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.
These 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.
RSI divergence and long term resistance set the scene for the Russell 2000:
Nasdaq 100 is also at important resistance. Break up and out, or break down here?:
Rydex buying power, which is money-on-the-sidelines, is at very low levels, which is consistent with other measures of ‘all-in’:
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.