Dow Jones $INDU

The Dow Jones Industrials stock index so far continues to honour both the May 13 DeMark price exhaustion high and the December 31 inflation-adjusted high, set against a backdrop of deteriorating breadth (top and bottom indicators):

29m20Yesterday’s potential new moon reversal tantalisingly sets the scene for renewed declines, to keep all in tact.

The relevance of the last-trading-day-of-the-calendar-year high is shown in the next two charts:

29m30 29m31…and the Nikkei peaked again on 31 December 2013, as did various risk-on / risk-off ratios shown here:

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Just the Dow-Gold ratio is a little in danger now, which adds to the scenario: if the Dow stumbles again here, that 31 Dec peak will likely be maintained.

Time is ticking on US large caps, as various divergences are now mature, and so I have my doubts that a summer rally can be mustered here:

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Source: Oppenheimer / Annotation: John Hampson29m40Source: DecisionPoint / Annotations: John Hampson

In short, the Dow is within easy reach of taking out both the 31 Dec real high and the 13 May nominal high to invalidate the above, and yet those risk-on cross-asset peaks of 31 Dec have not been taken out some five months later. So are we seeing the last gasp of a topping process, or consolidation before an overthrow leg higher? The answer lies right ahead.

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Key Time

Break out in stocks or new moon reversal back into the range?

The Nasdaq 100 has climbed back up towards its previous high, and so is adding to the moment with the prospect of a double top or bull resumption. Namo is overbought, which could be a constraint on further upside in the near term.

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 Source: Stockcharts

Breadth and volume are more bearish than bullish:

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There is renewed momentum in small caps, biotech and consumer discretionary, which is bullish, but we continue to see money flows into treasuries, out of high yield and recently out of other cyclical sectors.

28m5Treasuries have been outperforming the SP500 all year, and despite new highs in that stock index yesterday, bonds still rallied. The money flows into defensives would rather fit with a stock market in decline, so who has got it wrong?

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 Source: AThrasher

Either the short interest and money parked in cash, bonds and defensives provides the fuel for another leg higher, or the stock market is overdue an imminent correction. The stats show that large speculators are short, that smart money flows have negatively diverged and that a significant degree of the buying is by companies purchasing their own shares. But unless the market is swiftly pulled back into the range here, then short covering could propel it higher.

The Dax made new highs, but has the same weakness in breadth as the US indices. The contrast in volume to price in the SP500 is shown here as the prelude to a correction, historically:

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Source: J Lyons

Gold broke down yesterday as stocks broke up, which is more supportive of equities mustering a rally here. The two commodity indices are also charted below and show a loss of momentum the last 3 months:
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If stocks can break out here, then it’s going to sting. But all those bearish indicators remain in place, and we would likely be looking at a final overthrow move. As one example, in 1987, sentiment hit similar extreme readings around Feb/March time and price range-traded until May before an overthrow rally to a final market peak in August. But let’s first see how price behaves as we pass through today’s new moon, as internals are weak and a true breakout may again prove beyond reach.

State Of The US Markets

The SP500 is trying to break out again, but once again chances of success are slim. Volume ultra low, new high breadth weakest yet, complacency high:

24m1I rather see prices continue to gradually arch over, captured below:

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Source: Rory Handyside

The historically low put-call ratio range continues, whilst the ratio divergence above is warning of falls ahead, similar to the smart money flow divergence:

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Source: Todd Harrison

Skew remains elevated and the recent cluster of spikes exceeds 2011 where price arched over and then fell hard:

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Source: James Goode

Risk-off remains the dominant theme in 2014, and this is a notable change in backdrop to 2013:
24m7We can see the relative performance of cyclicals just turning up again recently in the bottom of the chart above. The Nasdaq 100 and Russell 2000 perked up last week too. So might we now see all-round bullish resumption? Small caps and tech corrected by price and large caps corrected by time? Well, neither saw the requisite wash-out in indicators to reload the bull. Investors intelligence sentiment has stayed elevated, volatility low and euphoria present. The negative divergences have not been resolved, but worsened, and various indicators continue to be at historic warning levels. All these suggest it is more likely that large caps fall imminently and join the other indices in a true correction, rather than we now see broad bullish resumption.

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 Source: U Karlewitz

But if there is to be a bullish resolution here, then it appears short interest could provide the fuel for another leg up:

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 Source: Chris Puplava

Note though that short interest is a component of the panic/euphoria model above which is more bearish than bullish, but nonetheless we could potentially have room for another leg up in the summer before price finally turns over.

If prices did break upwards here then we might take a fresh look again at those analogs from history (in terms of similar valuations, leverage, sentiment, etc) whereby a price range led to a final overthrow push up before hard falls erupted:

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 Source: Financial-Spread-Betting

In both those cases prices broke upwards around the end of May out of a trading range. However, know that leverage did not peak until October in 1929 and September in 1987 respectively, whereas it appears that leverage peaked out in February 2014. We ought therefore to see margin debt reverse the recent declines and rally to new highs to enable a further significant rally in equities. There is no demographic tailwind.

Leading indicators have been pointing to a mid-year pick up in the economy and economic surprises are now trending upwards again for the US. Might that also fuel such a final mid-year up leg, before falls in the Fall? It would fit with the seasonality of geomagnetism, whereas the Presidential cycle suggests trouble as of now. I continue to believe the development of the solar cycle is key. If the waning in sunspots continues (and May is likely to print a 3rd month of declines from the Feb peak) then we should see stocks and the economy turn down together. Margin debt and small caps are leading the way and the rest will follow. If, however, the solar cycle has a sting in its tail and prints an anomaly like SC16 (belated monthly sunspot spike) or SC5 (belated smoothed maximum), then we should see speculation in assets and activity in the economy continue to bubble away and margin debt make higher highs. So we can continue to cross-reference.

Drawing on the 2000 and 2007 margin debt progressions, it looks more likely that margin debt topped already. However, both years saw a pause in margin debt declines whilst a summer rally took stock prices to a secondary peak:

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 Source: DShort

For now, the balance of probability suggests the solar cycle is now on the wane (sunspots since Feb, solar scientists’ predictions, bulk of previous solar cycles compared, margin debt decline and froth stocks peak Feb-Mar), and the balance of probability suggests large caps will tip over imminently and join small caps in true correction, and that this is the last gasp of the cyclical bull. There are too many bearish indicators, divergences, and red flags to enable a bullish resolution here. For stocks to break up and out of 2014’s trading range, we would need to see repairs to volume and breadth and risk-off money flows, and we would need to print anomalies in some historically reliable indicators. Failing that, it looks likely that the SP500 will be repelled again at the top of its arching-over price range. With Monday a US national holiday, there is just one trading day before the new moon which could then initiate renewed downside as lunar phase extremes typically do a good job of marking trend changes when price action is overall choppy.

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In summary, the case is still overwhelmingly bearish for US stocks, and my primary scenario is that prices are arching over into imminent hard falls, to correct the multitude of extremes in valuations, sentiment and technicals that have been in place for some time. Small caps, tech, margin debt and sunspots all look to have peaked around February and I expect large caps to fall in line. However, there is a lesser case for another bullish leg over the summer before hard falls in the Autumn, and that remains my worst case scenario. If that is to occur though, we need to see supportive developments in volume, breadth, cyclicals and other indicators. I continue to attack and trade short, and look to this week’s new moon for another potential definitive peak in the SP500.

Perfect Set-Up?

Speculation increasingly looks to have peaked out exactly at the solar cycle maximum again, as demonstrated by these 3 charts:

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22m2If you have doubts about that beautiful triple cross-referenced set-up, then there are plenty of supporting indicators to shore up confidence:

22m3 22m8 22m9 22m10Once again: I am not an advisor, so don’t follow me. I see as perfect a set-up as I will ever get for a medium-long term trade, and the market is giving me plenty of time to position optimum short. If I wanted an opportunity to make a life-changing amount of money, here it is, and so I am positioned accordingly. Why front-run the market at all? Timing a top is very much possible, and not the game of fools: proponents of that mantra just don’t know the tools. My strongest case short was for the RUT and therefore the home of my biggest shorts – it is already down over 10%. My guess is some traders now see a potential short in that index but are waiting for a retrace that maybe never comes. The wider indices are an elastic band at snapping point. Some traders will be nimble enough to catch it, others will stand like rabbits in the headlights. Those still playing the long side at this point are the dumb money: not just my opinion but as evidenced in indicators.

A historic opportunity, which I hope we will all be celebrating together.

Markets Update

A little rally in US equities Friday-Monday, keeping the market in bull-bear limbo. Volume was bearish, relative performance in defensive sectors was bullish. The bigger picture remains the same, with various divergences suggesting bearish resolution. Shown here is high yield versus treasuries, new highs / new lows, and consumer discretionary versus staples:

20m6The even bigger picture continues to show a historic opportunity on the short side.

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On the flip side, leading indicators point to a pick up in the global economy as of now through the summer, which coincides with the more supportive geomagnetic seasonal period, and economic surprises have turned upwards in the US and Japan.

Screen Shot 2014-05-20 at 06.51.36 Screen Shot 2014-05-20 at 06.51.59 Screen Shot 2014-05-20 at 06.52.11 Screen Shot 2014-05-20 at 06.52.25So far in May, sunspots look set to continue their monthly waning trend from their peak in February. Should this continue, not only should the excess speculation be pulled from stock markets, but the ‘growthflation’ in the economy that typically peaks around the solar maximum should also ebb. In other words, the stock market and economy should fall together.

20m7We currently see various commodities at key decision points, in the noses of technical price triangles, such as oil and silver. Are they going to break upwards and outperform as late cyclicals as equities turn down, or are they going to break downwards as deflationary post-solar-maximum forces take over? Either way, their predicament is suggestive of a big move ahead in assets.

Returning to equities, whilst I cannot rule out higher prices in the near term, the stronger case is that the markets already peaked out and that stocks tip over again this week. Should that short term prognosis prove false, then the medium and longer term cases are unequivocally bearish, and so I stick with my strategy of selling into strength. The safety is on the short side, time is ticking towards the elastic band snapping in large caps.

Fake Out Top

By my work, that completes the cyclical stocks bull market peak.

The solar maximum is looking likely to have run from Dec 2013 through to April 2014 (smoothed peak ~Dec, monthly peak ~February, daily peak ~April). The real inflation-adjusted Dow peak stands at 31 Dec, along with the Nikkei, at the new moon. Various cross-asset measures also inverted at that turn-of-the-year, which has been historically potent, as the inverted geomagnetism peak. The Nasdaq and Russell 2000 peaks were at the turn of Feb-Mar, also at the new moon. The nominal SP500 and Dow peaked-to-date at the full moon of two days ago, making for an inversion.

If the solar maximum, inverted geomagnetism peak, and lunar phase extremeties rule the markets, then all four indices are now likely in bear markets, and whilst we won’t know that for sure for some time, we will know soon enough if those peaks are taken out.

It is the cross-referencing of the timing measures (solar max, geomag, lunar phase, DeMark) with the technical and fundamental indicators (valuations, sentiment, equity allocations, leverage, divergences, cross-asset performance, bull market measures, demographics) that makes this so compelling. The technical/fundamental indicators suggest the top timing should be now (Dec-May), the timing measures in turn suggest the indicators ought to be flashing red in that window, and they are. Indicators on red began to accumulate towards the end of 2013 and the last few recently fell into place: a decline in margin debt, a waning in the monthly sunspot count, a snapping of the parabolics (biotech, internet), DeMark exhaustion.

For these reasons, it is unlikely that the markets can extend longer or higher, and whilst I cannot rule out higher prices, the attempted break-out by the large caps of several days ago was an important test that looks to have failed. I still remain confident that waterfall declines will erupt, as the historic leverage is unwound, but the question is when. I was too early in their prediction as the solar maximum extended beyond solar scientists’ expectations. Assuming the solar cycle continues to wane from here, then I have two possibilities in mind. The one is those sharp falls erupt imminently, once technical price supports are broken. The other is they erupt around Sep/Oct at the inverted geomagnetism seasonal low, which has hosted most of the major historic waterfall declines. I am specifically talking about 3-4 weeks of panic selling, differentiating that from a more measured bear trend.

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Exhaustion Or Breakout

Superficially a bullish breakout, but behind the scenes both the SP500 and Dow met DeMark’s exhaustion topping criteria yesterday.

Supporting that, the breakouts/rallies were on low volume, the put/call ratio for the indices (CPCI) finished at one of its lowest ever readings, and the CPC and VIX also reached contrarian low levels:

13m2Source: Stockcharts

A longer term look at stocks volatility plus treasuries volatility reveals historic compression:

13m3Source: @Not_Jim_Cramer

Sentiment remains elevated, as the March/April falls in the Nasdaq and Russell 2000 made little impact:

13m4Source: Investment U

So, put/call, volatility and sentiment all signal high complacency, whilst the last time we saw such persistent money flow into defensives was 2011:

13m5Source: AfraidToTrade

I’ve added again to the SP500 and Dow short positions. Tomorrow is the full moon, let’s see if we get an inversion and bull trap.

To finish, this is how the Dow peak looked at solar cycle 20 maximum, namely a topping process at a turn-of-year solar top:

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Underlying Source: FiendBear

As things stand, the current solar cycle (24) smoothed peak is likely to have fallen circa Dec 2013, the monthly sunspot spike in Feb 2014, the real Dow peak likely end of Dec 2013 and the secondary high here in May: all very similar to 1968/9.

Window Closing

Some more charts:

1. Financials leading down:

9m9Source: Charlie Bilello

2. Consumer Discretionary leading down:

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Source: Charlie Bilello

3. Defensives outfperform:

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Source: Charlie Bilello

4. Consumer staples performance relative to SP500 echoes previous peaks:9m1

Source: AThrasher

5. Investors Intelligence sentiment leading sharp corrections:

9m2Source: Stocktwits

6. New highs consistent with 2000 peak:

9m6Source: J Lyons

7. Q ratio valuation now exceeds 1907 and 1929 peaks:

9m4Source: DShort

8. Market Cap to GDP valuation also now only superseded by the 2000 mania:

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Source: DShort

9. Evidence for a bubble:

9m3Source: Market Watch

10. Tom DeMark’s indicators predict peaks in the large caps are now at hand. He says the Dow effectively peaked on December 31st and a secondary move up to a level of 16,660 will create a top for the Dow.

At this point, the number of bearish indicators I have amassed is a source of great conviction. It will be a long time before such an opportunity re-appears. Those who suggest that too many bearish indicators is conversely bullish are confusing contrarian investing. Too many bulls, too much euphoria, too much allocation to equities: those are contrarian indicators. They are measures of ‘all-in’ and no-one left to buy.

I have more than 50 bearish indicators, each with a reliable history. Just one on its own should be a reason to be cautious. Many different angles, and together a solid cross-referenced case. To dismiss them all is effectively to argue that this time is different for each indicator, that each one was valid until now but no longer. To proponents of this time it’s different: Fed policy does not trump all, but has been the mantra behind bidding up equities to historic valuations; Low interest rates and low growth reflect recessionary deflationary demographic trends that cannot be stopped; Secular bulls do not erupt from these levels of valuations, leverage and euphoria – in fact, the worst bear markets in history do. Anyone still playing the long side at this point is playing a truly woeful risk-reward set-up.

Don’t trust me, trust the indicators. This is as good as it’s ever going to get for a medium/long term trading set-up. It’s right here, and I’ve done my best to demonstrate what that is so by drawing it all together as objectively as I can. I withhold from putting it more bluntly because I am not an advisory service, so I just share what I am doing, which is deploying my biggest ever trades in shorting the US stock indices (with the biggest in the RUT), trying to negociate a level of exposure which reflects maximum opportunity-taking whilst avoiding risk of wipe-out.

Unprecedented collective demographic downtrends in the major nations suggest this is a short-and-hold opportunity on a par with the Nikkei at the end of 1989, and accordingly I believe it’s RIP Warren Buffet’s buy-and-hold value strategy 1950s-2014, which only works if the long term nominal is up.

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US Stock Indices

I recently gathered 40 indicators showing why the stock market is a major shorting opportunity, and now we have increased evidence as to why the speculation peak may be behind us, with the solar peak likely Dec 2013 – Feb 2014, and margin debt thus far having topped out in February.

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Source: NOAA

The Bitcoin speculative peak was December. The real Dow and real Nikkei peaks were thus far 31 December 2013, joining the club of historic peaks falling at the inverted seasonal geomagnetic peak (second and third charts):

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 Source: Dshort

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Also, the 31 Dec peak was 1 day from the new moon, which fits the pattern of historic peaks typically occurring at the peak optimism of the new moon. The Russell 2000, Nasdaq and Biotech peaks also look to have fallen at the new moon of March 1st:

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Source: Stockcharts7m6

The SP500 has flat-topped between December and May. Chances are slim that this is consolidation before further upside due to the congregation of indicators at historic extremes and the likely waning from here of the solar maximum. Recall: super peaks need a solar maximum, a leverage peak (same buyers more debt) and a demographic tailwind (new buyers). The latter is absent and the leverage is at all-time extreme already.

The solar maximum generates maximum human excitement, so as well as speculation peaking in the markets, we typically see growthflation in the economy into the solar peak. I therefore expect markets and economy to decline as one from here.

A historic opportunity:

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