Cyclical stocks bull top?

Weighing up whether the equities bull market that began in 2009 is topping out here, we can look to fairly reliable historical topping signals, and I can summarise as follows:

1. A topping process, normally months, with reversals of reversals of reversals in a range – yes, up and down legs since May within overall range

2. Evidence of overbought and overbullish extremes (such as RSI and sentiment surveys) – I found this not to be too reliable as an indicator once the topping process has begun, but nonetheless, investors intelligence bears would be one such current reading – click here for link

3. Breadth divergence – yes, advance-declines or Mclellan summation index would be two

4. Cyclical sectors topping out before the index top and money flow into defensives – nope, not happened meaningfully yet

5. Major distribution days near the highs – we have had some 90% down days since May

6. Yield curve flat or negative – since the debt impasse began, treasury yields at the shorter end of the spectrum have indeed inverted, the longer end remains healthy

7. Tightening of rates through rising yields – we have seen a doubling in treasury yields over the last 6 months

8. Excessive inflation – nope, we are seeing global disinflation

9. Rolling over of leading indicators and recession model alerts being produced – combining OECD, Conference Board, ECRI, narrow money and Recession Alert, we don’t yet see this in any meaningful way

10. Market valuation excessive – measures such as the Q ratio and cyclical p/e show the US to be currently overvalued, whilst globally speaking valuations are within normal historic range (however, by my work this is relative to demographics and as such USA and Europe should get cheaper)

In summary, we see some warning signs of a top in progress, but not yet a full set.

To be clear, not all cyclical tops are a process. Some are parabolic manias that end in a spike, with a similar crash down the other side. Examples link here.

However, we don’t see parabolic rises in equities in global stock indices currently, and if this is a top being formed currently, then it is of the topping process type. The 2000 and 2007 tops were topping processes, as were the multiple tops around the 1970s.

What I have found about the topping processes is that when the topping range began, there were precious few topping signals present – as if the stock market were as competent a leading indicator as any other. But when the topping range ended – the last push up – the majority of signals were clearly present. I have highlighted the 2000 (Mar-Aug) and 2007 (July-Oct) topping ranges on the charts below to show this.

First, OECD leading indicators – downtrends in evidence by the end of the topping ranges

14oct20131

Second, ECRI leading indicators – by the end of the topping range had fallen through zero
14oct20133

 

Third, treasury yields – rising prior to the topping range, then falling once topping range in progress
14oct20134

Next we see the topping ranges on the SP500, which if you zoom in, had different shapes in 2000 and 2007 but in both cases there was a last push up to the highs, with many topping signals present, before the bear began. I show here what happened with commodities – both times topping after the stock market. In 2007 commodities only took off once the equities topping process had begun, so there is the potential for that to occur now, but it has to happen without delay if this is a top.14oct20135

Fifthly I show US housing, declining into the market tops. The recent drops in new home sales, related to the increasing mortgage rates, could be similar if it continues.14oct20136

Sixth, US GDP – again clearly in a downtrend by the end of the topping ranges, so should look for the same this time14oct20137 Seventh, margin debt. We see a similar overthrow rally in margin debt recently as per the 2000 and 2007 tops, and again margin debt was in a clear downtrend by the end of the topping ranges so should look for the same to occur
14oct20139 In short my message is this. If this is a topping process in equities, then we should see a further leg up ahead where the bulk of these indicators have moved into clear downtrends. We have certain topping signals already in place, but the rest should fall into place ahead if this is a topping range. It means a golden opportunity to go short would be following a further leg up in stocks against the backdrop of these remaining indicators having turned. If this is not a top in equities, but a consolidation before further gains, then we should break free from the range, and the topping indicators in place one-by-one cease to be.

I want to end by commenting on the global disinflation in place currently. This to me is consistent with demographic trends, and is the threat to a commodities rally coming to pass. If commodities can’t rally as per historic topping order norms, then I would point to the unprecedented collective demographic deflationary trends in place now.

As inflation levels drop in the major indebted economies, the danger is that inflation drops below yields making the massive debt effectively grow bigger. Central banks would then need to intervene further to suppress rates or initiate inflation, perhaps by increasing QE. If, on the other hand, commodities become a speculative rally target here, then inflation will increase but the move would have detrimental impacts on the economy. Central banks would again be bringing out the toolkit. It’s the trap that I referred to before. Can instead the goldilocks scenario continue, of low growth, low inflation and equities rising, with the Fed able to slowly ease out of QE? I personally can’t see it, because it is such a fragile position. Rallying yields or rallying commodities or government pullback on stimulus/spending would likely tip the fragile economy over, and I believe one or more of those will happen in due course. It would take stronger growth to prevent this, and I don’t see it can occur against the demographics.

 

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27 thoughts on “Cyclical stocks bull top?

  1. Al worth the read, even for a genetic bull, so when the time comes you can avoid being ground beef. Tom Sent from my iPad

    >

  2. I noticed that the ECRI Weekly Leading Index has come down sharply in the last two weeks. It seems that your work focuses on the Conference Board’s Leading Index. But does the sharp decline in the ECRI version give you any sense that what you are looking for in the leading indices is beginning to show up?

    I took a brief glance at the high readings in the ECRI version in ’00 and ’07 and it seems to peak at the market high, and the recent peak was mid-September.

  3. Hi John
    “What are the elements of a topping process”
    This is such an important post I have printed it.
    Thank you
    bob

    PS I wonder if any member of Johns site has info on the inflation / deflation status of various countries, or where to find such info.
    eg .USA is deflationary
    UK is inflationary
    BRICS are inflationary.
    Norway is neutral.(that should get a response)
    I think the inflation / deflation process is what will determine demographics..

  4. A sneaky and stealthy day. Who would expect a strong day up, after 0.66% gap down, on a bank holiday, after a sloppy 2(!) hour initial balance from open. Looks like even some market workaholics would have missed this move. 7 minutes before close they still tried to shake out long positions.
    This is why expectation are good until we trade. When we trade, expectation don’t matter.

    1. Hi,

      I might just add my 50 cents.
      1) There is this divergence between job report and sp500 which look a bit like we might be close to the top.
      2) One the other hand russell 2000 looks like it want to go higher and since some years it is usually leading sp500 and nasdaq.

  5. John,

    Brazil still looks cheap. Took half off positions from last update to protect profits, but long term very attractive.

    Select big cap precious metal miners are looking ripe for upside reversals. ABX is a name I like. Daily technicals are suggesting a reverse head and shoulders– unconfirmed.

    Beaten up coal producers look attractive as well. Could these guys outperform at this point in the business cycle? CLF is building a nice base.

    Really like your S&P/CRB comparison chart!

    All the best,
    Rick L

  6. Interesting to see all the world markets (FTSE, DOW, DAX….) all push up greatly (wide ranging bar) on the Bradley turn date (9th/10th Oct) so could this be a critical low if broken in the future…? Seems there is some bullishness left in the short term unless we get bad news from Washington..??

  7. Another great post, I appreciate your scientific method. Actually looking back at what really happened as opposed to logical assumptions that are frequently wrong. The stock market bottomed the day Iran took US hostages and topped the day they were released. The stk mkt took off like a rocket the day Iraq 1 started. The mkt topped out after VJ day. Overbought is a sign of strength in a bull mkt. This market has been rallying into all time highs as we approach debt default. I think actual default terrible, but resolution a top on good news.
    The credit cycle still looks positive. Weak economy and easy money equals a strong stock mkt. However, after 1989, the Japanese stk mkt and economy turned down very soon after credit condition just quit improving. It didn’t take a flat or inverted yield curve to cause problems because the underlying economy (demographiccs) was so weak. Certainly the recent rise in interest rates has stopped improvement.
    Several pre crash peaks have occured on or near lunar eclipses, Oct 18. (Tulip, Mississippi, 1929, 2000, Japanese 1989, 1980 gold and silver, and several more). A resolution on Wed causing a big jump like Bernanke no taper top will be a negative as well. I actually like interesting times

  8. The mass is confident, rely in US debt solution. But if not. An what about the FED? They have loosed control in bond markets from last year- in theory they are still buying. Read the translation of this:

    http://translate.google.com/#es/en/%E2%80%A2%20Hasta%20ayer%20solo%20la%20deuda%20p%C3%BAblica%20USA%20a%20cort%C3%ADsimo%20plazo%20se%20hab%C3%ADa%20tomado%20en%20serio%20la%20posibilidad%20de%20que%20EEUU%20llegue%20a%20la%20primera%20fecha%20de%20posible%20default%20%28impago%29.%20Deuda%20p%C3%BAblica%20USA%E2%80%A2%20Sin%20poder%20realizar%20nuevas%20emisiones%2C%20el%20Tesoro%20de%20EEUU%20agotar%C3%ADa%20el%20dinero%20que%20tiene%20en%20caja%20entre%20el%2023%20y%20el%2031%20de%20octubre.%20A%20partir%20de%20ah%C3%AD%20tendr%C3%ADa%20que%20decidir%20si%20da%20prioridad%20al%20gasto%20social%20o%20a%20los%20intereses%20y%20a%20la%20parte%20de%20la%20deuda%20vencida%20no%20renovada.%20%20%20Tesoro%20EEUU%E2%80%A2%20Soluciones%20posibles%3A1%29%20Cancelaci%C3%B3n%20por%20la%20Reserva%20Federal%20de%20parte%20de%20la%20deuda%20p%C3%BAblica%20que%20tiene%20en%20su%20activo%2C%20creando%20as%C3%AD%20margen%20para%20nuevas%20emisiones2%29%20Prioridad%20de%20pago%20de%20la%20deuda%20p%C3%BAblica%20como%20dice%20la%2014%C2%AA%20enmienda%20y%20reducci%C3%B3n%20a%20cero%20del%20desfase%20presupuestario%2C%20lo%20que%20exigir%C3%ADa%20un%20ajuste%20anual%20equivalente%20al%204%2C5%25%20del%20PIB%3A%20recesi%C3%B3n3%29%20El%20Tesoro%20acu%C3%B1a%20una%20moneda%20de%20platino%20de%20un%20bill%C3%B3n%20%28la%20moneda%20es%20competencia%20suya%29%20de%20d%C3%B3lares%20que%20deposita%20en%20la%20Reserva%20Federal%20y%20contra%20la%20que%20toma%20nuevos%20pr%C3%A9stamos.

  9. Another possibility, is a solution or partial solution Us debt, with a final rush in US markets and european markets till end oct´13 or beginning nov´13 and end point.

    1. ….or as most of the European managers are doing is rotating into Junk for fixed income – much safer than Treasuries at this point (and we do have part deux in the Republican/Obama standoff to look forward to).

  10. It’s not that there’s not enough commodities for the Chinese, the point is that paper or digital money are cheaper in storage and maintenance than most of commodities. So are US stocks…

    1. I always wonder about the shortage of commodities in China.
      Its a hugh country.The commodities are there.!!!!!!!!!!!!!
      I think China is spending its $$$$$$$$$$$$ and leaving the OIL in the groung
      No scientific backup for this post .Sorry Robert and Danny.
      Just my thoughts
      bobc

  11. In last 20 years, two main comets prelude significant financial crisis, first in 1997, second in 2007, the 3rd main comet is coming in december´13.

    Will it prelude a meltdown?

    @apanalis

  12. The tidal cycle had a top around Sept 10, and the correlation shows that sunspots tend to peak ~40 days later, which is around Oct 20.
    The corresponding SPX-correlation shows a very bullish period from the tidal peak and the next ~40 days, into the sunspot peak.

    One of the best timing-tools for SPX-tops are the T-projections from Terry Laundrys work. The last T-projection had a max-date of Oct 14, and markets should have topped within a few days from that date.

    When SPX now shows such momentum after that date, it probably means we have an extension similar to March 2012.

    It looks like this and has a T-projection in the interval Oct 17-28.

    So it is a very short T-extension, and could produce a top anytime until Oct 28.
    My shorter term work suggest some kind of dip and a last push up to complete some kind of topping formation or blow-off

    My projection for Norway suggest weakness next days, and a top (lower/double/higher) around next weekend.

    Jan 🙂

  13. There is lots of stuff happening right now on the financial astrology front: lunar eclipse, lunar positive period begins in the next few days, increased sunspot activity, hybrid solar eclipse and Bradley turn scheduled for 3rd Nov, marking the beginning of a Puetz window.

    http://www.marketmulticycles.com/marketmulticycles9.htm :

    “It is crucial to understand what the siderograph is about since almost all traders (and even financial astrologers!) misunderstand it. Over the decades it has been observed that the siderograph can NOT (!!!) reliably predict the direction but only turning points in the financial markets (stocks, bonds, bonds, commodities) within a time window of +/- 4 calendar days (in a few cases up to +/- 7 days). Inversions (i.e. a high instead of a low and vice versa) are quite common. Also, it is not a timing tool for short-term trends but rather for intermediate-term to longer-term trends because the turning window is rather wide.” – Manfred Zimmel

    The major Bradley turning points have worked well so far in 2013, so it will be interesting to see what direction the market takes into 3rd November.

    If we head down into the 3rd, we could be in for a “melt up”. As with Bradley, it is my observation that eclipses work much in the same way, marking turning points only:

    http://tinypic.com/r/s3lfms/5

    In the chart I’ve circled the turns that appear to have worked particularly well in recent years.

    Then we have the obvious ending pattern on the major US indices. My only observation here is that if it’s obvious, it probably won’t play out, which must be a concern for the bears.

    For my part, I’d like to see the indices rise into the Bradley & solar eclipse turn dates…from that admission, you can guess how I’m currently positioned!

    Good luck all.

    TDL

  14. It would be prudent to wait until the market is really blowing off the top and it would be premature to short the market at this point in time. We are certainly at the last stage of the bull market – euphoria. However, more signs are needed to signal the capitulation point. The first and last stage of the bull market is the most powerful wave up, so we still have more to go.. probably another 5% to 10%… till end of the year…

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