Listening to and reading the financial commentators in the last couple of days there's the usual blather about corporate earnings, equity valuation levels (not over valued yet is the general opinion - naturally), GDP growth, etc., all leading to the conclusion that there's no need to bail out of equities. And they might be right. But there is no doubt that one very important driver of equity prices since 2009 is shutting down, and that's the Fed Reserve money machine. So from that standpoint it has to be admitted that there is some cause for concern. The effect of the Fed tapering is pretty obvious in the DX - old bucky has been blowing through the roof and is not showing signs of letting up. Why? Because the potential return to US$ denominated assets is relatively greater than those elsewhere in the world because there is the anticipation of higher interest rates as a result of Fed tapering. Which brings us back to the outlook for equities. For five years now there has been no opportunity for return from the fixed income sector because interest rates have been deliberately suppressed. Now that equation looks to be changing, and we may be seeing the beginning of a major shift in portfolio asset allocations out of equities and into fixed income vehicles. Which does not bode well for equity prices. Less demand = lower price.
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Since the ATH of Sep 18 the ES/SPX has put in two impulse moves down. At this point if a significant intermediate term top was established at that high the market has yet to confirm it with a completed 5 wave bear sequence. Since the rally off Friday morning's low overlapped the low of the 1st down impulse which bottomed on Sep 23, then the ES has either established a nested series of 1st and 2nd waves as in the below chart or the selling is over with a simple zig-zag A-B-C ending at Friday's low. If we are seeing a nested wave 1-2 series then the market is headed a lot lower and the odds are very good that the Sep 18 ATH is in fact a significant IT top. If this has been a garden variety correction then new ATH's should be forthcoming in the very near future.
If the ES continues lower a level that bears watching is the 1938.25 to 1934.50 area. The volume profile chart (below) shows a "volume hole" in that area. Also, it so happens that a .618 retrace of the early Aug through mid Sep rally lands at 1937.75, right at the upper edge of that volume hole. If the ES powers through that area the race to the exit doors could be on.
