Cyclical Stocks Bull Topping Indicators

This is how some of the key stock indices currently stand. The FTSE 100 is trying to break out of a long term triangle.

On the nearer term view, however, it has been turned away at declining resistance. The question is whether this is a fifth failure since the cyclical bull began in 2009, or whether it is consolidating before it finally breaks through.

The Hang Seng, meanwhile, has now broken out of its similar long term triangle, and it is breaking out on a p/e of 11, which is historically relatively cheap. Unless it is pulled back in this week then that break would be validated.

On the nearer term view, it can be seen that it is now up against another resistance level: the March 2012 highs. So if it is to be pulled back into that long term triangle range, then here is a level to be repelled at. Two things to keep an eye on therefore.

The German Dax is also into a zone of importance. Below is the horizontal support of the March 2012 highs which it appears to have successfully backtested, whilst above is the cyclical bull high-to-date resistance (from 2011) around 7500. It additionally has the support of a rising channel to potentially take the index up to that resistance level. A break of either support would turn things more bearish.

Meanwhile, the Nasdaq in the US is in a different place. Unlike the indices above, the Nasdaq reached far above its 2011 highs already, early in 2012. It since then rose above those 2012 highs (in March) to higher highs (in September) but has failed to hold above. The chart below shows that this could be meaningful.

The near term action since September has produced a little series of lower highs and lower lows, which suggests a new bearish trend. On the flip side, the index is nearing oversold, approaching RSI 30.

Clearly the Nasdaq has some way to fall before dropping out of the bottom of its cyclical bull channel and officially into a new bear market, but we should not need to wait for that to be able to judge whether the cyclical bull has topped out. One topping signal would be a major distribution day near the top, and we saw that on Friday. Another would be that cyclical stocks such as Techs break down first and money roates into defensive stocks. Techs are the weakest sector currently. US earnings are now overall flat year-on-year, which actually beats expectations (which were for shrinkage), but tech stock reports particularly have disappointed.

So the question is, are we seeing the first part of a topping process, with techs leading us down first, or are we just seeing some current weakness particular to tech stocks and their poor earnings (overall US earnings are so far flat, which actually beats expectations), with some knock on effect from the Nasdaq index onto other indices? With different indices around the world in different positions, it’s not clear, but there are some other common characteristics to cyclical stocks bull tops, so let’s review:

1. A topping process, normally months, with reversals of reversals of reversals in a range

This chart shows the last two cyclical bull market tops highlighted. Both topping processes lasted around a year, and within the boxed ranges there are both double tops and double bottoms, reflecting the reversals of reversals in a range criteria. If we are seeing a top on the SP500 currently, then we should see this play out into next year, with some sideways volatility to make a topping process. That should allow the 200MA to catch up and then the market can slice through it to begin a new cyclical bear. Could the topping process have begun in March this year at the lower peak? If so, we should still see more up/down oscillation as the market gradually rolls over.

Source: Ed Yardeni

2. Evidence of overbought and overbullish extremes (such as RSI and sentiment surveys)

I’ve done some checks on this and the evidence isn’t very compelling that this actually correlates with a cyclical bull top, namely because of the sideways ranging. These indicators can flash at the start of a topping process, as an up move rolls over into ranging, but thereafter don’t hold persistently.

3. Breadth divergence (such as new highs / new lows and advance-declines)

Cobra’s chart here shows how at the 2007 cyclical bull top for the SP500 price made a higher high whilst advance-declines made a negative divergence. This shows narrower participation compared to a healthy rally which is based on broad participation.

Source: Cobra / Stockcharts

Chris Puplava’s chart here shows that in the run up to the previous cyclical bull top of 2000 shares hitting new lows in the NYSE (SP500 and Dow) exceeded those hitting new highs, which again is a signal of a narrowing rally.

Source: Chris Puplava

This is how things stand today. NYSE (SP500 and Dow) advance-declines are still in an uptrend. For topping evidence, we would want to see a pullback in stocks and this ratio, followed by a new high or double top in stocks where the ratio negatively diverges.

Source: Stockcharts

And this chart is a cominbation of Nasdaq new highs – new lows and NYSE new highs – new lows. Again, we don’t see divergence yet, so would want the same as above – pullback then push up with negative divergence.

 

Source: Humble Student / Stockcharts

4. Cyclical sectors topping out before the index top and money flow into defensives

Leading into a cyclical bull top, money normally rotates out of cyclical sectors such as technology, consumer discretionary and materials into defensives such as healthcare, utilities and consumer staples. This is because the economy is turning down or forecast to turn down and these sensitive sectors therefore become less attractive. Below we can see that into the 2007 top, two cyclical sectors topped out several months before, whilst one remained strong, but the two were sufficient a clue for a top.

Source: Chris Puplava

Fast forward to today and this is how things stand. SP500 cyclicals have overall been in an uptrend since August and do not show that negative divergence.

Source: Stockcharts

Comparing three defensive sectors to three cyclical sectors below, we don’t yet see defensives outperforming and cyclicals falling away.

XLV Healthcare, XLU Utilities, XLP Consumer Staples

XLY Consumer Discretionary, XLF Financials, XLB Materials

Source: Stockcharts

However, the biggest faller has been tech, and that is a cyclical sector. So, as things stand, I would want to see a couple of other cyclical sectors join tech in underperformance relative to the wider indices, to add weight to a top.

5. Major distribution days near the highs

We got one on Friday so that’s a warning flag.

And in the wider environment:

4. Yield curve flat or negative

5. Tightening of rates through rising yields

6. Excessive inflation

7.  Rolling over of leading indicators and recession model alerts

The below chart captures 4. and 5.

Source: Scott Grannis

Cyclical stocks bulls have historically ended with inflationary and speculative froth, money pouring out of safety and pushing up yields, inflationary pressure and natural tightening tipping us over into recession, and indicators of forthcoming recesssion in evidence before the speculation tops. Is this time different due to Fed intervention in the bond market? I don’t believe it affects the overall mechanism, but perhaps means yields will peak lower than otherwise. I still foresee this excessive speculation and inflation playing out, as per my previous Forecast 2013 posts. Thus far we see a little inflationary froth through grain prices, but little else excessive.

Regarding leading indicators rolling over, a glance at the US ECRI WLI shows an indicator performing quite differently to the last two cyclical bull tops (leading into the grey banded recessions). What we would need to see is this indicator start to roll over and break into the negative. This coming Friday’s WLI reading is forecast to slip to 5.82, so there is a potential seedling for a trend change. But we would need to see a few weeks of increasingly lower readings to be consistent with previous tops.

Source: Dshort

The Citigroup economic surprises index for the US is also in a strong uptrend, and its correlation with the SP500 is shown. Again, it would need to reverse trend for a few weeks and break into the negative to be consistent with previous tops. More often than not, this indicator leads a trend chane ahead of stocks topping or bottoming.

Source: Ed Yardeni

 Turning to the global picture, Conference Board leading indicator latest readings for Germany and Australia this week both came in negative and worse than last month. This is in contrast to the recent general improvement since August in global leading indicators. Once again, we should see a trend change in global indicators back to the negative over several weeks, to be consistent with previous equities tops, i.e. leading indicators should roll over before the definitive top in stocks.

So let me sum up. There are several potential cyclical stocks bull topping signs: techs underperforming, the Nasdaq breaking technically and a major distribution day near the highs. However, this could as yet be a ‘theme’ to US earnings season, namely disappointing tech stocks sell off, infecting other indices, in seasonally weak mid-October, before the cyclical bull continues. To differentiate between the two we should see more bull topping indicators aligning, if this is to be a top, and the whole process should last a while yet. Following the current down move we should see another up move, and perhaps repeat that down-up oscillation one or more times again lasting into the end of this year. In support of this, Tom Demark’s latest forecast is for the SP500 to make a move up again to peak out at 1478-1485 in the next 10-12 trading days and for that to be the high for this year. That would fit with Presidential seasonality being strong into and around the US election.

Should we get that move up, then we should expect to see some negative divergences if this is indeed a topping process, such as narrower participation or economic indicators weakening or underperformance of cyclicals. Should that occur then I will use that strength to sell out of some or all of my stock indices positions.

It is curious to see the Hang Seng breaking out and the Shanghai attempting to bottom whilst the Nasdaq is potentially peaking. How might that resolve? Well, my overall message is that a market top should take some months yet to fully form, so there is no rush for everything to align. Solar and secular history suggests equities should top first and then commodities should make their blow off top. It is therefore appropriate that we see some strength or at least stabilisation in China, as a key demand source for commodities. US indices are also amongst the most expensive by p/e whilst China is in single digits. It would therefore fit if the US indices were to roll over first.

A gradual topping process over a few months (rather than a swift decline) should also enable sufficient speculative froth to produce the inflationary finale whereby commodities make a secular final parabolic and bond yields escalate.

So, I sit on my positions for now. I await a renewed up move in pro-risk after this coming weekend’s full moon and into the US elections, targetting Tom Demark’s range. There I will look for further evidence of a topping process to judge whether to sell out of equities.

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45 thoughts on “Cyclical Stocks Bull Topping Indicators

  1. Hi John

    Good to see the good work as usual. And pleased to read that you are planning your trip; exciting stuff.

    I haven’t been posting recently as I’ve been snowed with other business activities and my trading for the last couple of months has been quieter but I’m pleased to say my year is going well, though the performance has been made in a bity way recently.

    Take a brief look at a post I put on my ( rarely updated) blog and you will see where I think we are now.

    It looks like the over bullishness that came about at the point of the QE announcement is unwinding but is still highish(animus x) and price is still above my modelled Fair Value, hence things are soggy. BUT the FV price is rising rapidly underneath and given that the inversion the other day would suggest a turning point on the next full moon the two might come together neatly.

    I am still short from higher but will be looking to go long into that.

    All the best

    Will

  2. Thanks, John, as you know, my point of view, we are now like in the end of 2007, more or less, and the drop I´m expecting in the DOW Jones for next weeks is at least 12.000 or more, 11.700.

    Nasdaq, as leading index is pointing the path.

    Nice travel, John.

  3. My 2 cents, and 5 things:

    1. Back in July, Citi Group (Citi Prime Finance) called for a “terminal high” in the market place this year. They provided technical analysis for their belief. They said the most likely scenario was between end of July and beginning of August, but if not that, then October. So far, 1474 back in September was the high. In general, so far, so good. Point is, and again in their words, a “terminal high”.

    2. Voodoo magic numbers or something. Magic number is 808. Rally from the bottom of 2002 to the top of 2007 was 808 SPX points. Rally from the lows of 2009 to (so far) highs of 2012, that’s right, you get 808 points. If we lose 910 like we did from 2007 to ’09, then we would see 564.

    3. The law of diminished returns taking affect. Each leg higher in the market since ’09 has been shorter and weaker than the next.

    First Leg: +60%, 13 months
    Second: +26%, 9 months
    Third: 22%, 6 months
    Fourth: +14%, 3 months

    Most of these legs, let’s not forget, have been driven by Fed stimulus or the threat of. Also, as stocks have been making higher highs, high lows, stocks ABOVE their 200 day MA (index) have been making lower highs and lower lows since 2009. This divergence was also seen in 2002-2007.

    4. US stock market valuations on a relative basis are expensive as hell. Price to Earnings, Price to Book, there are many other countries (developed) out there that offer not only better valuations, but better yields as well (using ETF as proxies in some cases).

    5. There are many stocks, across many sectors that are putting in the typical bubble price pattern over a longer-term look (10 years or so). Apple, IBM, Amazon, TJ Maxx, Sherwin-Williams, Dollar Tree, Ruger, Ross Stores, Monster Energy Drink, are just a few out of many that are showing price patterns no different than bubble patterns that can be found in all previous asset bubbles dating back to Tulip Mania.

  4. Thanks Ryknow. The shortening legs certainly look telling. I don’t agree the rallies have been fuelled solely by Fed QE though.

    Here’s another way to assess the current environment for stocks: Fried’s 7 point guide. I’ll apply to the US, as that’s where any topping looks most compelling:

    1. Inflation rate – Stocks have historically risen when the official inflation rate is between 2-5%

    Hmm, the current official rate yes, but the Shadowstats rate no. Let’s say neutral.

    2. Bond yields versus stock yields – Long term gov bonds yields should not exceed stocks yields by more than 6%

    Has actually inverted – so this one is very positive.

    3. Interest rates – interest rates should be low.

    Ultra low – so again very positive.

    4. Yield curve – should be normal.

    Check – positive.

    5. Stock valuations – Stocks P/Es should be historically reasonable (historic average 17)

    US valuations around 15 – neutral.

    6. Investor sentiment – II, AAII, Market Vane should not be overly bullish

    Collectively in the neutral zone.

    7. Money supply – M2 money supply should be growing and strong

    It is, so positive.

    Overall, the environment for stocks is neutral to positive. That doesn’t mean stocks have to go up. But it does mean there should be limited downside. Ultra low rates and yields makes stocks relatively attractive. As long as money supply and yield curve are healthy and stocks are not too overpriced or overfrothy, then they should catch a bid from underneath. This environment would need to change to overall negative for a major decline to take place, and it’s another reason why I believe we need an inflationary overly frothy finale into next year before a collapse (as that should convert some of 1,2,4,5 and 6 to negative).

  5. Hey John,

    I got a few points for your 7 point system.

    1. You told us to value CAPE10 and stock prices, as well as GDP, with shadow stats data which is close to a 10% inflation rate. While you say to stay metrical, why would we stay netural if inflation is in double digits? And if inflation rate from shadow stats is not correct, than using BLS data says CAPE10 is above 20, which is extremely expensive. My view is either way stocks will decline, because inflation is top high like in 1970s and because stocks are too expensive with very high CAPE10. Why stay netural when both are bad?

    2. Inverting stock dividend yields against government bonds is not an automatic buy signal. From at least 1900 to 1950 dividend yields were higher than bond yields – link: http://www.financialsense.com/sites/default/files/users/u244/2010/03-long-term-treasury.gif. During those times we had massive cyclical bulls and bears many times over. Same is true above earnings yield too. Therefore, that is not a buy signal on its own.

    4. Yield curve loses its forecasting power when you enter ZIRP – zero interest rate policy and lock the front of the curve. Don’t you remember that Ben Bernanke told us all that he has pegged the 2 Yr Note to Fed Target Rate around 0.25%? So why bother following the yield curve? Japan has had many many recessions since mid 1990s despite a steep yield curve, which you said was “positive”.

    5. Market Vane remains extremely bullish. Consensus Survey remains extremely bullish. Investor Intelligence Suvey shows no minimum bears until recent update. Remember that II Survey netural reading is technically bullish long term, but in correction camp short term. AAII sentiment flashed bearish readings last year in July and potential contrarians like perma bullish guys over at Bespoke bought and found a crash on their hands and got their portfolio hurt badly (I’m a subscriber), AAII Allocation Survey cash levels are extremely low and complacent.

    I won’t on others in depth because to me they are pointless. Interest rates move in large 30 year cycles regardless of what stocks do. During K Spring rates rise with stocks, but during K winter rates stay low , but they don’t help stocks, which stay in a secular bear. M2 has no correlation with the stock market, especially when the money is flowing out of Eurozone and into US like it is today.

    It is amazing that one person can look at data and come up with a netural to positive outlook, and yet another person like me sees majority of the points as negative. I guess that is what makes up a market… bulls vs bears! *smile*

    1. Thanks for your input.

      1. Accepted. It’s either the one way or the other. So I’ll agree downgrade to negative.

      2. Not a buy signal, just a relative advantage. There needs to be some confidence that equities will hold or gain for the relative yield advantage to come into play, but the advantage is the point.

      3. The yield curve shape will still alter as the Fed is not the only player, but the Fed’s intervention in this market assists in keeping bonds unattractive to equities.

      5. The latest composite of market vane, AAII, II and call/put is in the neutral zone.

      Interest rates – not sure how you can see them as irrelevant. Discourages cash holding, cheapens debts, encourages borrowing, encourages investment in riskier assets of which one is equities. Clearly negligible rates can’t force any of that but the whole exercise is about assessing the evironment for equities, and in such an environment, equities (and other pro-risk) are lifted to high relative attractiveness. It is that, in my opinion, that limits the downside as there will be a higher bid level.

  6. By the way, regarding the post, it is a great write up. You put in too much time for your blog and readers. You should spend more time with your family. Enjoy your trip!

  7. Re US vs non-US markets, one factor not yet mentioned is the looming capital gains tax increase in the US, largely affecting wealthy investors holding winners, such as hedge funds and AAPL. We may be seeing early exiters now and will surely see more with an Obama win. Assuming Obama win, look for non-US markets to outperform through the end of the year and Demark’s 1485 may well be this year’s high; however US rebuying should ignite a renewed rally to start 2013.

  8. I agree with Tiho and Antonio. Ref all the “positive” financial data. The Japan Model shows it is not necessarily so. In fact, Japan tried open ended QE in 2001 and got a sharp 10 week rally.right after the announcement. The market was then cut in half over the next 2 years. The overall world economy and bear mkt over rode that action, apparently.
    According to the Eclipse crash sequence the mkt should have peaked on the new moon of Sep 15, which many indices did. A 10% decline to the Oct 15th new moon should have happened (which didn’t, only 5%).. Then there should have been a 30 to 50% recovery rally toward the Oct 29th full moon. Then full scale crash begins falling toward the solar eclipse of Nov 13 and a final low on the lunar eclipse of Nov 28th. 1929 and 1987 followed this general pattern. We are in the 28th day down from the Russell 2000 top. The 1929 top saw a 7 day 40% snapback after the 28th and then the crash really began. In 1987 the crash really started on the 28th day from the top. If we get a weak snap back rally from here, it would get me very focused. There are two of the eclipse crash sequences every year and they hardly ever happen, so it’s just a heads up memo.

  9. Been calling for a pullback to 12,900-13,000, could extend slightly lower, then another “final” move up. We are almost there on the downside. There is a critical reversal date of Nov 1st so metals and the market could turn up around that time…trough could extend to Nov 5th.

    My key VIX indicator busted support today, this can indicate one more attempt to the upside…the second attempt to break support could more than likely lead to a melt down…

    The market could top out around Dec 24 to Jan 7-12th. In fact there is a major Bradley turn date of Dec 22nd. The Nasdaq has most likely topped out for the next year and a half. Bears are licking their chops right now!

  10. John,
    you stated that you await a renewed up move in pro-risk after this coming weekend’s full moon and into the US elections, targetting Tom Demark’s range of 1478-1485. I was struck by what appears to be somewhat of agreement with your statement with two charts:
    (1) the DJIA Election Years Chart in your October 28 post
    (2) the Eurodollars Futures COT Report as percent of Total Open Interest.

    The DJIA chart appears to show a historical weakness in October during election years followed by a rapid rise into the end of November marking a new high for the year. Similarly the COT Report chart appears to show a dip after around Oct 18 but then a rise into what may be a new high at the end of November.

  11. Just by looking at the 2012 Eurodollar cot performance, my guess is that the decline over the course of 2013 will equal at least 20% for US stocks. The crash I thought would happen in 2014 seems like it may happen 1yr earlier. The sooner the better, in some ways. Poor equity performance may spark flight into gold and treasuries that’s large enough to burst both of their respective bubbles.

    1. Hey Edwin, are you buying stocks now that you think correction is over?

      Also are you still long CAT from early August and Coffee from mid September? I remember you stating you went long both of those. Also are you still short Treasuries?

      1. Not holding CAT nor JO. Long gone as they were just trades based on TA. Stopped out based on my discipline. I am still holding TBF (a generational position based on my conviction against future higher rate and perhaps an eventual sovereignty confidence crisis in the US).

        I have been holding EWH, EWJ, EWG, and VEU. Added INTC (yesterday) and GLD (today)…….I also a basket of preferred stocks(may hedge soon). No treasuries, A municipal bond position down to only 0.5%.

        I have several Structured CDs and Notes tied to the performance of SPX (>700); Stoxx 50 (>1,800); and the JP Morgan’s ETF Efficicente 5 index (a momentum based algos trading black box)back-tested to 1999). These are long term play with set strategies around them.

        Despite the above positions, I am still 80% cash as I see potential is limited. I am hoping and ready for a mother of all correction (Tiho’s style-:)) so that I can load up on stocks.

  12. Hi John,
    You made mention of a 19 year cycle a couple of posts ago. The lunar Metonic cycle of 19 years and five hours would appear to fit this. Apologies if this already known. Sincere thanks for the wonderfully balanced, clearly presented and very generously offered analysis.
    Best to you
    Rufus

  13. Latest US earnings position: Total earnings for 179 companies (as at yesterday) down 2.9% y-o-y, with only 57% of the companies beating earnings expectations. 33% of the 179 companies have beaten revenue forecasts.

    Before earnings season began the consensus expectation was for -3.4% y-o-y earnings shrinkage.

    1. Yes, but that’s the 3 month average. This month’s figure came in at zero – see the blue line here:
      http://paper-money.blogspot.co.uk/2012/10/the-chicago-fed-national-activity-index.html

      Overall there has been very mixed data this week looking globally. It isn’t the picture of reflation that I imagined. But it’s unclear currently whether we are cranking up again or tipping over again. The trend will become clear one data item at a time.

  14. Looks like Jim Bianco has also figured out what I have been trying to tell investor for awhile now:

    “We do not see a big interest rate bet being made by the public. We see tax plays, currency bets and a big bet in corporate bonds, which can also be described as a low beta stock market bet.”

    Those constantly saying that equities will rally because funds have been leaving and entering into bonds will be surprised to find out that the bond bubble is just a low beta stock play aka credit market play, for the lack of a better word. After all, corporate debt and stock market has a very high correlation and follows the business cycle almost identically. Mums and dads are not investing in interest rates like Treasuries, they are essentially betting on credit which are high risk bonds!

    What I predict is that those who have piled into corporate bonds will be slaughtered and those who have tried to be contrarians and have instead bought equities will also be slaughtered in the up and coming bear market / recession. More and more smart investors are realising that the bond bubble is another overvaluation of corporate securities and at top of the range near 1500… it’s time for a third cyclical bear within a secular bear market!

    1. Interesting that treasury bonds haven’t been a beneficiary of the pro-risk pullback of the last 2 weeks. Yields have advanced whilst equities have pulled back. Yields pulled back for 2 weeks post QE infinity announcemement and then began to rally again, which is behaviour similar to post previous QE announcements, but not if equities top out rather than advance.

      http://stockcharts.com/h-sc/ui?c=$TNX,uu%5Bh,a%5Ddaclyyay%5Bpb50!b200!f%5D%5Bvc60%5D%5Biue12,26,9!lc20

      1. Regarding Treasuries:

        John, we talked at the early months of the year via email and I stated that I don’t see a top in Treasuries like I did in late 2011. Back in October 2011, I turned bullish on equities as everyone was a bear. I remember one blogger, who calls himself “Smart Money Tracker” was forecasting the end of the world around the same time, with an S&P 500 target in 2012 below 700 on S&P 500. So much for being smart money. Naturally, I went the other way and also expected Bonds to decline.

        However… they only went sideways and did not sell off. I covered my short for a break even. Afterwards I said to you I expect that Bonds will go higher, because fundamental situation in Europe has not been properly solved yet. We did go higher from November 2011 peak into July 2012 peak and shorts got hurt.

        Fast forward to today… I still don’t see a top even though I am bearish and patiently waiting to short Treasuries after 31 years of secular uptrend. They are extremely overvalued but does that mean they need to top today or tomorrow? No it doesn’t, because still… after 20 plus EU Emergency meetings… fundamental situation in Europe has not been properly solved yet.

        Couple of months ago everyone said it was a Bond head & shoulders top and that hasn’t worked out so far. Head & Shoulder patterns usually don’t have down-sloping necklines. To me, technically it just looks like a consolidation period of sideways price action, before Bonds rally. Shorts will get hurt… again!

        Finally, consider one of the most important factors: correlation of Yen and Treasuries and the current sentiment (chart here). I’ll tell you one thing when I see bears on the Yen at 9 year highs… I definitely wouldn’t short Bonds and the Yen right now, that is for sure. I haven’t bought any Treasuries either, but I do own some Yen already and I also bought some more last night. I might add some more again!

  15. UK economy grew by 1% in 2012 Q3, thanks to one-off factors AND underlying growth taking place, so the UK seems to have left its double dip, but countries like France and Germany are seemingly about to experience a double dip in coming quarters. It’s not unusual for them to lag the UK’s economic performance, given that the UK slipped into a recession in 1990, whilst France and Germany only felt the recession by 1992

  16. If I am correctly interpreting the above posts, John and Tiho look at the same data points and John sees a neutral to positive outlook while Tiho sees the majority of the data points as negative. John thinks the equities market has yet to achieve a cyclical equities top but Tiho does not.

    On a personal note, during this entire year of looking at the market, this is the point where I have felt the most nail biting tension because I believe both John’s positive and Tiho’s negative outlooks are correct. It’s just a matter of timing. In my opinion, the market may yet make a higher top in Nov or Dec, but after that the negativity in the data or a black swan event may drive the market lower in a saw tooth pattern for a couple of years.

  17. Furthermore, one extra comment regarding the Yen:

    A great hedge fund manager and very deep thinker that I respect a lot by the name of Hugh Hendry stated awhile back that Yen might go so high and surprise so many that it will push Japanese policy makers into extreme money printing.

    While traders think BOJ has been devaluing the Yen at a rapid pace, they are wrong. BOJ is way behind ECB and the Fed (chart here), hence its strength… and the Yen might blow through 78 and into 60s before BOJ goes nuclear. What will cause the Yen to rise so much? Most likely some of all of the following: Eurozone crisis, Chinese hard landing and global synchronised recession.

    1. I looked at the Yen after you posted the sentiment chart on your blog recently – always on the look out for an opportunity. But, like treasuries, the yen index has been in a 30 year bull market, from 36 in 1982 up to last year’s peak of 132. That doesn’t preclude a bounce here or even a higher peak as per your expectations, but it’s not something I want to play long.

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