​Trading Lesson: Watch the Inflection of Transports/RUT & Hemline Indicator

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Watch the inflection right here in the Transports/Russell 2000 but also note the important dates for this month. And the Hemline Indicator, first developed in 1926, with recent forecasts for the fall collections—and fall markets, writes Jeff Greenblatt June 6.

Per our last update, the KBW Nasdaq Bank Index was hit very hard when financial markets clearly didn’t appreciate the geopolitical instability in Italy.

Recall even I was concerned about the potential for civil unrest. Apparently, I wasn’t the only one because Italian President Mattarella relented and allowed the choice of the victorious far right League and anti-establishment 5 Star Movement Giuseppe Conte to be prime minister after all.

Recall that last week Conte resigned when Mattarella rejected his choice of Eurosceptic Paolo Savona to be economic minister. Instead, Savona will be allowed to serve as European affairs minister.

This event upset financial markets. Now calm has been restored to Italy even as it likely hasn’t in Brussels.

The bottom line for now is markets have one less geopolitical risk factor to deal with.

The news got better for consumers as the oil complex keeps breaking important near-term support levels which will provide relief at the pump soon even as this isn’t good news for oil producers.

The bottom line here is a net plus since the economy is consumer driven.

However, the bond market continues to test the recent low which means at least for now that interest rates will stop going down.

Two out of three isn’t bad.

Markets were strong June 6, but two notable exceptions were the lagging Transports and late participating Russell 2000.If you only look at the daily bar you won’t notice. The Russell was up the first hour with everything else but slowed down while the markets kept going and finally woke up later in the session.

chart

One possible reason could be the cycle vibrational situation. Wednesday marks the 80th day off the February 9 bottom which was a 179-point low. According to the vibrational methodology, the first leg down of 179 points will vibrate at 79 days off the original pivot (the high) and even off the termination point.

We were watching an inflection point at 79 days off the original high back on May 16, which was the breakthrough point at the retest of important resistance at that time. When a good vibration like that is violated it usually means something bigger is developing.

Since that time markets followed that logic with another good thrust higher. This time we are in the back end of the 79-day window at day 80 off that original 179-point low. What that means is here we have another key inflection point. The importance of the Russell right now in the bigger scheme of things is whether it weakens and decides to create a new divergence with the rest of the market. It could join the Dow Jones Transportation Average which did not participate in the June 6 rally.

At this stage of the game, with May behind us the stock market no longer has the seasonal wind at its back. The key points to watch for in June is next week’s Fed meeting, the Trump-Kim summit and the seasonal change point coming on June 20. Markets don’t go straight up or down but always seem to change direction with the season.

The most important news isn’t what you would think. While many are rightly focused on Italy, North Korea and interest rates there’s an adage in the stock market when hemlines rise so does the market.

Prechter’s Socionomic Studies of Society and Culture notes Wall Street’s hemline indicator was first observed by University of Pennsylvania economist George Taylor in 1926. A rising hemline represents a rising social mood which causes the stock market to go higher.

That being the case, what should we make of the Miss America pageant’s decision to eliminate the swimsuit competition altogether? The organization said on Tuesday that not only are they eliminating the swimsuit competition and will no longer judge contestants based on their looks. Some might think this is representative of the politics of our time. However, the study of mass crowd psychology suggests politics of any era is nothing more than a symptom of a rising or declining social mood.

Utilizing the hemline logic, this appears to be next level stuff and likely indicates a contraction which will eventually lead to a bear market for stocks.

By the way a WWD.com story, “Bear Market Ahead? If Hemline Theory Holds, Then Maybe.” This article was dated February 7, 2018. They highlight the fall collection for 2018 which does call for lower hemlines.

Jeff Greenblatt is editor of Lucas Wave International.

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