Time for an updated look at the common historic features of peaks in cyclical equities bulls, with the focus on the US market.
1. Market Valuation Excessive : Yes
Second highest market cap to GDP valuation outside of 2000, the 4th highest Q ratio valuation and 4th highest CAPE valuation in history, last two years gains more than 80% multiple expansion and less than 20% earnings growth
2. Evidence Of Overbought And Overbullish Extremes : Yes
January 2014: II bears lowest since 1987, II bulls highest since October 2007, CS Risk Appetite US model into Euphoria; Citi Panic/Euphoria model into Euphoria; Put/Call ratio at extreme low; Second highest ever Skew reading; Greedometer at extreme; Margin Debt at all-time record; Margin Debt to GDP at 2000, 2007 levels
3. Major Distribution Days Near The Highs : Yes
24th January: 90%+ down volume day; 3rd February: 90%+ down volume day
4. Rolling Over Of Leading Indicators : Yes
Global economic growth to peak out between November 2013 and February 2014 according to leading indicators with 4-6 month lag:
5. Excessive Inflation : No
Developed economies are flirting with deflation, in line with demographic trends. However, recent action in commodities suggests that class may be gearing up to outperform as late cyclicals and deliver a temporary inflation shock to help roll the global economy into recession. Tentative breakouts to be watched.
Emerging markets raising interest rates; US Fed tapering QE; China actively reigning in credit; Developed markets bond yields rising into the end of 2013
7. Cyclical Sectors Topping Out And Handing Over To Defensives: Yes
8. Market Breadth Divergence : Yes
8. A Technical Topping Process/Pattern : Yes
Parabolic shaping on US indices into blow-off top mirroring Dow 1929, 1987 and Nikkei 1989 (and analogies further supported by similar levels in valuations, sentiment and leverage)
In short, with history as our guide, we have a fairly comprehensive case for a cyclical bull market top in US equities having occurred at the turn of the year. A late cyclical rally in commodities to deliver a short inflation shock would complete the picture. For equities, drawing together both the time and price guides of the analogies, we should now be alert to the possibilities of both a building out of a ‘second chance’ lower high and a more pressing collapse into waterfall declines.