Population, GDP, Debt, War And Solar Variation

Posted on September 29, 2014 Posted in Demographics, Indicators, Macro, Solar Cycles216 Comments

On a longer term view, these all fit together, and understanding their relationships can help us predict what’s coming.

The grand solar minima correlate with clusters of war:

War clusters / cycles

The grand minima were periods of lower population growth and lower GDP growth whilst conversely the grand solar maximum of the 1960s-70s was a period of peak population growth and GDP, shown here:

So, broadly speaking, the grand solar minima have equated to war, low GDP growth and low population growth, whilst the recent grand solar maximum was the opposite.

Benjamin Friedman established the correlation throughout history of declining economic growth giving rise to war. Extremists are brought to power under economic suffering. Revolutions occur when people are struggling (most recently, the Arab uprisings when food prices had risen to price people out of the basics).

World wars 1 and 2 were periods of low GDP growth, and WW2 occurred out of the Great Depression:

The end of that double great war period gave rise to a global baby boom that produced a young adult price-inflation swell in the 1970s then a middle-aged stock market boom swell between 1980 and 2010 (phased across individual countries).

Since then demographics are united in downtrends in the major nations producing this sobering composite:

Global GDP growth is struggling and should do so for an extended period, and stock markets should suffer likewise.

Meanwhile, solar scientists predict that we are tipping into a new grand solar minimum. The predicted low GDP growth above fits with the grand solar minimum predicted below, making for a compelling cross-reference.

The last piece of the puzzle is debt. Debt is prosperity taken from the future and has been increased with each war and each major recessionary/depressionary period, to pay for or offset those events:

The resultant long rising debt trend means more productive receipts have to be spent on servicing the debt, which crimps the economy beyond that of demographics.

The end game for debt is QE. Printing money to buy your own debt is the policy of last resort. The only way out of this is if demographics point to much higher receipts ahead, but in fact they show the opposite.

Drawing all these relationships together, the outlook is grim. The next couple of decades will be characterised by low global GDP (as written in demographics), which puts the world at risk of war (at both national and international levels). The debt situation threatens to accelerate out of control in certain countries (Japan is at highest risk) as central banks offset even lower GDP and potentially have to pay for war additionally. Major war would cut both GDP and overall population further, making for even greater per capita debt burdens.

These are the major themes. The specifics by country and by timeline are more difficult to predict. But at the global level, the negative feedback looping between solar, population, GDP, debt and war, suggest the crunch is unstoppable for the world.

Eventually, these interconnected phenomena will turn into a positive feedback looping. Out of the ashes of a grand solar minimum with a purge of population, the devastation of war and bankruptcies should come a new solar normal with another baby boom and some anticipated revolutions in systems and organisation (financial, economic, social). True new ways of doing things only occur when circumstances force.

Set against the bleak outlook of the next couple of decades is the continued parabolic rise of technological evolution. Developments in nanotechnology, biotechnology, artificial intelligence, space exploration, geonengineering and renewable energy may produce paradigm shifts that assist with GDP and debt, and accordingly could ease the conditions for war. However, the negative feedback looping captured above extends its grip over this too, as corporate investment has been shrinking across the world in recent years, in accordance with lower economic demand and higher uncertainty.

Declining levels of investment and R&D worsen the outlook for the future and add to the downward spiral.

We could argue that the global secular bear in the economy and stock markets began in 2000 and that as yet we have avoided major war. However, collective demographics have worsened since then, as Europe and China tipped over to join the US and Japan. With a comprehensive case for stock market peak here in 2014, the next leg down both in equities and the global economy should be the worse yet. To add to this, a large percentage of the population has seen little improvement in personal finance for some years (as the cyclical recovery since 2009 has been very unevenly distributed), which creates bubbling trouble.

The situation in Ukraine and between Russia and the West may be a fruition of these themes. Economic troubles were a major factor in bringing about the revolutions in Ukraine. The sanctions against Russia are hurting both the Eurozone and Russian economies, which are already struggling, thus worsening the situation for both parties. Protectionism was a theme of the Great Depression, and is a self-defeating policy, but it will most likely increase here with the anticipated next leg down in the global economy and markets, as nations turn to helping themselves and trying to prevent domestic unrest. There is the risk that China and/or Russia sell chunks of their large US treasury holdings and destabilise global markets in a major way. Both countries have been increasing gold holdings in recent years. Indeed, ‘war’ could take a new form in this era of global, interconnected and instant: financial markets may be targeted, adding to the risks for traders.

Putting such speculation aside, the trends in debt, demographics and solar variation combine to make a compelling case for a period of serious economic trouble. That period kicked off in 2000 but is now strengthening in intensity, and stock market indicators assess us to be on the verge of the next leg down, which should be the worst yet. The conditions for war are in place, and it seems fairly sure that trouble around the world will intensify. The question is to what degree and how matters unfold. The recent deterioration of relations between the West and Russia is an ominous development if we are now heading into a major breakdown in the markets and global economy at the end of 2014. Major international conflict is by no means certain, but if we were looking for the appropriate conditions for it, then they are in place.

Increasing Deterioration

Posted on September 25, 2014 Posted in Indicators, Stocks242 Comments

A rally in equities yesterday on increasing under-the-hood deterioration.

1. SP500 breadth measures not confirming:

Source: Stockcharts

2. Dow negative divergences persist:

3. Nasdaq breadth divergences continue to worsen:

4. Russell 2000 made the smallest bounce of the four and remains in danger:

5. Junk bonds had another big down day:

6. Financial conditions have diverged since the start of July:

Source: PFS Group

7. Skew reached reached a par with its highest ever (in 1998) at Friday’s close:

Source: ISpyETF

8. Investors Intelligence sentiment remains at the extreme this week, with 15% bears:

9. Rydex allocations also remain at the extreme at the end of yesterday, with the Friday-Tuesday sell-off not having dented confidence:

10. Margin debt for August was released and shown below. The February high remains in tact, which adds further weight to the speculation peak having occurred close to the smoothed solar maximum around then, and weight to the stock market being at the end of its topping process. September may seal it, subject to how the month closes.

Source: DShort / UKarlewitz annotations / My annotations

11. Gold, Euro and US Dollar positioning continue to suggest a reversal is likely, in favour of gold and the Euro and away from the Dollar, with associations for equities.

Source: @Market_Time

Source: @Sobata416

12. Sornette bubble end flag for US tech has now reached 0.6, which is an extreme high reading historically:

Source: Financial Crisis Observatory

Four trading sessions left in September. I stick with my call that we have peaked. The internals reveal a very weak picture behind yesterday’s rally in equities, whilst we have an associated brewing reversal across gold, Euro and USD. I believe the breakdown in small caps and junk bonds in September, together with the potent negative divergences in equities this month have secured the broad markets peak and that we will not extend to year-end. The latest solar and margin debt data add to this likelihood.

In the very short term, yesterday’s rally broke the bearish momentum, setting up alternatives for how this week ends. Based on the deterioration covered above, it may be that yesterday’s bounce is quickly engulfed by the bears, to continue the downtrends, or it maybe that stocks can rally back up a little further and precious metals leak more before breaking (down/up respectively) in earnest. Either way, the next two weeks down into the full moon of October have great potential to trigger the true breakdown in equities and the squeeze in PMs.

Topping Timeline And Targets

Posted on September 23, 2014September 23, 2014 Posted in Indicators, Solar Cycles, Stocks204 Comments

I played the long side of the stock market from 2009 to 2013, which longer term readers can vouch for. I reiterate that in case there is any doubt amongst newer readers that I may be a permabear. However, I would rather hope you can see my work is as objective as I can make it, bearish as it now is.

I began my series of bearish posts in December 2013 as topping indicators began to accumulate and I entered my opening shorts. I made my first topping call in early January as 31 December 2013, and here is the link to that post: click.

In that analysis I cross-referenced over 30 topping indicators and I therefore don’t have many regrets. It was a strong case, and it did capture certain peaks in risk and the likely beginning of the topping process, as shown here:

At that time, leading indicators were predicting a weak Q1, which then shocked to the downside, and earnings guidance was the worst on record. Solar scientists predicted the smoothed solar maximum was already through by the end of 2013, so the whole set up looked very promising.

However, solar scientists got it wrong, as sunspots continued to a (likely) peak of around Feb/March 2014. Therefore, I can now retrospectively account for speculation increasing from 31 Dec through to the start of March, and the negation of my original topping call. But at the time, not much I could do.

Below I present evidence of that Feb/Mar speculation peak in social media, biotech, Nasdaq breadth x2 (i.e. Nasdaq stocks started to break down here), and relative European and UK small caps performance:

All peaked at the turn of Feb into March, and this fits with margin debt leverage which currently peaked in February. My biggest short position is in US small caps, the Russell 2000, and this index also peaked at the turn of March, adding to the collective case for speculation and the solar max to have peaked at this time.

In a recent post (click) I detailed the comprehensive case for the market peak but stated we were missing a technical break. That R2K chart above shows the likely trigger for waterfall selling. A decisive break below 1100 would confirm and seal the topping process.

Meanwhile, on the SP500, I suggest the technical break is around 1900, where the 200MA and August low now collide:

A decisive break below 1900 would produce a lower low, a move under the 200MA (after 2 years levitating above it) and a break in the pattern of v-bounces. When I look at that chart I see clear evidence of the sun-inspired speculative mania, whereby every dip is swiftly bought up and levitation is sustained. Could Elliot Waves or other pattern techniques really predict that chart, and its ultimate conclusion too? I find that hard to believe, as I see a mania which is only predicted by the solar maximum, and the chart does not have a more ‘usual’ ebbing and flowing of sentiment waves. However, something sustained the speculation in large caps between March and now, so what did?

Certain additional topping flags have congregated in the last 2 months: vix divergence, extremes in volume, more negative divergences, higher Sornette bubble end flag intensity. But none of these offer anything revolutionary to what was present at the start of the year. Certain divergences were not so mature in January, but equally certain divergences are now too mature (versus historic norms). In short, I don’t see anything major now present as a topping flag that was missing before, but rather only a few subtle additions which add to the case. However, I put that out to you readers for your views.

The Nikkei did not top until 5 months after the smoothed solar max in 1989, so a top at the turn of August-September in 2014 fits that kind of lag, though here we could argue that the speculation targets were RUT, SOCL and IBB and have conformed to a tighter fit with the solar peak. Either way, I believe the market is on borrowed time since the March speculation peak, which now looks fairly clear. This window around October is the most likely for the falls to erupt, and various measures of ‘fuel’ suggest continuation of the bull market to year end is unlikely. Friday and Monday action looks very promising, and now I look for further follow though to confirm it. But I’ll stick my neck out again and say I believe this is finally it.

So a reminder of targets. Falls were swift and nasty under similar historic conditions:

Dow 1929: 3 weeks 44% declines

Dow 1937: 8 weeks 38% declines

Dow 1968: 8 weeks 18% declines

Dow 1987: 2 weeks 34% declines

Nikkei 1989: 6 weeks 27% declines

Nasdaq 2000: 3 weeks 35% declines

SP500 2011: 2 weeks 18% declines

I am therefore looking for a minimum of 18% declines over a period of 2-8 weeks. I believe such waterfall selling will kick off once the technical price breaks noted above are made, and I expect precious metals at that point to accelerate in the opposite direction. However, history is not clear on which way gold mining shares should go at that point, as they may only take off after the waterfall declines, and precious metals could be held back to some degree by forced redemptions under cross-asset selling.

I believe Friday kicked off the downward momentum in stocks, and that what looks like a breakdown in precious metals will now become a fake-out that is reversed. The very skewed positioning in FX completes the picture for an all round reversal in assets.

Indicators put us at the end of the topping process in equities. This means no ‘second chance’ ahead. Rather, we can see the second chance peaks already on RUT, IBB, SOCL, European indices and in behind-the-scenes indicators, so I believe US large caps are displaying a false safety in their price trends and that those who think a topping process has yet to form from here will be mistaken. If I am correct in where the markets are in the timeline, then bears should remain firmly in control now. Not every day will be down, but the trend will be fairly unforgiving, with little chance for anyone to get out or in. The technical breaks should then trigger the panic selling and the devastation will be through by November. From there the market should begin a slower partial retrace of the falls into year end. This is all based on historical analogs.

My aim is to close out of shorts once the panic selling leg is through, as the partial retrace of the falls should be multi-month. So I’ll be doing my best to use indicators to try to gauge where and when the bottom is in the waterfall selling. Might selling be more measured, say like after the 2007 October peak to year end? I don’t believe so because of various factors: the solar max, leverage, sentiment, allocations, skew, levitation above 200MA / pent up correction. Rather, the set up is for particularly heavy waterfall selling, and the closest analogs listed above. They average at 30% declines over 4-5 weeks.

Stock Market Vs. Equinox

Posted on September 19, 2014 Posted in Indicators, Stocks268 Comments

Tuesday 23rd September is the Fall/Autumn equinox. Equinoxes occur twice a year, the other being around 20th March.

The last 4 major tops and bottoms in the SP500 all fell within 2 weeks of an equinox:

Extending this to include major turns in the period that took place within 2 weeks of an equinox, we get this:

In total 10 bottoms and 4 tops. The dominance of bottoms fits with the seasonal model of the stock market, which is based on the seasonality of geomagnetism, and has lows near the two equinoxes:

The two red arrows on the ‘seasonality of geomagnetism’ chart show when stock market crashes have predominantly occurred in history. Therefore, bottoms or lows not far from the equinoxes make sense.

Highs around the equinox? Inversions happen occasionally in lunar phasing. Full moons bring about pessimism and typically mark lows, but now and again they can invert as a high. As geomagnetism is a similar sentiment phenomenon, I expect the same sometimes happens here, but I can’t be more scientific. Nonetheless, if next week’s equinox is to have any relevance, then it would most likely be as a top, or inversion high, because we have not seen a period of selling into it for it to mark a low, as we did into the lows 1998-2011 shown above.

Looking further back in stock market history, in 1987 stocks peaked 1 month before the Fall equinox and completed their devastation one month after, so centred around it. The 1976 top and 1978 bottom in the Dow were both within 2 weeks of equinoxes, but other major tops and bottoms in the 1970s secular bear didn’t align, clustering rather at the turn of the year and seasonal high. In 1929 there was a mini-crash March 25 (equinox), the Dow topped 3 September, the London stock exchange crashed 20 September (equinox), and the whole combined crash process was done by November 13.

In short, I would summarise that maybe there is an equinox phenomenon. The most compelling reason for it is the stock market seasonal lows that occur close to them (circa March and October), driven by geomagnetism which affects human sentiment. On these grounds, most major turns would be lows at equinoxes, and just occasionally we would see an inverted high.

One more add: next week’s equinox falls one day from the new moon and new moons typically mark highs (both minor turns and major peaks) so if it were to mark a high then there’s an additional reason for it to do so. For this to have any merit, stock market indicators would need to be signalling such an imminent peak.

Yesterday was a bullish day for large caps and overnight action looks to have cemented a break out. Small caps and junk bonds again didn’t share the optimism, negative divergences persist on large caps, sentiment and allocations are very stretched, and ‘normally’ this would mean an attempted breakout becomes a fake-out. Wider indicators continue to warn that this is the last gasps of a topping process, and as I have covered recently there is no case for a rally much higher or much longer. e.g. 20% higher into mid-2015, as this would negate a whole host of reliable indicators. The evidence leads me to believe that the stock market will peak here and collapse through the seasonal low of October – or, failing that – it presses on and peaks at the seasonal high of the year-end (a historical clustering targets 31 Dec).

I have difficulty believing the end-of-year option because indicator extremes and divergences are already very mature, whilst sentiment and allocations suggest little fuel for higher or longer. We would need to print anomalies in various indicators with different angles on the market to achieve it, and it would be a major stretch to achieve. Additionally, the smoothed solar max looks likely to have been around March and various risk measures peaked then or either side of that, which suggests this is already ‘borrowed time’. That said, price just won’t obey yet and until it does, I have to consider this possibility.

If large caps consolidate their breakout and push on through the new moon and equinox, pulling up small caps and other laggards too, then the end-of-year option will gain weight. If stocks hold up through the month of October then that would seal it, in my opinion.

But… the charts below show how things stand, and these are why I just can’t believe the market can truly break out upwards here. These charts are indeed supportive of a new moon / equinox peak. Plus it’s the week after expiration, normally bearish, and also a week of geomagnetic disturbance is predicted.

I may cut back short positions if (despite the indicators) stocks collectively motor here, but my eye is on the new moon / equinox combination next week. UBS see high likelihood of an important reversal in the next 3 sessions, and FX positions and technicals continue to be extreme, suggestive of an imminent reversal with associations for risk.

US Demographic Peak Of 2000

Posted on September 18, 2014 Posted in Demographics, Indicators, Macro, Stocks86 Comments

The US enjoyed united demographic uptrends from 1980 to 2000 and since then united downtrends. Here are a collection of charts that show the powerful reality of this influence.

1. Risk assets markets in real terms trended accordingly, and are calling for another cyclical bear down within a secular bear underway since 2000:

2. Real economic growth trends also align:

3. A dwindling proportion of people in jobs:

4. With associated lower household incomes:

5. Means that there is less dollar circulation in the economy

6. And consumer sentiment is overall waning.

7. Turning to the supply side of the equation, business capacity utilisation is in decline:

8. And corporate investment too:

9. However, corporations have been doing better than households:

10. As they have cut staff, replaced with tech, and kept wages low for retained staff:

Source: ForexLive

11. With shrinking real demand in the economy and in asset markets, the Fed has attempted to offset this by depressing rates:

Source: Gary North

12. And ‘printing money’:

13. The stock market has to a degree been a beneficiary as investors search for yield and corporations indulge in buybacks rather than business investment. However, this has all been sponsored by increasing debt, enabled by the low rate environment:

Drawing this together, demographic trends are creating a negative feedback looping between jobs, wages, incomes, spending, business investment and utilisation in the economy. Lower demand and lower supply. QE and ZIRP can’t really influence this because they are nothing ‘productive’ (tinkering with the money mechanism), and they are also only policies of encouragement rather than policies of force. However, they have served to shore up the banking sector, to keep debt costs low, and to push some people and businesses to look for yield, driving up some asset markets with an associated wealth effect. Equally though they have detrimental effects by postponing necessary economic cleansing, driving up asset prices through increasing debt (i.e. unsustainable), discouraging more productive use of money and in some ways worsening the economic situation by reducing incomes dependent on saving rates. Nonetheless, the Fed was keen to avoid the 1930s front-loaded deflationary devastation and has succeeded in this. But have they prevented it, or just postponed it? On a long term view, they have of course only postponed it, because the massive borrowing that they have undertaken is wealth taken from the future. But for us traders, the shorter term outlook is key.

I believe the above collection of charts demonstrate clearly that the Fed’s policies do not overcome the overarching demographics as they all show a series of stair-steps downward since 2000. If we contrast it with the 1930s we see evidence that the Fed has helped to phase the devastation, but the charts show they have not been able to neutralise it. When we consider the unprecedented collective demographic downtrends in place now in all the major nations, I believe it is clear we are on the cusp of another leg down, both in economic measures and asset markets, that will take us to a new level in all lower than 2008/9. We can cross reference this with the stock market currently at extremes in valuation, sentiment, leverage, buybacks and allocations: namely it has the attributes of a ponzi scheme wealth effect, at high risk of full reversal. When the stock market collapses, the next leg of demographic devastation will wash through, revealing the relative impotence of the central banks.

Problems in China

Posted on September 16, 2014 Posted in Demographics, Indicators, Macro166 Comments

1. China tipped over the demographic cliff circa 2007-2010. Here are middle to young, middle to old, net investors and dependency ratio (inverted) measures:

2. China’s stock market enjoyed a parabolic mania at the demographic peak, like the US did in 2000 and Japan in 1989.

Source: Yahoo

3. China’s stock market correlates closely with commodities:

Source: Yardeni

4. Demand for commodities is weakening as the economy weakens:

Source: Yardeni

5. Chinese official GDP stats are questionable, so proxies are used for greater reliability. Here, steel, cement and electricity output show a wilting in 2014, flirting with the zero level:

Source: Bloomberg

6. Imports and exports are at much weaker growth levels since the demographic peak, and both have seen lurches below zero in 2014:

Source: Yardeni

7. Government spending has shrunk:

Source: AlphaNow

8. Producer prices are mired in deflation:

Source: Yardeni

9. And certain indicators have suddenly become more acute in 2014, starting with foreign direct investment:

Source: ZeroHedge

10. Then the housing market:

Source: AlphaNow

11. The shadow banking market:

Source: Investment Watch

12. And lending:

History shows that economies which expand at breakneck speed typically derail at some point. A potential hard landing for China has been discussed in the media for a long time, but analysts don’t largely understand that it is only in the last 3-4 years that this has become more realistic, since China fell over the demographic cliff. Their one child policy has a nasty sting in its tail. The key is whether the Chinese government can roll out measures that nip the sharp 2014 declines in the bud (which would postpone rather than prevent the devastation), before the negative feedback looping becomes too acute.

In my view, it is the unprecedented collective demographic downtrends in USA, Europe, Japan and China that are tipping the global economy into an unstoppable negative spiral here (only currently propped up by the wealth effect of the stock markets) and central banks will not be able to prevent it. Japan, USA, Europe and China all took turns to be the engine of the world economy between 1980 and 2010 but now we are engineless until circa 2020/2025. By demographics that means a global deflationary recession, or a depression. Passing through the solar maximum here in 2014 should produce dwindling speculation and economic activity and nudge the stock markets and world economy over the edge, feeding off each other.

Gold Update

Posted on September 12, 2014September 12, 2014 Posted in Commodities, Demographics, Indicators186 Comments

Gold behaves as the anti-demographic. This chart shows US demographics versus p/e ratio (equivalent to inflation-adjusted stocks) and gold price on a long term view. P/es or real stocks trend with demographics in secular fashion and gold the inverse.

Underlying Chart: Glenn Morton / My annotations

In the 1970s we saw a gold secular bull as demographics declined, then 1980-2000 the inverse. Demographics turned again around 2000 and put us in a secular stocks bear and secular gold bull from then through to circa 2025, which makes the gold correction since 2011 a pause in proceedings, similar to the Dec 1974 – Aug 1976 correction in the last secular gold bull:

The late 20s stock market peak was equally a demographic peak and gave rise to a stocks bear / gold bull combination. Homestake Mining is used as a proxy here:

Gold should make a speculative mania into solar cycle 25’s peak, circa 2025, with this target on the dow-gold ratio:

A look at long term gold and silver sentiment shows a pattern has developed over the last year similar to the lift-off in 2000.

Source: Jeremy Lutz

Cross-referencing with the current position in stocks, we see a range of topping indicators and extreme overvaluation in equities, which sets the scene for a new cyclical stocks bear (within an ongoing secular bear) to erupt imminently whilst gold resumes its secular bull. So I am looking for a floor in precious metals around here (I am long and looking to add).

Gold miners show a rounded bottom whilst gold sentiment has reached bottoming levels:

Source: Emma Masterson

Source: Mark Hulbert

Gold has been falling the last several weeks in dollar terms as the USD has rallied strongly, but gold in yen, sterling and euros looks more healthy. The rising dollar is consistent with the deflation theme that is powered by demographics, and this theme should pull the rug sharply from under stocks in due course. When that occurs, gold should lift off, as in 1987:

Source: P De Graaf

10 Indicators Cross-Referenced

Posted on September 11, 2014September 11, 2014 Posted in Indicators, Solar Cycles, Stocks79 Comments

1. Investors Intelligence

II Bears (advisor sentiment) is sub 15 again this week, previous clusters shown:

Source: Stockcharts

Here are those sub 15 readings on the 80s Dow:

Source: Stockcharts

The 1983 extreme II reading occurred 12 months after the new bull market kicked off, and is comparable to the spike down in early 2010 in the first chart that didn’t quite reach <15 bears. The 1986 and 1987 double (circa 5 years post bull launch) is comparable to the Dec 2013 and current extreme pair, but note how stocks rallied for 5 months after the 1987 extreme before collapsing.

2. Rydex

Rydex asset ratios (Rydex family of funds) current extremes are most similar to the 2000 period, namely a time band of extremely skewed holdings lasting for around 7 months in 2000, as we are seeing in 2014 (9 months mature).

Source: Stockcharts

But note that within that 2000 time band we saw two periods of major sell-offs: March to May and September to December. We have not experienced either so far in 2014.

3. NAAIM

NAAIM exposure (managers US equities exposure) made a pattern of extremes-plus-divergence at both the 2007 and 2011 market peaks:

Source: Acting-Man / My annotations

We see similar extreme high readings plus the same gradual divergence since November 2013. The pattern is most similar to 2007, where it lasted 10 months before the market finally entered a bear market. Here in 2014 the pattern has also been in play for 10 months.

4. HYG:TLT

The high yield to treasury bond divergence (a risk off measure) lasted 4 months, 5 months and 5 months at the 2007, 2010 and 2011 market peaks. The 2014 divergence has been running 8 months and is therefore excessively mature.

Source: Jesse Felder

5. Skew

The persistent extremes in Skew (risk of outsized move) beats any historic parallel, but we could point to 1990, and the most recent cluster in 2011, both which produced 20% sell offs in the market. The 1990 cluster lasted 7 months which makes the 2014 cluster, at 10 months, again excessively mature.

Source: Dana Lyons

6. Q ratio

Q ratio valuation (replacement cost of stock index companies) shows that flirtations with an extreme value of 1 were historically swiftly repelled (by bear markets) with the exception of 1996-2000.

Source: D Short

With the stock market now 2 years above the 1-level, the closest parallel is that period into 2000. Note there was a 20% correction half way in 1998. However, the run up to 2000 was a demographic peak, this is not, and valuations need demographic context. I believe 1937 is the most applicable mirror which puts us ripe to fall.

7. Household Equity Allocations

Equities as a percentage of US household financial assets have historically signalled market peaks once flirting with the 30% region, with the exception of 1997-2000. Again, demographics do not support this indicator rising to higher levels, so I would mark this indicator as similar in outlook to the one above.

Source: ShortSideOfLong

8. Margin Debt

Margin debt (investor leverage) surged for 15 months into 2000’s peak and 10 months into 2007’s peak whilst the surge into the Feb 2014 peak lasted 18 months, so relatively mature. Whilst the Feb 2014 margin debt peak is only tentative currently, it occurred 6 months ago, versus 5 months and 4 months pre-peak in 2000 and 2007, so also relatively mature.

Source: D Short / U Karlewitz

9. Sornette Bubble

Sornette’s bubble end flag calculation looks like this currently on the SP500 and the US tech sector:

Compared to historic examples, the SP500 has not flagged at as higher intensity, whereas the tech sector now has. On the other hand, the tech sector flag looks fairly ‘new’, whereas the SP500 flagging has built up gradually. Neither have spiked multiple times in an extended period like in 1929 or 2000 (which both lasted around 2 years). At this point, the picture is most similar to 1987 of the three.

Source: Financial Crisis Observatory

10. Solar maximum

By most solar models, the smoothed solar maximum is behind us, circa March 2014. If this is so, then the last four solar maxima delivered the asset mania peak within 5 months, which makes the current peak ripe.

There are question marks over how close the timing ought to be (looking further back in history), and we cannot yet be sure the smoothed solar max is behind us. However, this is where cross-referencing comes in useful.

Investors Intelligence argues the top should be before 2014 is out, whilst NAAIM calls for one straight away. Rydex, Skew and HYG:TLT all argue a sharp correction circa 20% or a bear market is overdue, and margin debt tentatively does too. Meanwhile, Q ratio and household allocations argue for a sharp correction circa 20% imminently or a bear market too.

All these indicators cast great doubt on the speculation peak being some way ahead in 2015. Collectively they argue for us to be in the last gasps of a topping process that began at the turn of the year. If stocks were to continue to rally into 2015 then we would print major anomalies in all these indicators: they all worked historically, but this time is different. I don’t buy that.

The Sornette bubble either places the market at a 1987 style peak now, or will come again at a higher intensity any time up to the end of 2015. The solar cycle places us either ripe to fall, 5-6 months post smoothed solar max, or also may allow for a peak up to the end of 2015.

I therefore believe that the logical case is for the eight market indicators to work once again and deliver a peak now, which then fits with the 1987-style Sornette reading and the most likely smoothed solar max / speculation peak lag combination. It all fits together, it all fits with history.

Short Term Clues

Posted on September 9, 2014 Posted in Indicators, Stocks134 Comments

The Dow, Biotech and Junk bonds are all still flirting with double tops and are unresolved at the time of writing, though JNK has been the most repelled (Stockcharts):

In the last two weeks before yesterday, all the gains in SPY came out of hours (Fat-Pitch).

The best performing sector of the last two weeks was Utilities, in line with the YTD (Macromon).

Volatility reached new lows, and suggests complacency which occurred into and around previous peaks (J Lyons):

Rydex bull/bear assets at the end of yesterday are back up to near 12x levels, on a par with the 2000 peak and all-time extremes.

Investors Intelligence percentage bears is down to 13, on a par with the 1980s lows:

The Sornette bubble end flag has dropped to zero (Financial Crisis Observatory):

If the July flagging was the bubble end, then it would fit with the model from 1987, which flagged and then several weeks later the market collapsed:

In support of the July bubble pop scenario, cyclicals broke down around that time (UBS):

If July wasn’t the final peak, then the Sornette bubble should rise again and flag at a higher intensity in the future.

Evidence in support of the speculation/solar maximum being around March time and behind us comes from the current peak margin debt reading and the first of the double tops in biotech, but also seen here in peaks in social media, commodities, Russell 2000 and Nasdaq advance-declines:

Like US small caps, the relative performance of European small caps also peaked out at that time.Today is the full moon. Let’s see what it brings.

S O L A R C Y C L E S

Month: September 2014

Population, GDP, Debt, War And Solar Variation

Increasing Deterioration

Topping Timeline And Targets

Stock Market Vs. Equinox

US Demographic Peak Of 2000

Problems in China

Gold Update

10 Indicators Cross-Referenced

Short Term Clues