10 Indicators Cross-Referenced

1. Investors Intelligence

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

11se1

 Source: Stockcharts

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

Screen Shot 2014-09-11 at 09.09.12

 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).

3se13

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:

11se3

 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.

11se8

 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.

11se10

 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.

11se12

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.

11se27

 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.

11se6

 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:

Screen Shot 2014-09-11 at 10.37.45 Screen Shot 2014-09-11 at 10.38.29

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.

11se25

11se21 11se23

 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.

Screen Shot 2014-08-10 at 16.30.44

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.

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79 thoughts on “10 Indicators Cross-Referenced

  1. “It all fits together, it all fits with history”

    As per my last post John:

    You know something is nearing an end, when most think it will go on forever 😉

  2. John
    Many thanks again for all your great insight & effort which you generously share.

    One question, one poster mentioned a likely geomagnetic storm hitting US tomorrow. Should this have a negative impact or boost speculation?

    Thanks

      1. Hi John-

        As we appear to be moving through a topping process, am I right in assuming you believe roughly a 20% correction rather quickly will occur then what? Do you believe we run back up to the peak again and fail? What is your timeframe and ultimate low on S&P as a bottom to go long again? I believe the Greedometer from his blog is also now rather steadfast in believing regardless of ECB QE that we will turnover and correct 20% the next month and a half, then try again at the peak only to fail and run possibly to triple digits in S&P sometime in 2015 or even below our last bottom in 2009…

        Thanks in advance,
        Ken

      2. 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

        So I am expecting something swift and severe lasting 2-8 weeks and a minimum of around 18%. Thereafter I expect a multi-month partial retrace of the falls: circa 3-4 months and retracing 50% of the declines or so. This is all based on historical analogs. Then after that a long bear market. So, when to go long? Not for a long time, but there should be an opportunity for a counter trend rally once that initial 2-8 weeks panic selling is out of the way.

      3. I expect a high on the 18th of September and after that the decline John mentions into october 9th. This would be 2-3 weeks. After that the recovery into nov/dec.

  3. Allan, I do not think there is one person here who
    thinks it will go on forever, certainly you do get a
    sense of frustration in some recent comment and
    people giving up attempting to time the
    next large decline.

    The only real debate imv is on timing, duration and
    depth.

  4. Here is the stock market peak in 2000 versus daily geomagnetism. See how three major storms hit in July-Oct following the actual solar/stocks peak of March 2000, helping tip the sentiment over. We are in the same seasonal geomagnetic window now, so for the bear case, a big storm this week would be timely.

    1. John, call me crazy but I get migraines when there is a geostorm. That drew me to the possible collective effect on humans. Currently, I am having one, but it hasn’t hit yet. Any ideas why?

  5. Valuation to demographics should be enough to cause a correction. Being bullish despite these facts seems like incompetent investing advice, or blatant market manipulation.

  6. looking strictly from the pattern perspective, it allowed for and suggested a wave 4 pull back to approx. 1984 spx. Then we would see the beginning of one more 5 legger up. The 5 legger up will likely be the final 5th wave. It is always difficult to know exactly where a final 5th wave will end because it could be a truncated failure, or a normal 5th wave to 2020’s SPX, or it could even be a 5th extension…blow off top maybe going into the 2030’s.
    So far we have seen a bounce at 1983ish, as expected. Now we need to watch this next leg up carefully. It can end abruptly or extend for a week or more. The wave 4 down to 1983ish was complex. If the wave 4 chooses, it can add an “x” wave here rather than the 5th wave, and continue to grind sideways for another 3 legger in an effort to kill more time. Why would the SP want to kill time as it has done? Maybe because of the FOMC next Wed. I don’t expect it to start another 3 legger sideways move, but it can do it, especially since we have an important old yeller announcement coming next Wed.

  7. Distribution at the top in play. Important question is how far the first stage of decline will progress ? My bet is around S&P 1900 in rather straight line, maybe next week.
    I definitely lost my heart for gold and I don’t see any upside for that PM. 900-1000 may be final target for gold. Continuing strength in USD may last longer then.

    1. neutral to neg until 117 (iwm)…

      again, why does everyone see bullish indications at the tops of the cycles? blows me away.

      it’s one thing to look for continuation patterns but to ignore the fact that IWM clearly has failed to rally past the top of the cycle is nuts

      1. elvis, you are correct and it is unfortunately a factor of the conditioning that has taken place in recent time and something that became widespread during the dot.com. bubble. BTD!

        ben, a look at RUT longer term charts tells a different story. I would be very careful.
        All rallies are getting sold on the SPX and other indices look vulnerable.

      2. Allan –

        I believe the bear case will come sooner than later myself but 4 of the last 5 days we have closed at highs and rallied off lows in the SPX. SPX is also up roughly 9% for year. I find it interesting that you believe the rallies are being sold. Hard to disagree right now with the bulls not being in charge. We are also only 10 handles off the closing high for the year after todays close. This seems to be hardly a bearish setup. I’m not short or long, just waiting for a trend change which is why I find John’s analysis invaluable should it play out…

  8. Don’t think the market can make progress with credit markets selling off. To me, it’s been a piece of the puzzle that’s been missing for the bears…no more. We’ll see if the weakness is more than just a ST draw down.

  9. Peggy – thanks for the link. If that model is correct, then we will miraculously dodge most of the second bigger and faster CME a few hours after the US open tomorrow!

    The first one is due to impact us near the US close today – but we’ll miss the worst of that one too.

      1. not sure. I’ve noticed that it’s pretty accurate although they do change the daily forecast totals occasionally. guessing it’s based on the previous 27 day rotation and estimates based on that solar activity.

      1. continuation of the uptrend will be signaled if…

        the indicator moves above (with zeal – ha) 26.33 and the bull/bear power goes positive

  10. As I wrote before, analogy between 2007 and 2014, with EU indices advancing tops in spring-summer, hand with hand with Russell2000.

    One month before now.

    Always talking about DJI, topped in the end of dec13-jan14, 2nd top in jun´14 and 3rd one in sep´14.

    Might see a rebound in nov´14 like dec´07, above?, below? prior top?

    Anyway, 17-17.5 K would be a great opp. to be short, in my case, with no-leverage, or little in extreme case.

    This is my 2014roadmap.

    After I pointed out 3 possible scenarios:

    1>-0,5 fib from 2009 to 2014, like S&P 1980-82 (upward prior top structure is the same), to the 200MMA, around 11-11.8K

    2.> -0,618, common retracement, like 1978-80-82 levels> 10-10.5K

    3> 1909-16-19 upward structure. After last peak in 1919, retrac. -0,76, or even a little more to the 2002/09 bottom> 8K, even 7K.

    I operate by levels, with no-leverage in long runs, can add some laverage in particular-extreme cases.

    Time will tell.

    Best regards, John and all of you

    @apanalis

  11. oh my, i’ve had enough with the bearish scenario. My advice is to jump on the bandwagon and ride the trend. Some people say we are only in the early innings og this bull market.

      1. like it or not, OBJECTIVELY, we’ve been in a DOWNTREND since the 3rd. That can change on a dime but can you tell me how you will know???? or are you just a parrot on the bull pirate’s shoulders hawking “bull market, bull market!”

        downtrend

    1. duncan – do you actually have any money in this or is this just another video game?

      http://stockcharts.com/h-sc/ui?s=$VIX&p=D&st=2013-06-07&en=2014-09-11&id=p02016516959&a=303385635&r=1410467442473&cmd=print

      vix technical buy but last time it looked like this was early march before that correction…

      AGAIN it is the top of a cycle and we have continuation failures all about like soft stuff in a pasture! all we have is trace of bull but no real bull stuff to be found! lol

  12. Thanks for sharing John, good work. I am probably more bearish long term than anyone here. SPX 440 would not surprise me. So far however, the pattern has been correctly predicting the lows and highs. It predicted the low at 1903-1904spx, then a new high. The actual low was 1905ish SPX and we have seen the new high in 5 wave fashion. Next it predicted a wave 4 low at approx. 1984spx. Actual low so far is 1983ish. Now we should expect another wave 5 up to new highs. Probably in gap up wave iii:5 right now. Wave 5 may end near 2023ish + or -. Nobody can accurately predict the final wave 5 because they come in 3 sizes, truncated, normal, and extended.
    I am super bearish, but the pattern says to stay long for now. We all want to jump on the “short” train, but patience might be a virtue for several more days. We might get a mid point measuring gap in the morning that will get us a little closer to predicting the final top.
    Thanks again for all your hard work.

  13. Dips are being bought folks, as Ken referenced earlier.
    This does not suggest an imminent change of trend to me.

    The path of least resistance appears to be up, for now.

    Will the FED do anything to upset the consensus next week?,
    highly unlikely.

    Ukraine could flair up at any point, and as Duncan said
    this is the bears current best (short term) hope.

    Appreciate many others will see it differently
    and I reserve the right to be wrong )

  14. It is true that every dip has been bought back. I am not sure if this is considered a super bullish sign though. imho the Dow movement the past few days mirror the pattern in March 2000. VIX vehicles are also moving the same way like March 2000, whipsawing,. hitting bottom for a few weeks before the real spike.

    FOMC meeting on 09/17 – another chance for the Fed to save the market. The sell-off, if imminent, might not happen until the week of 09/22 as the earliest.

  15. Hi P. Here is my post a few days ago. The Feast of trumpets signals a major turning point. First day of the FoT will fall in on 09/25, the 09/22 week. This might either signal a significant top, or the major crash…

    The bible says every 7 years God commanded for the Land to rest for a period of 1 year. The Feast of trumpets, 9/25/14 to Feast of Trumpets 9/13/15 is a Shemittah Year

    The last Shemittah year was from Feast of Trumpets 9/13/2007 to Feast of trumpets 9/30/2008. The Dow topped out just after the Feast of trumpets in Oct 07, and the crash came the same week of the FoT in 2008.

    The Shemittah year prior to 2007-8 was 2000-2001. The FoT started in Sept 30th 2000 and it was just right after that the SPX completed topping and started tumbling.The end of the Shemittah year was at the FoT in Sept 18th 2001, exactly 7 days after the attacks on 9/11/01.

    With that said, I will continue watching with great interest and extreme caution the market development from 9/25/14 to 9/13/15.

  16. If this resembles 1987…those who panicked and sold missed another 12 year bull market. There is no mania in this market. CNBC has 20 year ratings lows. Nobody owns stocks, my neighbour isn’t telling me about his gains. Nobody is day trading at work. Margin data and NYSE Advance Decline stats no longer work, because margin data includes hedge funds that offer collateral off market and NYAD data includes ADRs, bond funds/ETFs and closed end funds.

    So why bother timing the market, since this “one resembles 1987” according to John. If you ignores your brokerage statement for 6 months after 1987 you continued to ride the bull all the way to 12000.

    This is the most hated bull market of all time and it peaks at DOW 32,000 and S&P 3600 and some will hate it all the way up and then say “I told you so” when it collapses.

  17. Pretty sure the analysis I posted is right. Means John has this here. If that support breaks (what I think does not matter but I think it will) it’s all over baby blue.

    Nice work Solar Cycle Blog!!!!! This is your time.

  18. It does seem like every SPY dip is being bought. Quite frustrating to be short the indices, but meanwhile TSLA and other speculative stocks are tanking.

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