A stock market warning has just developed for those who are bullish.
Here's what I'm talking about (CNBC, May 22):
The House voted May 22 to pass the biggest rollback of financial regulations since the global financial crisis.
In a nutshell, lawmakers want to get rid of onerous rules that have been placed on small and medium banks as part of Dodd-Frank, the law that was passed in 2010 to prevent another financial meltdown.
One might ask, "Why should bullish investors see this as a red flag? Isn't the loosening of financial regulations a positive for the stock market?"
Well, EWI has, indeed, observed a correlation between financial legislation and the stock market, but it's probably not what most investors expect.
Financial history shows that financial legislation tends to follow the stock market, not the other way around. Put another way, financial regulators implement reforms after busts and later turn optimistic and repeal or relax financial regulations after booms.
Besides Dodd-Frank, a historic example is Glass-Steagall, the first major federal legislation to separate commercial and investment banking. This law was enacted after the bottom of the 1929-1932 stock market crash.
The December 2013 issue of the monthly publication, The Socionomist, showed this chart and said:
Notably, the stock market rallied after Glass-Steagall passed, and then some 66-years later, plummeted shortly after the law was repealed.
Yes, the government is usually the last group to act on a trend. If technical indicators are also pointing to a reversal, investors would do well to position their portfolios accordingly.
So happens, EWI's analysts are saying that many of the market's technical indicators are suggesting a major acceleration in the DJIA's current Elliott wave price pattern.
Get more financial insights like these -- 100% free. Just follow this link
Elliott Wave International does not provide investment advice. All rights reserved.
Recommended Content
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price holds strength ahead of US core PCE inflation
Gold price holds onto gains near $2,200 in Thursday’s European session. The precious metal exhibits firm footing ahead of the United States core PCE Price Index data for February, which will be published on Friday.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.