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BofA Pushes The Panic Buttton: "Dow Theory Sell Signal, Key Supports Broken, Semis Sinking, No Capitulation"

To think it only took an unprecedented surge in volatility as the market suddenly realized that central banks are losing control in a world where secular stagnation is a direct function of 7 years of failed central bank policy, to get the banks out of permabullish hibernation and to slam the "sell everything" alert.

Here is BofA's new chief technical research strategist Stephen Suttmeier telling his clients "Dow Theory flashes Sell Signal"

  • Dow Theory flashes sell signal. S&P 500, NYSE & Russell 2000 all closed below key supports.
  • No tactical capitulation. Not 90% down. ARMS below 2.0. 10-day total put/call ratio not showing panic. But VXV/VIX oversold.

Some more details from BofA with charts and what not that our readers have, as usual, known for weeks in advance.

Red light: Dow Theory flashes Sell signal as of August 20

The Dow Theory flashed a sell signal yesterday. The Dow Industrial Average (INDU) closed below its January 30 closing basis low of 17,164.95 on August 20 to confirm the Dow Transportation Average (TRAN) close below its January 30 closing basis low on April 2. This reverses the Dow Theory buy signal from January 18, 2013 and moves the Dow Theory to a sell signal. The message from Dow Theory is that the primary trend for US equities has turned down.

This Sell signal occurs with the Fed looking to be less accommodative

The last two Dow Theory sell signals from May 17, 2012 and August 8, 2011 both saw continued near-term downside into June 2012 and October 2011, respectively, but both quickly reversed into Dow Theory buy signals. The prior two sell signals occurred with the backdrop of accommodative Federal Reserve policy, while yesterday’s sell signal occurs with the Fed looking to begin a tightening cycle.

 

Semiconductors keep sinking

While not part of the Dow Theory, the Philadelphia Semiconductor Index (SOX) broke below its January 30 closing low in early July and has remained weak. Both the Transports and Semiconductors are important economically sensitive groups (canary groups). Both are also prior strong leadership groups that have broken down.

 

 

Key supports broken on SPX, NYSE & R2K

The S&P 500, NYSE Comp, and Russell 2000 all closed below their key supports highlighted in Chart Talk: 20 August 2015. These supports are 2052-2040 on the S&P 500, 10,600 on the NYSE, and 1200 on the Russell 2000. Sustaining the break below 2052-2040 on the S&P 500 suggests deeper risk to 1980-1972 (Feb/Dec lows) and 1940 (pattern projection). This means that weekly uptrend support from late 2011 near 2028 is at risk. A failure to regain the 200-day MA near 2078 on rallies keeps the bears in immediate control.

 

A quick reminder on Dow Theory:

The Dow Theory was created by Charles Dow over 100 years ago. The theory uses the Dow Jones Industrial (INDU) and Transportation Averages (TRAN) as a gauge of the US equity market's primary trend.

 

When both the INDU and TRAN are rallying to new highs, the Dow Theory is on a confirmed buy signal and the primary trend is up. When both the INDU and TRAN are declining to new lows, the Dow Theory is on a confirmed sell signal and the primary trend is down.

 

The INDU and TRAN must confirm. When they do not, the existing Dow Theory signal enters into a nonconfirmation phase. This is either a secondary correction ahead of a reconfirmation of the existing signal or a transition period ahead of a reversal of the existing signal

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So what does this mean? Well, if this report had been authored by BofA's former chief technician MacNeil Curry whose Gartmanesque track record was almost as good as that of Tom Stolper, we would say the time to buy has arrived (Curry is gone as of this month - he, like Stolper, just couldn't take it). However, in this case we will give it the benefit of the doubt: maybe, just maybe, a sellside "strategist" is actually right for once.