Devaluation of Yuan/Renminbi Is the US Stock Market’s ‘Black Swan’ Event

New York (Aug 14)  The bulls say that stock market resiliency so far this week following the devaluation of the yuan by the Chinese central bank, is a sign that the bull market for U.S. stocks continues.

A different view is that the bull market for U.S. stocks has been showing signs of aging for months but needed a "black swan" event to trigger the negative technical signals that would indicate the risk that a bear market was possible. The devaluation of the yuan is that black swan.

Investors who think that a bear market is possible must realize that it is defined by a 20% downside move from recent all-time intraday highs for all five major averages. Once this happens, the U.S. stock market would be in bear market territory.

Here are the progression of warning flags that began to wave on Black Friday, Nov. 28.

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The bull market for U.S. stocks began in March 2009, and the first warning of a potential market top began when the Dow Jones Transportation Average peaked at 9,310 on Nov. 28, 2014.

At that time transports had a gain of 336%. As December began, it appeared that truck loads would lighten, that the transports off energy products on the rails would wane, and the number of shoppers' holiday packages sent via delivery companies wouldn't be up to par.

This pattern is clearly shown by the daily chart of the Dow transports:

The daily chart for the Dow transports shows a down trend from the high of 9,310 through the highs of Feb. 25 and March 20. After this third high, the 200-day simple moving average (green line) provided a magnet between March 26 and May 29.

This was followed by what market technicians call a "death cross" on May 26. This death cross is still evident with the 50-day SMA (blue line) of 8,290, which is below the 200-day SMA of 8,724.

For the Dow Jones Industrial Average and the S&P 500 the mantra to "sell in May and go away" proved to be accurate as the Dow 30 peaked at 18,351 on May 19 followed by the S&P 500 peaking at 2,134.7 on May 20. At these all-time highs, the bull market gains were 184% and 220%, respectively.

Source: TheStreet