Charts Updates

The big picture looks like this:

28janu13

Source: Stockcharts

Global stocks, commodities and the world’s reserve currency turning in unison at the end of June 2014.

Extreme lop-sided positioning in the US dollar suggests a reversal should be close at hand. I expect gold to be a beneficiary.

28janu6

Source: J Lyons

Tying in with this, economic surprises have crossed fortunes in the US and Europe:

28janu30

Source: Moneymovesmarkets

Therefore, the Euro should be due a bounce versus the Dollar.

US leading indicators remain mired negative.

28janu14

Source: Dshort / ECRI

And so far, Q4 earnings have disappointed, as predicted by a rising dollar and falling oil. Here we can see the key turn down in earnings per share:

Screen Shot 2015-01-28 at 08.00.58Source: Factset

The SP500 looks on borrowed time since the end of June 2014, when we look behind price:

28janu20

The stocks:volatility ratio also turned down at that time, and resembles key changes in 2000 and 2007:
28janu40The sector performance tale in 2015 is the same as 2014: defensives lead as they tend to post-peaks:

28janu1

Source: Macromon

28janu2

 Source: J Lyons

Skew remains persistently high, warning of a potential big move in the markets:

Screen Shot 2015-01-28 at 07.01.56

Source: Barrons

Money continues to pour into government bonds, with Swiss 10 year yields now amazingly paying holders a negative return:

28janu11

Source: SoberLook

28janu9

The bullish development in equities is in Europe where various indices have broken upwards on the QE news, with Germany the leader. There is a 12 month divergence in breadth, which I would tie in to the bigger picture above which would suggest Europe may be experiencing a blow-off top.

28janu25

 Source: Indexindicators

If that is not the case, then we should see risk-on firm up again globally, making repairs to the various asset and indicator downtrends that I present. As things stand though, the balance of evidence is still weighted to the global peak being in the past, and if my three key dates are correct, then US stocks should not exceed their December peaks, with European stocks shortly falling into line. Which way this triangle resolves will tell us the answer:

28janu50

3 Exact Dates

As we wait for the ECB decision and market reaction, I see 3 exact dates being revealed that align with my ‘triple confluence peaks’ idea, i.e. we are seeing major market peaks form at the new moons closest to the geomagnetic seasonal highs (inverted) closest to the smoothed solar maximum.

The smoothed solar max is likely to have been around April 2014.

22janu14

The seasonal peaks (inverted geomagnetism) fall at the turn of the year and mid-year.

22janu1

The new moons closest to these seasonal peaks were 1 January 2014, 27 June 2014 and 22 December 2014, so it follows that we should see major speculation peaks at these dates in the year of the solar maximum, 2014.

Bullish percent to call/put, cyclicals to defensives, high yield to treasuries and small cap equities to bonds all peaked very close to the 1 January 2014 date.

22janu2Stocks:dollar, stocks:bonds, FTSE Eurostox and NYSE composite indices, NSYE breadth, volatility and junk:treasury bonds, oil, US dollar (inverted), leveraged loans and junk bonds all peaked very close to the 27 June 2014 date.

22janu7 22janu5

22janu3

The final date, 22 December, has tentatively topped out the remaining key indices and speculation measures, namely SP500, Dow and Wilshire 5000 (plus an associated bottom in gold) and a blow-off top in sentiment and allocations.

22janu4 22janu6If this ‘dumb’ model of the markets is correct then we should make no new highs from here but rather collapse to a March/April initial bear market bottom (first leg down).

If an anomaly is at hand and the solar max is still ahead or speculation somehow extends further in time, then the next logical peak would be mid-year 2015, likely June 16. However, I rate this possibility as negligible. Look again at the risk measures that changed course Jan 1 2014: they remain in downtrends ever since. Add to these the large range of assets and indicators that peaked June 27 and remain in downtrends ever since too. Then consider the change in market and cross-asset behaviour since the final date, Dec 22, together with that capitulation in sentiment and allocations. This has to be game over, in my opinion. However, if we consider it a game in which central banks can cheat and change the rules, then maybe, just maybe, natural forces can less freely flow through the markets. I don’t think this is likely as central bank members are solar subjects too. However, this is subject to confirmation in a critical real time test in 2014-2015. Market reaction over the next few days to the ECB announcement will be a key tell.

 

 

 

More Indicator Updates

1. Topping thrusts compared:

2ja1Source: Stockcharts

That 4th chart now stands at 52 days and 15%, so ripe for conclusion.

2. Skew:

2ja2

Source: Dana Lyons

Skew is still in the elevated range warning of potential large move.

3. Put/Call:

2ja3

Source: Dana Lyons

Mirrors previous topping processes.

4. Sornette Bubble:

Screen Shot 2015-01-02 at 07.15.30

Source: Financial Crisis Observatory

SP500 bubble end still showing as start of July.

5. Sunspots:

Screen Shot 2015-01-02 at 07.19.24

Source: Solen2ja6Source: SIDC

Both sources, plus IPS additionally, show the smoothed solar maximum behind us in April 2014 with a value of around 82.

6. Gold and gold miners sentiment still at contrarian depressed levels:

2ja8

7. US Dollar still ripe for a reversal:

2ja10Summing up, the picture painted by these indicators is consistent with my last post, namely that stocks have been in a topping process in 2014, that the solar max and speculation peak is behind us, that the effective peak in stocks was end June / start July 2014 and that stocks are still set for a big move to the downside. Plus, fortunes in the US dollar and gold/miners should reverse, fitting with the reversal in stocks.

Recall the 1989 solar/stocks peak. The solar max was July 1989 and stocks (Nikkei) stretched upwards until the end of December 1989 before finally topping out and falling. However, note the new moon then was 28 Dec, providing an additional optimism peak. Here at the turn of 2014/2015 the new moons are 22 Dec 2014 and 20 Jan 2015.

 

End Of 2014

I’m back and refreshed. Thanks for all the messages, and for all the comments in my absence. Here is the big picture.

1. Primary shift to defensives and away from risk occurred as of January 2014, as measured by stocks to bonds, cyclical to defensive sectors, small caps to all caps and high yield to treasury bonds. Clock ticking from that point.

30dec2

 Source: Stockcharts

2. Solar maximum looks to have occurred around April 2014, marking peak speculation. Equities mania on borrowed time thereafter.

Screen Shot 2014-12-30 at 06.16.52

 Source: Solen

3. Game over effective start of July. World equities, crude oil, high yield bonds and the US dollar all turned at that point. Deflation in charge.

30dec44. US equities composite, breadth measures and volatility all show the same reversal at the same point: start of July.

30dec1

5. Those twin peaks in risk appetite at the start of the 2014 and mid-year fit the seasonal model which is from the influence of geomagnetism:

30dec12

6. Which sets us up for a final peak at the end of Dec 2014 / start of Jan 2015 for those remaining stock indices which have yet to top. I referred to this as my worst case scenario (latest peak) in 2014.

30dec15

7. Developments in December support this now happening: sharpening falls in crude and government bond yields, flattening of yield curves, blow-off top in equities allocations.

30dec530dec10

8. A new bear market in stocks will be a cyclical bear within an ongoing secular bear market. No new secular bull market as many believe.

30dec16

9. This secular position is dictated by demographics.

30dec20

10. The other play from this is that gold should enter a new cyclical bull within an ongoing secular bull, and this is supported by recent signals such as miners:gold ratio, gold/miners sentiment and price basing patterns.

12se1

 Source: Glenn Morton / My projections

11. A sampling of stock indices from around the world, below, shows 2014 has been clearly either a large topping process or a large consolidation range. If the latter, then we should have seen excesses in valuations, sentiment, allocations and leverage worked off with time rather than price, yet all those measures remain highly stretched, suggesting this is a topping process.

30dec3012. Plus, the two strongest sectors of 2014 are the two that are historical associated with outperformance after bull markets peak out:

30dec7

Source: Macromon

13. The peak-to-date in margin debt remains close to the solar maximum. This leverage, along with major extremes in sentiment, allocations, tail-risk, valuations and our post-solar-maximum status, is the set-up for a market crash. To repeat what I have said before, until/unless these measures are reset without a crash, then history dictates that is the most likely outcome. Crashes don’t occur often, but when they do, the set-up looks like the current.

30dec9

Source: DShort30dec8

14. Leading indicators and the longer term stocks:bonds ratio resemble 2000, 2007 or 2011, suggesting a minimum 19% drop in equities. This is the percentage figure I quoted as my general target for short positions because, stretching the view to the last 100 years, this is the minimum we should expect without being greedy by aggregating various angles on the market. To be clear though, the set-up is compelling for a bear market, not just a sharp correction, so I refer you to the secular bear chart above for the bigger projection.

30dec40

Source: DShort30dec41

15. Which brings us to the value of history as our guide, because 2014 taught us one key lesson: 100 years of reference points may not be enough, we need to allow for the unprecedented. An aggregation of angles shows how unprecedented 2014 became:

30dec50

 Source: Hussman

So what caused this? The most common view is that central banks brought this about with their policies of ZIRP and QE and unwavering verbal support. However, I maintain that ‘central bank policy trumps all’ was rather the mantra for this solar maximum mania than the driver. To prove this, we should now see equities collapse and gold rise despite central banks, and that is the final part of the real time test for the power of the solar maximum. If I am incorrect, then equities should continue their bull market in 2015 as central banks policies overrule. However, I refer you back to all the topping indicators and angles in equities that have amassed, together with the examples of 1930s US and 1990s Japan which revealed central banks’ true relative impotence. Ask yourself if typing numbers into a computer (ZIRP and QE) and saying a few soothing words can really work.

The crazy stretching of indicators delivered this year made for the most difficult year of trading since 2000, the last solar maximum. So if I can make one prediction for 2015, it is that it will be easier and more predictable. I am short equities and long gold and expect patience to be finally rewarded. I wish you all the best for the coming year.

A Topping Candle

Yesterday produced a topping candle in US stock indices, but was it the topping candle?

The SP500 closed with a marginal 0.04% gain but advance-decline volume was 1:2 (Urban Camel). It was the 2nd-worst breadth day ever when the S&P 500 was up and so near a 52-week high (Jason Goepfert).

ISEE put/call closed over 230 for the second day in a row, suggesting major contrarian lop-sidedness. Previous instances in 2014 marked below reveal they occurred near tops but tended to be markers of subsequent sideways churn.

Screen Shot 2014-11-14 at 05.30.51That chart also shows the RSI divergence which ought to eventually lead to a leg down.

Small caps and junk bonds had the biggest down days yesterday, both risk-off flags which argue a notable drop in large caps should follow sooner rather than later.

14nov9Source: Stockcharts

European indices moved further to the precipice in European hours yesterday. At this point European indices and US small caps topped out by June 2014, and most other major global indices in September, just leaving US large caps, the Sensex and the Nikkei as the notable indices still to peak. Drawing on previous major tops (2007, 2000, 1989, 1968) stock indices peaked out within 4 months of each other. Therefore, if I am correct in my assessment of where we stand then those remaining indices should top out without delay and this fits with the picture painted by most indicators: November ought to end as a down month.

Rydex allocations hit the highest ever level yesterday aside from mid-January 2014, which suggests a top in equities should occur:

14nov10

Here is the comparison of the 2000 topping process, confirming that Rydex spikes to extremes typically marked tops:
14nov11

Combining the current extreme readings in II and AAII sentiment, these are the mirrors from history:

14nov4

Source: Dana Lyons

1987 marked an important top. January 2011 was an early warning of an important top. 2003-2004 was ‘healthier’ froth that sometimes occurs during early bull market progress, so I suggest that cluster is less relevant here.

MACD on the Dow produced a reading only seen 3 times before. All were pullback signals on the short term, but different results in the medium term.

14nov5

Source: Northman

Four headwinds for US equities: a) monetary trends point to a weakening ahead in the US economy relative to Japan and the Eurozone (chart below), b) QE support has ended, c) the rising US dollar and falling oil prices have resulted in a cutting-in-half of earnings and revenue forecasts for US Q4, d) the US stock market is the most expensive in the world of all major countries (table below).

14nov18

Source: Moneymovesmarkets

Screen Shot 2014-11-14 at 08.23.06

Source: Telegraph / ZeroHedge

If we could argue that until now a relatively stronger economy in the US coupled with the relatively most aggressive / supportive central bank made for outperformance in US stocks (shown below relative to the rest of the world equities) then that fundamental case looks to be reversing here.

14nov30

The case for the US dollar to reverse too is added to with the below contrarian Euro positioning and sentiment.

14nov2

 Source: Nautilus

And this would fit with a reversal in gold which looks to be basing. Here is another angle on gold that suggests we are at a similar point to the secular bottom in gold at the end of 2000.

14nov18

Source: Sentimentrader

Drawing in other evidence from previous posts, there is a compelling case for a major cross-asset reversal here, out of the USD and into gold and out of equities, particularly US equities.

In the very short term, yesterday’s US equities intraday reversal candle together with the Rydex spike, junk bonds drop and very precarious European indices technicals set up the potential for a follow through to the downside either today / early next week. My case is that this is the last peak in the topping process and if so we should see at least one large voluminous down-day over the next several sessions. If instead we churn sideways in a range for the remainder of November then support would grow for an end-of-year peak, but with every man and his dog expecting positive Nov/Dec seasonality to take stocks higher the stage is set for the opposite, particularly as actual geomagnetism (the underlying source of seasonality) is trending downwards currently.

Cross Asset Position

No reversal yesterday in equities but I maintain it has to be close at hand.

The Nasdaq added another day to its small sideways range. RSI divergence argues the next move should be down.

11nov8Source: Stockcharts

The SP500 is at the top of its megaphone pattern and the Dow has edged above it. Gold miners made a megaphone top in 2011 and they also edged out above it, before reversing:

11nov2The combined reading of II plus AAII sentiment is the highest on record, which casts doubt on the fuel for higher prices in equities.

11nov3Source: Lance Roberts

Positioning is extreme in the US dollar, sentiment is extreme, and there is an RSI divergence between the two recent peaks.

11nov15 11nov16

Source: Acting-Man

Gold miners bullish percent reached zero and Friday saw a voluminous bounce. Positioning in gold is also extreme and contrarian:

11nov17

Source: Acting-Man

Sentiment plus oversold conditions in commodities argue for a broader reversal too:

11nov12 11nov13

Source: Emma Masterson

Plus positioning in treasuries remains at elevated levels more in keeping with a bottom in treasuries than a top:

11nov7

Source: Zero Hedge

Add all these together and there is a compelling set-up for a major reversal out of equities and the US dollar and into gold, miners, treasuries and maybe other commodities too. If gold and miners can hold above Friday’s low then I believe the move kicked off at Friday’s full moon, but we really should see supportive developments a.s.a.p. if so. There is a geomagnetic storm in progress and the cumulative geomagnetic trend remains down, so the underlying pressure is negative on risk assets.

Here’s a look at buy/sell pressure and momentum indicators for US equities. There have been 6 major distribution days in 2014 and no major accumulation days since October 2013. This suggests underlying enduring smart selling pressure despite the higher prices. Also reflective of this are the negative divergences in the two money flow indexes CMF and MFI:

10nov2

MFI has been divergent since the turn of July, which puts us on borrowed time for stocks to peak, but CMF shows anomalous long divergence since way back in mid-2013, which I suggest shows the atypically long mania in prices.

The Chaikin oscillator and ULT momentum indicator show the same anomalously long divergence, this time since the start of 2013. I don’t believe these indicators are broken, but rather they again reflect the strength and duration of the mania this time, which in turn suggests a major crash lies ahead.

10nov3

There are multiple other indicators that reveal the mania in stocks began at the start of 2013 and is now almost two years old. Phenomenal and historic.

If we look back at the Nasdaq into its 2000 peak, to compare manias, then those two ChiOsc and ULT indicators still only made a normal 3-month leading divergence. Their divergence versus the Nasdaq in 2014 is around 12 months, which is unprecedented.

10nov8So what does that mean? I believe these indicators further cement the overall picture of one serious mega-mania which is on borrowed time and heading for a major crash. It’s just a matter of patience and money management in negotiating the short term.

So far in November we don’t see a renewed ramp up in sunspots and the probability remains that the smoothed solar max is behind us.

a2Meanwhile, the collective evidence from sentiment, allocations, negative divergences, cross-asset positioning and other market indicators make it improbable that stocks can grind higher into year end or Q1 2015 for an anomalous late peak relative to the solar max. Rather, the evidence still supports a renewed turn down in equities this week and a significant down November, keeping the bear trends in European indices in tact and completing the megaphone tops in US large caps.

Simply put, I have no case at all for higher prices from here whilst I have a multi-angled cross-referenced case for equities to turn down without delay in a last gasp of the topping process that began 1st Jan. It is what it is. So on we go, it’s a partial holiday in the US today, but stocks and futures are open whilst bonds closed.

In Perspective

1. The start of January brought the shift to defensives, measured here in 4 ways: stocks to bonds ratio, cyclical to defensive sector ratio, small caps to all caps ratio and high yield to treasuries ratio.

9nov10Source: Stockcharts

2. The best performing sectors in 2014 all year have been health care and utilities, the two defensive sectors that perform best once the stock market peak is in.

9nov15Source: Macromon

3. The yield curve, measured here by 2y versus 10 yr treasuries and 2m versus 10 yr treasuries, has flattened ever since 1st Jan. We won’t get an inverted yield curve under ZIRP so flattening takes over as a topping warning.

9nov114. The best performing asset class in 2014 has been government bonds and the chart below shows this has been a global phenomenon (Germany, Japan, UK and US quoted by 10 yr yields (bonds inverted)), again since Jan 1st.

9nov85. Looking at stock market breadth, deterioration has been under way since almost the turn of the year in the Nasdaq indices.

9nov126. Whilst the NYSE, SP500 and Dow picture reveals breadth issues since the turn of July. We can also see there was an earlier bad-breadth run into the turn of 2014 which was subsequently repaired: like an attempt at a bull market peak but it wasn’t quite ready.

9nov137. Turning to sentiment, NAAIM manager exposure to equities has been dwindling since Jan 1st, whilst Investors Intelligence bulls made a double peak 1 Jan and start of July, since which they have dwindled too. Meanwhile, Vix made its low at the start of July and has been in an uptrend since then and Skew has stayed elevated for a year, with triple peaks in Jan, July and Sept.

9nov148. Commodities have been in sharp decline since the turn of July, as the US dollar sharply rallied, in a deflationary wave.

9nov69. For US earnings, a rising dollar and falling oil prices is overall doubly negative. Q4 earnings growth has recently been accordingly cut in half to 4.5% and sales growth cut in half to 2.2%. Earnings growth has missed target in each of the first 3 quarters of this year. The average of 5 valuations puts US equities the joint second highest in history after the 2000 mania. There is a big gulf between price and earnings.

10. Global stock indices look like this. European indices peaked out by the start of July and have since made a lower high and lower low, the definition of a bear trend.

9nov2

11. The Hang Seng, Bovespa, Kospi and Australian index all made peaks at the start of September.

9nov4

12. However, the US SP500, Dow and Nasdaq, as well as the Japanese Nikkei have all made new marginal highs since then.

9nov1

13. The Russell 2000 double topped at the start of March and start of July, whilst the overall Dow Jones World double topped at the start of July and start of September. Junk bonds and leveraged loans also made July/Sept double tops and lower highs and lows since.

9nov5

Across all the above charts in this post, three dates consistently stand out: the start of Jan, start of July and start of Sept. The topping process began the 1st January and additionally the Sornette bubble end flagged on the SP500 at the start of July and on Technology at the start of September. Insider selling peaked at the turn of the year and we have seen six major distribution days since then without any major accumulation days. Put/call ratio, bullish percent and the summation index additionally point to the relevance of the start of Jan and start of July:

9nov19

Now draw in the solar cycle. The likely smoothed maximum was April 2014 (based on SIDC, Solen, NOAA, IPS and polar switch). Here’s why the smoothed sunspot maximum is important, it generates peak speculation events:

9nov22

Either side of the expected smoothed solar maximum of April 2014, we have two seasonal peaks (inverted geomagnetism peaks) of turn-of-year and mid-year:

5nov40

Homing in on the new moons of those two periods we get specific dates for a triple peak confluence of speculation/optimism: 1st January 2014 and 27th June 2014. I believe this is a compelling cross-reference for all the market charts above. We see multiple index and indicator peaks clustering at the very start of Jan and very start of July (both within two trading days of the new moon).

So I maintain this is the true picture of where we are, mirrored on the last solar maximum stock market peak of 2000:

30oc6

30oc5

And I still expect stocks to reverse here like they did at the same point in 2000:

9nov17

We have had several days of small range consolidation with a slight upward bias (averaging the 4 US indices), whilst sentiment and allocations are bumping up against invisible limits. I therefore believe the next move is down, like the subsequent red candle above. Furthermore, I believe that is then the end of the topping process in global equities. It effectively ended at the start of July, and really did for various indices shown further up, including the overall Dow World. But we have now seen new highs again in US large caps which on the surface look bullish, but underneath not.

I believe the unprecedented extremes in levels and durations of price levitation, sentiment, allocations, leverage, tail-risk, and negative divergences mean a crash is coming. Like an elastic band stretched to the limit. The superficial 2014 bull trend in US large caps is nothing of the sort under the surface, but has served to fool most into a false sense of security. This last rally from October to November has sucked everyone in again (sentiment, allocations) and we have extreme lop-sidedness in the markets. I believe equities will tip over here and fall hard and fast, with no reprieve this time. No dragging on until year end: the megaphone formations on the US large caps are ripe for resolution now and overbought/overbullish indicators support this.

7nov120

The October monthly hanging man candles suggest November should be a significant down month. I maintain the view that the evidence is too compelling now for consideration of an alternative scenario. If you remove me from the equation then there is an awful lot of fact in the above charts and many other recent charts that I have relayed that a bull needs to explain away. Simply, too many. However, we can argue there is a middle position in accepting all the warning flags but predicting prices can still yet go higher into year end under dual positive seasonality. Perhaps a scenario of increasingly thin volume and increasingly bad health but still scraping higher.

The problem with that is that whether we look at Nymo, Rydex, II, AAII, RSI or the ascent and shape of the Oct-Nov rally we see the same tell: exhaustion. Stimulative action from the BOJ and ECB in recent days have failed to catapult global equities higher. So I believe the middle position’s best hope is that equities retrace away from these exhaustion levels but then quickly washout, to enable a December rally into year end. However, I would refer you again to our positioning in the topping process. There is no case for another rally. If we tip over this week I believe that is it: equities won’t come back again. This is what I expect to happen.

Screen Shot 2014-11-04 at 07.53.54

SP500 Monthly

V-Correction Or Breakdown Part 2

Tuesday’s selling to a lower low delivered the missing positive RSI divergence on the SP500 and out of that we saw a strong rally on Wednesday.

9oc1

It was a necessary stick save for the bulls at key support in most indices, particularly the Russell 2000. So we are back to: is this another v-correction or just a save before a true breakdown?

There were clues behind the scenes yesterday.

The best performing sectors in the rally were the defensives: utilities and healthcare.

Gold and gold miners rallied and appear to be turning last week’s breakdown into a fake-down.

9oc7

Treasuries also rallied, so either risk or defensives have it wrong.

9oc3

Breadth weakened rather than strengthened, casting doubt that equities have it right.

9oc4

 

9oc10

The above chart shows Vix remains divergent too.

Investor Intelligence % Bears are at 14.1 this week, still at the historic extreme, so there has been nothing remotely resembling a washout. Complacency rules.

The US dollar’s parabolic has broken.

9oc6

Lastly, to respond to the point that this chart may be cherry picking the RUT as it fits time-wise:

Screen Shot 2014-10-07 at 07.15.41

My case is that the RUT was the speculative target as evidenced by the p/e, hence the epicentre with RUT and margin debt right at the smoothed solar max. However, the point is that all stock indices should top out close to the solar max, without any cherry picking. So, the last solar max peak looks like this:

March 2000 = Smoothed solar max

December 1999 = FTSE peak

January 2000 = Dow peak

March 2000 = Margin debt peak; Hang Seng peak; Dax peak; Nasdaq peak; SP500 peak; Russell 2000 peak

April 2000 = Nikkei peak

So, the epicentre was March, and all major global indices topped out within 4 months of this. Now, if you assume here in 2014 the smoothed solar max was March and that all stock indices have now topped out (for which there is a strong case), it looks like this:

March 2014 = Smoothed solar max

February 2014 = Margin debt peak

March 2014 = Russell 2000 peak

May 2014 = FTSE peak

July 2014 = Dax peak

September 2014 = Hang Seng peak, Nikkei peak, SP500 peak, Nasdaq peak, Dow peak

So, the epicentre was March and all major global indices topped out within 6 months.

However, this can’t be validated until we are sure that the smoothed solar max was then and that stock indices do not make new highs from here. Nonetheless, with every month that passes odds are that this is correct and that stocks were on borrowed time since March.

To sum up, by the looking under the hood, the probability is that yesterday’s rally in stocks is quickly reversed again. This could happen as soon as today, or perhaps more upside can be squeezed out into the end of this week. But the signals point to ultimate failure, which means the stick save at support is just a temporary reprieve for the bulls. To those who think yesterday’s save means waterfall declines aren’t going to happen this year, understand that this was a crucial save at the final support on the RUT: it was unlikely to break without a fight. Traders have become conditioned to buy the V-bounce at support over the last 18 months, but the clues are that this time should fail, as covered in recent posts. 6 of the top 10 biggest Dow down days occurred in the window right ahead:

19 Oct 1987
26 Oct 1987
28&29 Oct 1929
6 Nov 1929
15 Oct 2008

And I believe this picture nicely sums up the Q4 2014 scene:

9oc9

Last Quarter Of 2014

September finished as a down month for all US stock indices, which means the peak in margin debt should remain as February. Cross-referencing: SOCL, RUT and Nasdaq breadth peaks are still signalling a likely Feb/Mar speculation top, whilst biotech remains tentatively supportive, at a double top with March. The smoothed solar maximum continues to look like it occurred around March, so the whole picture remains strong for a sun-driven speculation peak around March and a period of ‘borrowed time’ for equities since.

1oc9

1oc2 1oc3

The SIDC chart shows that they are still running with an alternative in which the smoothed solar max double tops ahead at the end of the year, but the majority of other solar scientist models are aligned to their SC prediction (smoothed max behind us, circa March). By cross-referencing with measures of speculation above, the behind-us scenario gains further weight.

The Russell 2000 has now reached the key technical level around 1100 for triggering potential waterfall declines, and it arrives here at the most bearish point in the year, the seasonal geomagnetic low of October supplemented by downward pressure into the full moon of next Wednesday 8th.

1oc1Conversely, if the RUT and other US stock indices can hold up through the full moon and the rest of October, then a year end peak in large caps would gain weight, with the seasonal upward pressure out of November. As things stand though, the recent collapses in junk bonds and inflation expectations, the September declines in all stock indices and the acuteness and maturity of many different stock market indicators (which I have detailed on this site) all support the October breakdown option.

Turning to other markets, the US dollar is in a parabolic ascent, the Euro a parabolic descent, and the slide in precious metals continues. All three show extremes in positioning and indicators that are suggestive of a reversal, and the parabolic trajectory of the FX pair suggest a snapback should be imminent, but when?

1oc8 1oc5I see it as linking in nicely with the situation in equities. If US equities break down through the key technical supports (to clearly kill the prospect of another v-bounce), then gold should at that point reverse course, and the dollar may then be sold off. Much of my recent work on stock market indicators shows that the case is strong for equities to break down without delay, suggesting these intercorrelated reversals ought to indeed occur here in this pertinent window at the beginning of October.

The rising Dollar negatively affects 45% of S&P companies. Earnings season for Q3 gets underway next Wednesday, and the predicted earnings growth rate is 4.7%. This stood at 8.9% on June 30th and 12.2% at the start of the year. For the YTD picture, US earnings growth forecasts at the start of 2014 were Q1 4.4%, Q2 9.2%, Q3 12.2%, Q4 13.5%, whilst actuals are Q1 2.2%, Q2 7.7%, Q3 4.7% (est). In other words, to justify valuations, average quarterly 10% earnings growth was required and projected, but the reality looks like less than half that. As earnings season typically have a ‘sell’ or ‘buy’ theme, I suggest odds are this one will be a sell (as reality dawns), and help pull down equities in October.

At the macro economic level, economic surprises in Europe and China continue to languish negative, whilst the US remains positive. The global real narrow money leading indicator predicts a slowdown once we hit 2015, whilst ECRI leading indicators for the US remain poised at a low level from which a fall in equities would likely tip then negative. This brings me back to what leads what. I recently covered that equities in fact tend to lead leading indicators by a month on average and that previous major tops reversals in leading indicators only occurred once equities had made initial hard falls, which in 2014 they have yet to.

This in turn leads me to the question of whether equities could yet have a second chance peak ahead, like in August 2000 (after the first March peak) or October 2007 (after the June top). In both those scenarios, large caps dropped around 15% before rallying to the second chance peak, whilst leading indicators diverged negative into the second chance peak. The possibility here would be for large cap stocks to break down in October, perhaps 15% again, but then rally back up towards the recent peaks by year end, perhaps for a 31 Dec second chance (lower) peak.

Well, the speculative targets of RUT, SOCL and IBB all show second chance peaks already. Developments in margin debt, HYG:TLT, NAAIM, Rydex and various mature divergences also suggest we should be at second not first chance peak. But the price patterns in large caps don’t really fit. UBS side with the year-end second chance prediction, shown below, yet beneath that their TNX divergence chart is another indicator conversely suggesting we should be at second chance peak already:

Screen Shot 2014-10-01 at 12.12.28 Screen Shot 2014-10-01 at 09.56.18I suggest that if we are post-second-chance but having ‘cheated’ a decent first chance correction (and this is the picture painted by most stock market indicators), then the falls from here should be twice as hard and echo action post-second-chance in 1929, 1987, or 1989 (Nikkei) whereby the falls become waterfall declines or panic selling. If the selling is more measured and back and forth then we should alternatively look to indicators to washout and align for a bottom at perhaps a 10% or 15% correction, before a potential rally into year end.

This last quarter was the best quarter so far for viewing stats on solarcycles.net. The best month was this last month (shown below), the best day just yesterday. So, thanks for reading my analysis and thanks to all those who contribute and make for a good discussion board.

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To sum up, I’d give 80% odds to equities falling in October through technical supports and cementing a new bear market. I’d give 20% odds to equities holding up into or making a second chance peak at year end (both around 31 Dec). I don’t have a case for a bull market extending into 2015, as this would invalidate a variety of historically reliable indicators with different angles on the market.

As this is the last quarter, it seems appropriate to stick this up: predictions from the professionals at the start of 2014 for year-end. We can see that all were bullish on equities, predicting an up-year (accepting that they largely play it safe and align with each other). As you know, I was bearish at the turn of 2014 and always expected us to end the year in a bear market, so it’s a black mark against me if we don’t. But I believe the weight of evidence still supports the markets swinging to me by year-end, so let’s see at 31 Dec.

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