The SP500 followed the Russell 2000 and Nasdaq to new highs, on good breadth with healthy leading sectors. A marginal new high is normal in a topping process, but we would expect to see some kind of warning flags developing in terms of leading indicators if not in internals. We would also expect any new high to still be within an overall topping range, so not to run away too far. Here is one such topping model:
So might stocks get pulled back soon? Earnings reports are just getting going so too soon to assess beat rates, but earnings season usually produces a bullish or bearish theme. Geomagnetism continues to disturb and diverge from performance in some key stock markets. I have highlighted a historic rhyme below, which would be consistent with a topping process and then a fall in earnest in US equities:
I have updated all models on the site this morning.
ECRI leading indicators for the US have changed trend:
And the ISM manufacturing and services composite is also trending down:
World GDP is also in a steadily weakening trend, which is in line with my expectations based on the confluence of negative demographic trends now in place between US, Europe and China. I have marked their respective demographic peaks to illustrate:
Because of the demographics, my primary expectation is that the economic data will indeed continue to weaken and in due course topple the stock market. The alternative would be that the collective efforts of central banks are sufficient to prop up the global economy to a sufficient degree to maintain the low-growth-low-rates environment which is positive for equities. So all eyes on the leading indicators.
The US stock market is now in the top 3 most expensive by CAPE globally. Again from my demographic work, high price-earnings valuations can go higher if demographic trends are positive. However, the US is in a period of negative demographic trend so the expensive valuation is an anomaly that should be corrected in due course.
Crude oil has continued its upward trend and cemented its breakout. Gold and silver look to have carved out bottoms, though still tentative. The CCI commodities index has now been in a two week uptrend. So still early developments for commodities, but I maintain there is a greater likelihood of the historically typical process of commodities starting to outperform whilst equities make a multi-month topping process (with bonds already having topped), and eventually commodities topping last as they help tip the economy into recession. Another possible development in support of this would be if the US dollar broke down from its recent uptrend following Bernanke’s softer QE stance that came out last week. A chart by Niels here:
So as things stand, I maintain my overall expectation that stocks are in the first half of a multi-month topping process, with a marginal new high being carved out currently that should soon be turned back down. Commodities should outperform here forwards. Leading indicators should weaken sufficiently to prevent further advance in equities, but not too drastically to sink commodities. Moving into 2014 commodities should peak as they suck the remaining life out of the global economy, which is already vulnerable due to collective demographics of the major nations. Whether they can do this around the time of the solar maximum, as per history, remains to be seen, as the experts continue to diverge on forecasting when the solar maximum will be or was. The sunspot trend remains messy for now.
Trading-wise, if equities can rally a little higher here whilst we see a little more leading indicator or earnings degredation come to light, I will take off some more from the long side and add on the short side. Meanwhile I continue to sit on my ample commodities long positions.