Stock Market And Red Flags Update

Yesterday’s strong up day in the SP500 and Dow claimed back a significant chunk of the previous day’s losses, but less than the full amount and on lower volume. Unless we see follow through on this over the next few sessions to break out to new highs (above Dec 31) on momentum, then this is still consistent with the 1929 and 1987 Dow peaks and the 1989 Nikkei peak, in that we should see several weeks of battling between bulls and bears. I have marked with an arrow where I see us, as the timings in these analogies are fairly consistent with each other.

Dow1929b Dow 1987b Nikkei1989bThese are guides, so the technical shaping of the indices this time round won’t look exactly like any of them, but the idea is the same: many major topping signals are in place but with such extreme bullish sentiment and positioning, a process is required to gradually change perception. Since Dec 31, we see a tug-of-war between bulls and bears but with an overall downward bias, and the topping process is so far in tact. If I am wrong about the Dec 31 timing and the bulls regain control and we see a break out on momentum, then I would see the markets going yet steeper parabolic before a similar peaking process coming to pass. As previously indicated, the confluence of warnings and flags suggest this should occur by March at the very latest.

Monday’s falls did nothing to temper the put/call ratio. Below is the 17 day average versus the SP500. The current extreme beats the other incidences of sub 0.8, but in both those cases a correction followed.

15jan1Risk of an outsized move persists with the Skew still evelated at historic extreme levels:

15jan2Sentiment measures remain collectively extremely bullish (contrarian bearish) and continue to be a red flag:

15jan3Distance above the weekly 100MA is at a historic extreme and warns of a deep pullback:

15jan4

RSI divergence and long term resistance set the scene for the Russell 2000:

15jan6

Nasdaq 100 is also at important resistance. Break up and out, or break down here?:

15jan7

Rydex buying power, which is money-on-the-sidelines, is at very low levels, which is consistent with other measures of ‘all-in’:

15jan8

Sentiment against bonds and gold miners remains depressed, whilst bonds, gold and gold miners look finally to be basing. OECD derived leading indicators point to a global economic peak Jan/Feb, whilst narrow money leading indicators point to a global economic peak having occurred around November. Economic Surprises are in the historic high range for the US, and as this is a mean-reverting indicator (analysts will accordingly raise economic forecasts) we should see a a twin-negative going forward in worsening data versus elevated expectations. Earnings season for the US now starts to ramp up, with the most negative guidance on record. In short, I see everything in place for money to exit equities and move into gold and bonds, but this is a process and patience is the key.

Advertisements

32 thoughts on “Stock Market And Red Flags Update

  1. John,
    Thanks for the excellent articles. I came across your site a couple of weeks ago. Just a point id like your opinion on. Financials usually lead the market down. We havent seen this at this time. RBS, Lloyds and Barclays all appear to be trading a recent highs or making new highs. Would you have expecred to see this by now?

    Duncan

    1. Good question.

      In 2007 we effectively got a double top in the markets in July and October. The cyclical sectors index (broadening out from financials alone) showed no divergence into the July top, but was in decline by the October high. Most divergences (breadth etc) were only really clear at the second high. The charts at the top of the page show that we ought to see some declines, then a rally back up again, at which point I would expect more pronounced divergences.

      The Dow had a very long topping process from May 1999 to May 2001. The cyclicals index rallied into May 1999 and then displayed divergence thereafter. So a similar picture of general cyclicals not diverging into the initial peak but thereafter. Here in Jan 2014, we don’t yet see divergence in cyclicals whilst defensives take over. It is one thing that bull market defendants point to and I accept it – but I’d just make that point about it should transpire prior to the proper market falls.

      I believe 2000 is more relevant to now because of the solar maximum mirror. The speculative target of that solar max was stocks and specifically tech stocks. The cyclical tech sector did not diverge into the peak, but rallied right into the max. For this solar max it’s again stocks and the embodiment stocks include Amazon and Priceline, both which have helped power consumer discretionary to top sector. Financials are the second biggest gainer, and if dot.com ‘new norm’ was based in the tech sector, then ‘Fed policy trumps all’ new norm is best teamed with Financials. Maybe then these cyclical sectors don’t diverge this time.

      1. Thanks John. I read yesterday that $XLF touched the 61.8% retrace from the 2007 highs to 2009 lows.

        SPX also closed at the 31/12/13 high yesterday after making a new high intraday.

  2. In regards to financials, a good friend of mine well-versed in Point & Figure said the Bullish Percent for the sector just flipped into ‘O’s’, meaning negative.

  3. Every trade I take has as one of its components a line from a medianline setThey were developed to project long term targets and possible turning points. Though I am primarily a short term trader, I always know the long term charts of what I am trading.Here is my long term chart of the $SPX.There are only two long term resistance points based on the tools.Right here right now or above at approx$spx1956.Up to this point the long term momo traders have even had my methodology at their back.Now, in support of John’s work,there is important resistance either right here or just above.

    http://stockcharts.com/h-sc/ui

  4. I need to qualify my comment above regarding Financials. It’s true that the P&F chart for financials moved into ‘O’s. However, the chart for banks is quite different and remains in ‘X’s, i.e., positive.

  5. Hi John (and all),

    I haven’t posted here for ages, and even gave up on my blog so if anyone wondered what happened it’s due to a divorce and other businesses have taken over for a while though I have popped in here regularly.

    Well done John – your site is as good as ever.

    A few points:

    John your list of red flags that point out an impending top are undoubtedly valid so extreme caution should be taken by anyone going long at this point. There has been some talk of whether the Presidential cycle has inverted or not. Nothing personal to the person who posted that but I hate this type of talk. Rather than focusing on “the cycle” , focus on why the cycle exists and if this cycle is has “normal” drivers or not.

    The normal cycle goes like this – New Pres gets in, in a reasobly buoyant economic environment, so he slows things down the first 18 months and then he pumps things after that to get re – elected. ok we all know that.

    When there is a shock to the system the new Pres has his hand forced. In Obama’s case he came into power when things were in free-fall so he had no choice but to adopt the expansionist measures already introduced at the end of the Bush administration, and pump day one. This gave his “Pres Cycle” a different shape. Strong year 1 into March/Apr yr 2 – weakness over summer y 2 – strength from end summer y 2 to Apr yr 3 – most wobbly summer yr 3 – stregth again and then muted most of yr 4.
    Not the whole cycle but the same strong first year was similar to Bush snr after the crash in 1987.

    Where there is a second term you would expect the second term to have a vaguely similar shape with the second term having less extreme down moves as the Pres will try to maintain the move. The exception to this is where a significant up move has taken place by year 3(7) and this is when a crash/topping is most likely. 1987(year 7). 2000(year 7) 2007(year 7)…….
    Do I think a crash is likely at this point in the cycle?,over the next few months…. A 10 – 15 % move quite possible…….a 40% move ….I doubt it.
    I will be more interested to see where the market is next year as a crash if things are very overextended is more likely then.

    Things are very confusing – sure! Valuations, Q ratios etc etc all point to this being a major top but these are unusual times with significant deflation so central banks are not going to walk away from their pumping tactics in a hurry – or more importantly is Obama going to let them and risk a poor legacy.

    The Gold price is certainly confirming these deflationary forces. My suspicion in Gold is this – we are in a secular bear market but we are in the cyclical bear phase for the dollar in the Pres cycle and therefore in the cyclical bull phase for PMs. I banged on about this for ages last year, saying that you should not look to buy them until week 28 of 2013.this is the start of the bull phase which runs until the end of 2015.

    I did buy gold then at 1225 and sold it out for a 10% turn because I believe we are in a secular bear period. The good news is that if Gold falls below 1225 (which is the point it hit on week 27 ) then it will mean revert back to that at some point before the end of 2015 – based on history. I am more than happy to produce a chart to john to demonstrate this. I have no position at the moment but will certainly but if there is a significant fall below 1225. in the meantime I hope it does rally for John.

    I will add one more thing …..most people on this site are obviously seasoned and wise. I have been lucky enough to have been a pretty successful trader over the years but I believe the least profitable area has been shorting indexes – a few big winners but also plenty of loses.

    caveat venditor – manage your trades well!

  6. In ’29 and in ’87, a substantial portion of the declines came on the last 2-3 trading days of the crash (calendar days 52-56 from the price top).

    When looking at today’s situation I was thinking about what has the potential to do technical damage needed to inflict that kind of decline. From my perspective, if prices stay above 1575 +/- then a level of complacency will exist.

    Perhaps then in the final 2-3 days of the crash (should it take place) we will get a strong break of 1575 and create a panic liquidation.

  7. I think the arrow should be a few candles before the final high. SP500 squeezed a new high and I suspect the DJ will make it too.

    Meanwhile the DAX continue accelerating. The last two moves up since mid December are already perpendicular on all charts – hourly, daily and weekly….. if this is not a final blow off I do not know how it should look like:)

    With this indicators and this sentiment at least a significant correction 10%-15% should be around the corner…. or this time is different 90% of the traders will make money and only 10% will loose:)))

  8. This is not meant as a personal attack, but John Strike’s comment on the previous post sounded very similar to “this time is different”. I think Mr. Hampson’s appraisal of the situation is well founded. I’m cautious and in my opinion, rightfully so.

    Trading wise, I closed out my longs in miners yesterday. Waiting for opportunities to present themselves in the meantime. Best to your trading, all.

  9. John,
    Amidst all the data I lost my clarity so I have a couple of questions

    1. After the Feb/Mar time frame when a waterfall decline is expected, how long do you expect the decline last to last in terms of months or years?

    2. At the end of the steep decline do you see a continuing secular bull market?

    Jack

  10. The 1929, 1987, 1989 examples employed by Steve Puetz in his research on eclipses/crashes. The first of his crash windows this year opens 7 April.
    Taz

  11. Thanks for informative posts all.

    A thought:

    At the moment negative to positive earnings announcements are at extreme levels negatively – the ratio is almost 10:1. The market is still buoyant which I would take to be bullish, from a very simple market psychology viewpoint. There can be no definite explanation for this, but one that springs to mind is that “dumb money” is flowing, people who have finally woken up to the fact that the SPX has been doing rather well for 5 years and they don’t want to miss out. Additionally, as highlighted here and elsewhere, share buy-backs are pretty prolific.

    How about a scenario where we see the 1956 number (as an example, I don’t have this number specifically in my mind personally) over the next month or three in a volatile market after which we see some months of where a retest of key levels towards 1300/1400 are seen?

    I am no technical guru but can see and agree that John’s charts look ominous and my bearish stance over the past 5 months has prevented me from taking full advantage of the gains I really did not expect to see in fact. However, there are 2 main reasons that are not easy to quantify that lead me to think it is very possible the scenario above may play out:

    1. Everyone is expecting a correction if not worse.
    2. Most macro reports I read are calling for increased global growth etc. over the next 2 years, and combined with dumb money (imho) would not be a scenario where fear is likely to occur in the markets currently – partially because of pojnt 1 – but also because of what I call the funnel-effect of current monetary policy. i.e. where else do you put your money.

    If we see a correction that overshoots the consensus – and let us say that is perhaps around the 10% mark, then we may see the crash that we are talking about, but we need to see fear – and at the moment despite earnings announcements as per above and all the other signals that John highlights there is none that I can detect which I (somewhat reluctantly) must say to me is bullish…

    From a trading perspective I don’t have a lot of funds in the market at the current time, although I have been buying gold miners ETF’s/funds over the last 2 months as a longer term position in terms of a bounceback. I feel justified in doing so even if there is a 30% correction in the wider market basically because they are already so suppressed that they look reasonable value, and in a reallocation scenario may be good for a good bounce at some stage. I am also starting to get interested in Brazil, but I am not sure it is good form to discuss personal strategies here so apologies in advance if I have broken any rules!

    good luck and be safe
    J

  12. $SPX:TLT says a top occurred on Dec 31st.

    A man is as good as his conviction, especially when it is based on evidence.

    John, let see how this play and you will look back and I am sure you will feel good about yourself.

  13. All i can ask of every new high in the market are these questions.

    Did price trade to a predefined target with potential completion structure?

    Yes based on the SPY ETF

    Did the computers set up a sell algo off that high?

    Yes, again based on the SPY.

    WORST CASE for bears…. goes directly to new high from here..

    BEST CASE for bears price takes Monday low

    price level where bulls and bears will both see make or break level
    if price retraces in an abc move to 618 by late friday.

  14. Slater9, sorry for the delay in getting back to you regarding the 1956 price target for SPX.

    What Peter Lee wrote is:

    The June 2013 uptrend channel is between 1,720 and 1,836. A breakout above 1,836 would suggest +114 points, rendering SPX upside target to 1,952 possibly as early as the first quarter/second quarter of 2014. The bottom of the June 2013 uptrend channel is at 1,720 (support). A violation would suggest -114 points or SPX
    downside target to 1,604 (-17.8% downside). Note the pivotal March 2000/Oct 2007 breakout is also at 1,600.

    He also pointed out that 13 Sell Side Equity Strategists made Year-End 2014 forecasts. The average SPX forecast was 1,956.

    So his forecast for a top is 1952-56

    1. Thankyou…forecasts can be very useful if you do your own technical work as price approaches a projected point…I know already what I looking for… when I scan the longer term charts of hundreds of stocks I WANT 90 % to be on sells based on my tools and down on the smaller time frames i want sells across the board in the index etf’s… a few weeks ago I stated my big concern was lack of long term sells… the list is growing every day… among the handful I had back then was BBY…it triggered on 11/18/13at 4310… today it traded as low as 2578… lets us hope when the sell triggers many stocks respond with such vigor!

  15. “So his forecast for a top is 1952-56”

    Well, *a* top and a timeframe of potentially 12 months. I think that is quite likely to happen…….but not sure how useful a prediction to make:)

    J

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s