Friday was a bullish fightback, but I still think the roll over is in gradual progress here. Here’s why I think the markets are at the second chance peak, rather than earlier in the topping process.
It’s fairly clear on RUT, IBB and SOCL: the nominal peak was Feb/Mar and second chance lower highs have since been made, in keeping with historic norms.
It looks acceptable on COMPQ too – a marginally higher high on negative divergences is not uncommon. But the large cap indices of SPX, INDU and NDX don’t appear to conform, making significantly higher highs, which are not in keeping with, for example, 2000, 2007 or 2011.
Nonetheless, we can see divergences initiated at the turn of 2013 into 2014:
Bubble end flagged once around then and again now:
Source: Financial Crisis Laboratory
In II bull-bear spread, we have seen two extreme peaks plus a divergence between them, which positions us where the markets tanked in both 2010 and 2011 (rather than earlier in those peaking processes).
Underlying source: Jack Damn
Source: Jesse Felder
Put/call and Skew tell similar tales.
We also have seen extreme peaks and divergence in Rydex assets, which would position us where the wider markets finally broke down in Autumn 2000, rather than earlier in the topping.
Margin debt peaked out in Feb. The 2000 and 2007 analogs again position us at the second/final peak, with July 2014 being 5 months after.
We are likely now 4-5 months or so after the smoothed solar maximum. That would also position us around the second chance peak of 2000, rather than the initial peak (March 2000).
So what happened next in each of the applicable historic mirrors?
In 2011, the markets fell heavily over the course of 2 weeks. In 2010, the markets fell heavily over the course of 3 weeks, including an intraday flash-crash.
In 2007 and 2000, the markets entered definitive bear markets at this point. Bears firmly in control, with periodic heavy selling. I suggest 2000 is a more compelling mirror than 2007, because this is a solar maximum like 2000, with RUT and biotech p/es reaching similar craziness levels to internet stocks in 2000. Rydex, market cap to GDP and q ratio all look more similar to 2000 too. What’s missing here in July 2014 is that by this point in 2000, the speculative targets of the Nasdaq indices had already suffered waterfall declines, washing out that excess leverage that had built up. That hasn’t happened yet in 2014 (RUT, SOCL, IBB or COMPQ have seen no heavy selling) meaning it’s still ahead.
Going further back in time, I maintain 1937 as the closest historical mirror. As then, if this is the second chance peak, it falls around 5 months after the smoothed solar maximum. At this point in 1937, two months of heavy selling erupted.
Drawing it all together, the messages are that heavy selling should be imminent, at least in the key speculative target indices and sectors, and that in the wider markets there should be no second chance retrace peak ahead for the bulls, but that we are rather currently rolling over into the definitive bear trend, at the end of a topping process that began in January. Yes, US large caps have made significantly higher highs versus Q1 2014, but the divergences and indicators tell the hidden story of this being the second chance peak.
I believe the definitive bear process has initiated on US small caps and European indices, since the turn of July. US cumulative advance-declines also peaked out then, and Vix bottomed. SP500 has yet to beat its start-of-July high, and although the Dow and Nas 100 have, they have done so on negative RSI divergences. Therefore, Friday’s up day should form part of the rolling over process for large caps, and nothing more.