SC24 v SC16

Solar cycle 24 is projected to peak with a smoothed sunspot count of under 80 (peak SSN), which makes it the weakest cycle since solar cycle 16:

Screen Shot 2014-04-29 at 15.08.49Source: CBDakota

Solar cycle 24 is also the first since solar cycle 16 to have a higher secondary peaking of activity at the maximum, rather than the higher peaking coming first:

Screen Shot 2014-04-29 at 15.19.55

Source: Livingston & Penn

Solar cycle 16 is also the most similar in shape and progress to solar cycle 24:

29ap2

Source: Solen.info

The solar cycle 16 maximum ended with the 1929 crash and the start of the Great Depression. Demographics forecast a similar such period ahead and current stock market indicators point to both a bull market peak and a the set up for a stock market crash.

The chart of SC16 below shows that the stock market did not collapse until the final and largest monthly sunspot count:29ap3

 

Source: Solen.info

Have we experienced a similar last burst in solar activity in Q1-Q2 2014?:

29ap5

Source: Solen.info

Or does the top need to extend further yet in time? Either way, the similarities are intriguing.

I maintain the solar cycle is key to the stocks bear. We have 30 bearish indicators, and max leverage in the markets. Now we need to speculation to top out and leverage to unwind, and I believe it will do so when the solar maximum starts to wane. It may have already begun to wane and stocks have already topped out, but the evidence comes in slowly. Patience and money management are the key.

Advertisements

Price Cheerleading

Time to look at what has been invalidated from my Q1 analysis.

I am no permabear. I played equities long-only from 2009 through to 2013 but by the end of 2013 there was an impressive congregation of topping indicators, which aligned with a predicted peak in the solar cycle. Adding in my demographic research, the case was particularly compelling to short stocks and hunt for a major peak. So I decisively switched teams. That compelling bearish case still stands, as just a couple of weeks ago I produced a list of 30 indicators advocating short. See that list here.

In short, focussing on US stock indices, whether we look at valuations, bull market characteristics, sentiment, euphoria, leverage, IPOs, equity allocations, smart money flows, breadth divergences and other indicators with reliable histories, we have a case for a top in US equities. Add them all together, and it’s just about the timing. Therefore I don’t understand shorters throwing in the towel at this point, and particularly because as things stand, US stock indices have traded sideways in 2014. There is no definitive bull or bear trend, and at the time of writing 3 of the 4 main US indices are below their Dec 31 close, whilst only marginally so. Price has only paid for short term trading over the last 4 months, and the rest of us are patiently – or impatiently – waiting. Pending that resolution, beware the price-cheerleading from both bull and bear camps, thinly disguised as analysis.

So, with that multi-angled case for a top, why have stocks not fallen decisively yet? I argue that the reason is the solar cycle maximum extending beyond the predictions of the major solar scientists, and its implication on speculation in the markets.

23ap1

Therefore, my anticipated waterfall declines in March and April and analog aggregation did not happen:

23ap2

However, by indicator extremes and similarities, the set up remains for a crash in the markets and the delivery of those waterfall declines as the peak leverage is unwound. But, for now, the stock indices have morphed into sideways ranges, as the solar maximum has extended. The solar maximum, through human excitement, influences speculation and also economic activity. Once the solar maximum begins to wane I expect both to ebb together, and I therefore consider this one of the most important items to track.

Should the solar maximum not peak out until mid-2014 then I would look to the possible analogs of 2011 and 1987 as price guides. Both these analogs shared similar indicator extreme readings and backdrops, and both saw waterfall declines in the Fall/Autumn. 2011 produced a long sideways range ahead of the falls, whilst 1987 eked out further price gains in the summer, before the falls. My approach is to stay short and attack short until we see the major declines, shearing off profits as I see fit based on the short term action, and should stocks eke out further new highs before the falls, as per 1987, then my current exposure can cope with that.

Should the smoothed solar maximum be behind us, and sunspots wane from here, then those Q1 2014 trading ranges in the indices may turn out retrospectively to be the beginning of a new downtrend, made clear by imminent sharp falls (declines from here would fit the Presidential cycle). In support of that possibility, my January call that the Dow and Nikkei peaked 31 Dec still stands at the time of writing, and my March 2 call that the Russell 2000 and Biotech sector peaked out around last day of Feb is so far accurate.

From a bullish perspective, cumulative advance-declines continue to support, and cyclical sectors recovered after their January sell-off. Gold and miners have fallen back since mid-March. Leading indicators suggest a pick up in global industrial production as of mid-May, so that could become a tailwind if stocks do not significantly sell off over the next couple of weeks. Q1 earnings are projected to produce an overall decrease in earnings, for the first quarter in some time, but thus far we do not see overall bearish price reaction to those that have reported. Economically, we do not yet see the tip into outright deflation or negative growth, but I expect that to come hand in hand with the stock market declines post-solar-maximum, i.e. sharp stock market declines will affect the economy and vice versa, all guided by the sun’s influence on people.

My Q1 2014 ‘misses’ in terms of analysis can be summed up as impatience over the sharp falls into a definitive bear trend, but I believe the reason for that is the extension of the solar maximum, which was unknown at the time. The bulk of my analysis still stands, and will continue to do so until that definitive selling erupts.

In the near term I am looking at market reaction to earnings, how price behaves into the new moon at the end of April, and the indicator reports at the turn of April-May for sunspots, margin debt, and more. I am adding short into the stock market rallies, such as this 6-day rally into today, looking to short term indicators for overbought/exhaustion. I am also watching commodities to see if they can continue to rally as a late cyclical class (considering gold separate) which typifies a top, but I have been taking profits on commodities positions as I have my doubts about the longevity of their rally due to deflationary/recessionary pressures. Potentially reflecting such pressures, treasuries have continued to perform since their turn-up as of the start of January and are another clue into what lies ahead.

23ap3

 

Solar Cycle 24

The solar cycle matters for this reason:

20ap1

Peaks in the activity of the sun produce speculative peaks by variation in human excitement, so it is a trading timing tool.

It has been a thrill to watch in real time this solar maximum unfolding and the associated congregation of indicators suggesting a historic top in equities occurring close the solar maximum again. Each of those indicators that I have aggregated has a reliable history on its own, so the question is why the stock market has not tipped over to the downside more decisively by this point. It looks like the answer may be that the sun is still increasing in activity:

20ap3

4 consecutive daily sunspot prints over 240 over Easter weekend keeps the visual in trend in ascendance.

Previous speculative peaks occurred close to the smoothed solar maximum and on a monthly spike in sunspots, so the question is whether this solar strength can be maintained for the rest of April and for the weeks and months ahead to drag the smoothed maximum from end-2013 to mid-2014. Either way, this continued solar strengthening was a bad miss by most solar scientists, with only SIDC in my congregation running such an alternative, and kudos to Mark for suggesting the maximum would extend.

Note also how at this solar maximum we are seeing a higher later peak in a fairly typical double peak, whereas previous cycles tended to produce the higher peak first:

20ap5 20ap4Sources: Solen and SIDC

This adds to the peculiarity of this solar cycle maximum.

The implications for trading depend on how the solar maximum continues to unfold. If the smoothed solar maximum is dragged out to mid-2014 then we may then be looking at the Autumn/Fall for a true stock markets sell-off. If on the other hand sunspots quieten down in the weeks ahead then the smoothed solar max may be retained as ~Dec 2013 and the stock markets may be about to decline in a more major fashion. But either way, the persistent strength in the sun’s activity beyond the end of 2013 through to now has been a key and unexpected factor in maintaining speculation and keeping the markets elevated despite indicators at historic readings.

I now look to the end of April to see how the monthly sunspot count shapes up, to see how solar scientists adjust their forecasts, and to see whether other measures of speculation, such as margin debt, show a peak or continue to rise.

 

Sell Into Strength

Or buy into weakness, what’s it going to be?

Valuation looks like this:

17ap1And the Russell 2000 trailing p/e is now over 100.

Bull market looks like this:

17ap2

Sentiment looks like this:

17ap3

Leverage looks like this:

17ap4

Solar cycle looks like this:

17ap5

 

Economic surprises for all the main regions continue to wallow negative, and US earnings season is kicking off with 84% negative guidance.

Biotech, Social Media, the Russell 2000 and the Nasdaq all broke down as of the start of March, fulfilling negative divergences.

17ap6We now await the large caps of the SP500 and the Dow to follow suit.

My calls for the Dow and Nikkei having topped out Dec 31 still stand. The Dow did everything it could to close above the 31 Dec high without actually achieving it this far.

No crash Monday or Tuesday of this week. Instead the market sold off into the full moon and then bounced intraday. So time to get bullish? No way! The waterfall declines are the last piece of the jigsaw. On the back of a 3 day rally we now look to earnings season to support the market, but earnings are projected to disappoint. We need a historic normalisation of earnings at this point to justify the valuations. The market could of course continue to range-trade rather than sell off, and so to the question as to whether it’s appropriate to sell into strength or buy into weakness here. For me it’s clear: the multi-angled case to be short is compelling and a rare opportunity. The rug may be pulled at any point, but will be pulled eventually. I’m short equities and still looking for opportunities to add short on the rips.

Set Up For A Stock Market Crash

Last week I posted 30 bearish indicators here. Since then equities have begun to sell off and change trend after historic and solar-maximum inspired levitation. There is a long way to go to mean-revert, wash-out or fulfil these indicators, but that can be achieved in a shorter timescale with the help of HFT by way of a crash or waterfall declines.

Within that list of indicators we see identification similar to the backdrop to the May 2010 flash crash, and I posted about that here.

We see a similar price pattern into the flash crash repeated here too:

13ap1

Source: James Goode

We also see identification similar to the Nasdaq peak in 2000, before a flash crash and waterfall declines:

13ap2

13ap1

And the same applies to the Nikkei 1989 and solar maximum.

Additionally, recall that major declines in history have often initiated following a weekend, where equities sold off into the Friday close, and market participants have time to stew Saturday and Sunday. Stocks sold off into the close on Friday, in a fairly decisive Thu-Fri trend change.

Recall that the biggest decline days in history have typically occurred close to new moons and full moons. This coming Tuesday is a full moon.

Recall that geomagnetism is bearish for the stock market. We have been experiencing geomagnetic disturbance both Saturday and Sunday this weekend.

Recall that periods of heavy falls in the stock market have typically occurred in the inverted geomagnetic seasonal lows of March/April and October. This is April.

In short, the set-up is here for a crash or waterfall declines, and the greatest potential lies in Mon April 14 – Tues April 15 (tomorrow and Tuesday) for a major historic down day. I balance that with certain short term indicators suggestive of bounce potential, and were that to occur we might look to around the new moon of April 28th for fulfillment. But the crash set up is there for tomorrow, so let’s see.

Markets Update

The selling in equities into Tuesday did not wash out indicators, suggesting a lower low should be ahead. Yesterday’s bounce produced a very low put/call reading signalling high complacency.

10ap1

 Source: Stockcharts

Risk of an outsized move remains historically high:

10ap2

 Source: Barcharts

Investors Intelligence bulls back up to 54.6%, bears unchanged at 18.6%, continuing the historical extreme cluster of readings.

There is downward pressure into next Tuesday’s full moon. Presidential seasonality peaks out in mid-April. Earnings season ramps up as of next week.

8ap3

 Source: Fat-Pitch / StockTradersAlmanac

Narrow money and OECD derived leading indicators continue to point to weakness in global industrial output into May, before a summer pick up. Economic surprises for the main regions ticked further negative this week.

After a little consolidation, commodities (CCI and CRY indices) are breaking upwards again:

8ap5

 Source: Bloomberg

Whilst the US Dollar is flirting with breakdown again:

8ap4

 Source: Stockcharts

Treasuries and yields are in a range, watch for resolution:

8ap6

 Source: Stockcharts

In short, I expect the current bounce in equities to be short lived and roll over into further declines into next week’s full moon. April remains my target window for major declines in equities, based on historic patterns of falls accompanying this inverted geomagnetic seasonal low period, together with an anticipated solar maximum now on the wane. That would imply this earnings season would be a sell, and I think this is reasonable given we have negative earnings guidance once again whilst stocks have front-run up to valuations that in contrast demand a return to solid earnings and revenue growth. Leading indicators also suggest economic data should continue to disappoint into May, adding to this April window of opportunity. However, if equities can hold up in a range through this period until data picks up again, then maybe we could have a mirror of 2011, whereby stocks did not break down until the Fall. For now though, I suggest this the lower probability, and I expect April can deliver the goods.

The State Of The Markets

Thank you so much for all the messages of support – I was really touched to read them all. I had a burn out and now have to take things easy. I was working long days with the markets and doing too much of everything on top. So my posts will be less frequent for the foreseeable future, but as my focus is on the medium and long term, less intensive tracking may be no bad thing. I come back to the markets after a couple of weeks away and although price continues to frustrate, little has changed in the big picture. Some of my near term timings didn’t work out, but the overall case remains solidly bearish, and it’s a question of patiently waiting for price to fall in line.

Focusing on US stock indices, I have updated the bearish indicators and flags and added some new ones below:

1. A 5-year bull trend only occurred once before, in the 1990s, and was followed by 3 down years

2. Historic levitation above longer term moving averages and lack of 10%+ correction since 2012

3ap35

Source: Gordon T Long

3. Last 2 years rally in US stock indices has been made up of less than 20% earnings growth and more than 80% multiple expansion. The last 2 such occurrences in history were 1985:1986 (leading into 1987 crash) and 1997:1998 (leading into 1999 real Dow peak)

4. Compound annual growth rate in equities since 2009 was only exceeded in 1929, 1937, 1987 and 2000, all of which led to steep market declines

5. Crestmont P/E is the 3rd highest in history after 1999-2000 (market peak) and 1929 (market peak), and in 97th percentile

6. This is the 2nd highest market capitalistation to GDP valuation outside of 1999-2000 (market peak)

7. This is the 2nd highest Q ratio valuation in the last 100 years outside of 1999-2000 (market peak)

8. This is the 3rd highest CAPE valuation in the last 100 years outside of 1928-1929 (market peak) and 1999-2000 (market peak), and the US is the 4th highest CAPE valuation in the world currently.

9. Russell 2000 index p/e is currently 74.8; Russell 2000 to SP500 valuation differential at all time record

10. 84% of companies have offered negative earnings guidance for Q1 2014 so far; Last quarter’s revenue growth was the lowest since 2009

11. Skew is in elevated range for the last 6 months; Cluster of extreme Skew readings not seen since June 1990 before recession began July 1990

12. Put Call ratio 21 day average over the last several months has clustered in the extreme low zone that previously led to sharp corrections

3ap1

13. Greedometer – aggregate of macroeconomic, fundamental and technical data – is at a record level exceeding the 2000 and 2007 market peaks

14. Citi Panic/Euphoria model at a level only exceeded into the 2000 peak:

3ap2

Source: Fat-Pitch

15. NAAIM sentiment remains historically high

16. Investor Intelligence % bears levels and pattern similar to previous significant stock market peaks

3ap29

17. Rydex bull ratio at extreme historic high

3ap16

 Source: Sentimentrader

18. Margin debt (updated for Feb 2014) is at an all-time record, both in nominal and real terms, and as a percentage of market cap; Net investor credit balances are at an all time low

3ap4

Source: Dshort

19. IPOs with negative earnings at levels consistent with previous market peaks

20. Leveraged loan issuance at record, surge mirrors 2007 and 2011 important stock market peaks

21. High yield corporate bonds to 20+ year treasuries shows a divergence with the stock market that has previously marked tops

22. AAII equity allocations highest since June and Sep 2007 and Dec 2013

3ap5

 Source: UKarlewitz

23. Smart Money Flow Index shows siginificant divergence in 2014

3ap6

Source: Todd Harrison

24. Biotech parabolic bubble breakdown

3ap7

Source: Stockcharts

25. Wider momentum stocks breakdown

3ap14

Source: Charlie Bilello

26. Leading indicators suggest global industrial output slowdown into a May trough, then a pick up into late summer

3ap15

Source: MoneyMovesMarkets

27. Citi Economic Surprise Indices for major global regions all negative

3ap17 3ap18 3ap19 3ap20Source: Citigroup

28. Fund manager allocation to global equities is at levels that previously led to a market peak or correction

29. Percentage of stocks hitting new highs is thinning into current new SP500 highs

3ap10

Source: Stockcharts

30. Six month breadth divergence in Nasdaq 100 in stocks above 200MA

3ap11

Source: Stockcharts

31. VXN/VIX ratio is a risk-off current flag

3ap22

Source: Stockcharts

32. Nasdaq 100 made a fake-out from its cyclical bull channel in March

3ap24

33. Best performing classes and sectors in Q1 2014 were commodities, treasuries and defensives

3ap30 3ap31

Source: Fat-Pitch

34. Late cyclical outperformance of commodities as equities top out consistent with 2000 and 2007 peaks

3ap32

35. Winding down of QE historically negative for equities, positive for bonds and gold

3ap21

Source: Jesse Felder

36. Trading in penny stocks signalling a peak

3ap36

Source: Sentimentrader

37.  Dow, FTSE and Nikkei are all at long term resistance levels (connecting 2000 and 2007 peaks)

38. Treasury Bond Yields Rate Of Change over last 12 months is at a level that previously led to market tops in 2000 and 2007

39. Rydex money market assets back to 1999 lows

40. Equities topping out with the solar maximum, in line with history

3ap23

Underlying Source: Solen.info

A 40-indicator case is a fairly strong case to go short. But we need to balance with what’s supporting the bullish case.

Cyclical stocks have broken out upwards over the last week. The cumulative advance-declines breadth measure remains in an uptrend, supporting the advance in equities. Euro Stoxx broke out to a new high. Gold and gold miners have pulled back in March, with gold having failed to hold a break out above the first meaningful resistance level:

3ap27

The question is whether a higher low can now be made in gold, to continue the bottoming process.

Margin debt, for which we have data up to the end of February, did not yet top out. I had initially expected margin debt to top out in December with an anticipated highest monthly sunspots spike at that time. However, a higher monthly sunspot spike in February suggests speculation could have topped out as we moved into March instead. We have thus far seen peaks in the Russell 2000, Nasdaq and Biotech in March, and we saw a lower monthly sunspot spike in March than in February. The consensus view is that the smoothed solar maximum for SC24 already passed at the turn of the year and that sunspots should decline from here. However, SIDC are still running a second alternative whereby a smoothed solar peak still lies ahead in H2 2014:

3ap34

 Source: SIDC

Playing to that possibility is the trend in leading indicators noted above. If stocks can hold up whilst economic data starts to improve again as of May then may be they can rally through to the Fall. On the flip side, we should have another month of disappointing data right ahead which could equally pull the rug from under equities. Were the second SIDC scenario to occur then I would expect speculation not to top out until the Fall, and a suitable technical mirror from history may be 1987 whereby sentiment reached record levels in Q1 1987 but stocks did not fall hard until Q3. But for now, the more probable scenario is of a smoothed solar maximum having passed and speculation declining from here, and for this to be confirmed I would be looking to see that the RUT and Nasdaq indices do not make a higher high from here, and that margin debt tops out. Sunspots should also notably trend down as we head into mid-year to confirm this.

3ap33

There have been a concentration of market falls occurring in the inverted geomagnetism seasonal lows of March-April and October. So again taking that primary scenario of sunspots now on the wane, I look to this new month of April to deliver major falls in equities, in line with the Nasdaq in 2000 (smoothed solar max and sunspot spike March 2000). Presidential cycles in the market suggest stocks could eek out further gains in the first part of April before falling for a period of weeks. DeMark also believes a top is within days but suggests the SP500 could reach 1931 before inverting.

The primary scenario of a smoothed solar maximum having occurred in December 2013 and a highest monthly sunspot spike in Feb 2014 is supported by a chain of events to date: Bitcoin peaked in Dec, Nikkei and Dow (very tentative at the time of writing) peaked and money flows switched into defensives at the turn of the year, the ‘theme’ stock indices and sectors of the cyclical bull exuberance phase peaked out Feb-Mar 2014. But this is all subject to confirmation or invalidation. So let’s see how April develops. I remain significantly short equities, and siginificantly long precious metals, with other smaller positions long commodities. My worst case scenario is the continuation of speculation into late summer before Q3 falls in equties, and I would hold my positioning until then if so. But for now this is the outside scenario, and I maintain good odds of April delivering significant falls in equities, and momentum returning to gold with a higher low.

Thank you for all your input whilst I was away.