned closely with our Gann Time Factor. Basically, tech has been the only sector truly holding up while most other sectors, including small caps, banks, and gold, have all been declining. At the same time, rates continue to rise, and the dollar continues to strengthen. Markets can only run higher for so long without financials on board. The way I see it, this plays out in one of two ways: 1. Either the Federal Reserve shifts toward a more dovish stance, causing the dollar to weaken, gold to rally, and the broader market to participate again. 2. Or rates stay elevated long enough to create stress on the financial system through credit issues, banking pressure, leading to a broad market selloff before the Fed steps in. With both CPI and PPI coming in much hotter than expected last week, any hopes for near-term Fed rate cuts are likely off the table. Even with the transition to Kevin Warsh, who many expect to lean dovish, these inflation numbers likely tie the Fed's hands. I know my reports can be long, but I wanted to look at one more thing I left off the last report. Here is the Shiller PE Ratio… https://preview.redd.it/9afb5dfp7w1h1.png?width=1420&format=png&auto=webp&s=12543c9c23e885272d459e70de29ba13d0099b63 If you're not familiar, the Shiller PE Ratio measures whether stocks are overvalued or undervalued by comparing the S&P 500 to the average of inflation-adjusted corporate earnings over the past decade. Looking back over the last 50 years, the current reading stands near the highest level on record outside of the dot-com bubble era, a period we know was way overvalued and eventually sold off hard. There is certainly a possibility that the elevated levels continue to increase to super unreasonable levels, just like the dot-com era. However, the way I see it, it is somewhat of a game of Russian roulette, with stocks commanding an enormous premium for every dollar invested. Plus, the more markets stretch, the harder they snap back, just like a rubber band, and just like we saw during the dot-com era. For these reasons, I think a pullback is in order, probably hitting after NVDA earnings, which is scheduled for May 20th. Ironically, this also happens to be the the start of the next Gann time window. I've been slowly adding bearish positions to my account. Most of them are down slightly from last week, which is why I don't add everything at once. However, on Friday, I did buy another small position, the IWM July 260/275 put spread for a price of $4.00. As stocks start to roll over, I'll be looking to add a lot more bearish positions once the move is confirmed.