Price Anomaly

The 2 days either side of Thanksgiving are typically bullish so there are reasonable odds November ends as an up month, which would negate the October monthly hanging man candle. However, the last 3 daily candles, two black and one red, suggest a brewing reversal. Seasonality doesn’t always work, so let’s see how today and Friday play out.


 Source: Stockcharts

Apple made a notable intraday reversal and closed down yesterday, so I am now looking for follow through from this leader. Meanwhile, bonds and miners had strong up days yesterday, adding to the likelihood painted by other indicators of a turn in equities being close at hand.

All year I have pointed out the outperformance of the defensive sectors normally associated with market tops. Below are highlighted previous years where defensive sectors made the top two rankings like 2014.


Source: Charlie Bilello

1990 finished the year down -6.56%, with a 20% drop within the year. 2000 ended down -10.14% and 2008 down -38.47%. 2011 finished exactly flat, but experienced an 18% drop within it. Yet 2014 is so far up +11.83%. How can we reconcile this?

One way is for 2014 to yet end much lower, with a steep down December. The other way is somehow ‘this time is different’.

Here is the updated comparison of the topping processes of 2000 and 2014, using the Dow Jones World index. The timeline runs similar due to the solar maximum occurring at a similar time of year. In both cases the topping process began in January with divergences from that point in breadth and defensives. The solar maximum itself provided a second peak, followed by a double top in July/Sept to complete the topping process. The notable difference in 2014 is that the double top was higher than the previous two peaks and the subsequent rally back up in price stronger too.

26nov2 26nov1

This fits with the picture painted by the defensive years shown further up, namely that the anomaly is in price action. Again, this could be resolved with a sharp crash late in 2014, with price belatedly converging with indicators. Or, option 2 again: somehow it’s different this time.

Another version of the 2000/2014 comparison is shown below, using the Wilshire 5000. In 2000 we saw notable divergences in sentiment/allocations (mania), volatility and breadth as of around July. Price then followed down. In 2014 we see similar divergences from a similar point, but price has so far gone the other way.

26nov10 26nov11

I suggest the same two options: a sharp crash is coming to rectify the anomaly, or this time is different.

One way this time could be different is if these divergences are repaired, resetting the topping process. But with froth this extreme, is that realistic?:


Margin debt was released for October. A decline from September, keeping the peak-to-date still as February.

26nov20Source: DShort

Net investor credit also declined, with its peak-to-date being August. Clearly the progression in margin debt looks a little different from the 2000 and 2007 peaks, but this again fits with the strong action in price. Nonetheless, the current peaks in both leverage measures fall either side of the expected smoothed solar maximum of April, which fits with the mania peaking around then, putting stocks on borrowed time.

Historically, manias saw (and needed) leverage rise into the peaks. With leveraged loans as well as margin debt having apparently peaked out, it suggests stocks really ought to snap or have snapped, which takes us back to the conundrum of price action, as US stocks are at all time highs here in November.

In the comments yesterday I shared the below comparison of final price thrusts into major peaks, with the rally since October in 2014 being similar in size and duration, although arguably with a little room for more of both:

Screen Shot 2014-11-25 at 12.47.57All the evidence I have shared in recent posts points to this indeed being a final rally, the last peak in the topping process. If so, then we need to be aware of the way these rallies peaked in the past: sometimes with an inverted hammer candle (a strong intraday reversal), sometimes with a topping range whilst momentum diverged.

In other words, if the last 3 sessions have been markers of a change in trend and an end to this 14% rally completing around the new moon then we could see either a strong reversal and no revisit of the highs or we could see a sideways range lasting a couple of weeks as momentum diverges. That both options are possible doesn’t make it easy, so we will just have to take it day by day.


Perspective Again

Take a step back and the topping process since the start of July can be seen in RSI, money flow and MACD divergences:

25nov1Source: Stockcharts

The same divergence processes in 2007 and 2011 lasted around 5 months. From the start of July 2014 that would equate to a final peak around now.

We also see the same NAAIM manager exposure divergence as the 2007 and 2011 peaks:

Screen Shot 2014-11-25 at 06.33.07Plus we see a topping process more clearly in the relative performance of stocks to bonds:


Junk bonds double topped in July and September and are now divergent to equities, and previous divergences were leading indicators of where stocks were headed next:


We see peak mania at the inverted geomagnetic seasonal mid-year peak closest to the smoothed solar maximum peak, via sentiment and allocations, just like at the last solar peak in 2000:



The sunspots chart shows the waning since around April 2014, putting stocks on borrowed time.

Offsetting the October-November rally in equities, we see gold and miners advancing and treasuries too, with the yield curve flattening further (equivalent to inversion under ZIRP):


Plus we see various divergences in place since the turn of July contrasting with price, including bullish percent, volatility and breadth:


A peak across the pond at the Dax reveals a similar topping process in place as measured by true strength and breadth indicators:

25nov40 25nov41

Source: IndexIndicators

To sum up, there is a ‘normal’ topping process occurring behind the scenes, yet most are oblivious. If your arguments are either that indicators don’t work any more or that central banks’ actions trump all, then history is not on your side. I’m no permabear, rather the evidence is far too compelling to be anything other than bearish on equities here. This remains a truly golden opportunity for ‘reverse value investing’ yet right now appears to be the point at which the least number of participants can see it.

If it seems like price can only go up and that all weakness is bought, then recall just a few weeks ago the situation was similar but in mid-Sept suddenly bears took control with several engulfing down days. The evidence above reveals this is going to happen again, and argues that this time will be definitive. The key point is that behind the scenes and cross-asset we can see that things clearly changed as of the turn of July and that this latest leg up in price is part of a topping process not a bull market trend. It’s just about the timing for capturing what should be the final peak.

Skew is back elevated like mid-Sept or mid-July, the last two times the market rolled over:

25nov2Source: Barcharts

We can add to that recent readings in ISEE put/call and Nymo for evidence a roll over is imminent.

Allocations look truly exhausted:


We are heading into the negative lunar period this week, and the real geomagnetic trend remains down:

a4 a7I am looking for the leading stock and leading index to roll over to cement the trend change, namely Apple and the NDX. Microsoft, the other main driver, has now broken, leaving Apple left to pop its parabolic.


And for the US dollar to break too. It shows the same negative divergences that marked previous peaks:


I believe gold has bottomed in line with October 2000, and that the break in both the USD and equities will send it soaring.

Friday Blow-Off Top?

Was Friday a blow-off top?

It was a higher volume reversal/exhaustion/black-bar candle with similarities to previous peaks.


Source: Stockcharts

It occurred with a super-spike in allocations.


And it occurred at the new moon, which often marks peaks.

Skew is back to high elevation, Trin ended Friday at the very low extreme and we can add to those the recent readings in ISEE put/call and Nymo for an overall case for stocks to move downwards from here.

Additionally, various indexes such as the Russell 2000 and the Dax have now risen as far as they should without jeopardising their ‘top is in’ status. Similarly, the divergences in breadth measures would be at risk if the upward break in equities is maintained. Recall the ‘failed’ top attempt at the turn of 2014: breadth was subsequently repaired and the process began again at the turn of July:

23nov5All year I have kept my worst-case scenario as a bull market top not occurring until the end of December 2014, and I still do. However, if equities were to keep rising from here for another 4 weeks, then I would expect the topping patterns in various indexes and the breadth divergences to be neutralised again. That would reset the topping process for a third time. I have great doubts that could occur but how/why might it?

I don’t see anything in November sunspot developments to suggest scientists have it wrong. The trend is still waning since April, which puts stocks on borrowed time. Yes, seasonality is now positive, and maybe for buybacks too. But the real geomagnetic trend remains down, which pulls the other way on sentiment. With the extreme readings in allocations, sentiment and put/call I doubt there is fuel for yet higher prices. Could we see a middle-ground whereby stocks hold up but trade sideways, thereby not resetting the topping process but holding them up until year-end? I can’t rule it out.

It all comes down to what happens this coming week. Recall the October monthly hanging man candle. By my calculations (positioning in the topping process and analogs) November should accordingly end down. That means we should see at least a 3% drop in equities this week from last Friday’s close. What might cause that? Exhaustion, I believe. See the mid-September topping candle in the first chart above, compared to Friday’s. A similar candle from a similar all-in / stocks can only go up positioning, and a sudden switch to bears in control followed.

If we look cross-asset, the behaviour in gold, miners, junk bonds, Vix and treasuries all support a break down in equities. But it has to happen now.

I was asked if I added short, but I am waiting for a clear reversal. If Friday was a blow-off top then we should see follow through to the downside as early as Monday. Should this occur I will be looking to add short positions with stops as we move down anticipating we won’t come back this time. But I want to see that clear follow through move to the downside.

Bear Market Bottom

Are we at a bear market bottom in equities? Take a look:

1. Cash holdings of fund managers like the major stocks lows.

19nov2Source: U Karlewitz

2. Short Interest like the major stocks lows.

15nov83Source: PFS

3. Capitulative Breadth in mid-October like major stocks lows.

Screen Shot 2014-11-19 at 07.10.26(CBI by Rob Hannah)

4. Volatility drops like the major stocks lows in 2008, 2002, 1990 and 1987.


 Source: Dana Lyons

5. And yesterday the Vix put/call ratio reached the same level as the major lows in stocks in 2011 and 2010:

Screen Shot 2014-11-19 at 06.44.47Source: Ycharts

How could this occur as stocks reached all time highs yesterday? And how do we square all the above indicators with contrasting bull market topping readings in valuations, leverage, sentiment, allocations, dumb money flows, sector and asset rotation and others (all documented in detail on this site)?

One thing should be clear. We are not at a bear market bottom – we are at all-time highs, the very opposite. So in line with readings on some other indicators, we are in the realm of the unprecedented.

Look again at the first chart: fund manager cash. Note how it moved inversely to stocks until the start of 2013. After that, cash rose steadily as the stock market advanced. Same for the second chart of short interest: generally inverse to the market but not as of 2013. In that same period, institutions have been sellers whilst retail and buybacks have propelled prices higher, so maybe this accounts for what we are seeing.


Look, if you want to take a bullish view on the all the above, no-one can argue against you. In the realm of the unprecedented, the implications of these readings will only be clear with hindsight. But, drawing all market disciplines together, my take remains that the most likely outcome is that we are heading for a steep and swift crash. All the terrific imbalances in the market, both in levels and durations, I believe are most likely to be resolved with a major reset. It’s either that or we are now in a new normal in which many traditional indicators no longer have validity. I don’t buy that.

Yesterday was another painful day, but the clues that a reversal is close at hand remain. Small caps and junk bonds declined again, defensive sectors outperformed, negative divergences persist and gold miners advanced again. Recall gold miners popped out of the top of their topping megaphone formation in 2011, only to be swiftly reversed with a long tailed candle to the upside. So I am looking for something similar. Maybe we have to wait until the weekend’s new moon, we will see. But, the lop-sidedness in the markets is more extreme than ever, when we look at Vix, Rydex, II&AAII and ISEE p/c all combined.

Lastly, here is sentiment over allocations which reveals stock market mania, tying in with the sunspot maxima.

Screen Shot 2014-11-17 at 12.28.43



Weekend Update

A doji on the SP500 on Friday, making for a week of sideways range. But there is one index still not slowing down, the Nasdaq 100. Apple and Microsoft are still in steepening uptrends, dragging this index higher. Note that these two stocks outperformed right into the end of 2007, later than most, so their rollover may be the last domino to fall. Unlike the other indices, the Nasdaq 100 is showing no major breadth issues, but does have divergences in bullish percent and volatility.

15nov42 15nov61

Source: Stockcharts

The longer term Nasdaq 100 chart does however show typical major topping divergences:

11nov14So, I’d like to see large intraday reversals / voluminous down candles on Apple and Microsoft and in turn the NDX as a sign of a peak.

The last dominos to fall idea is supported by the bigger picture. Various risk measures peaked out in January, European stock indices and US small caps topped out around June, other global indices peaked out in September, and breadth has been diverging on the SP500, Dow and Nasdaq composite. Look at the Nasdaq composite breadth compared to the NDX, it now has 4 lower highs and lower lows over an 8 month period:


The Dow Jones World index is shown below. A clear double top and lower high/low, with divergences on this rally since the turn of November. John Li raised the possibility that US large caps may still need a ‘second chance’ peak given they have made new highs again, and I can’t rule that out, but on DJW this is a fairly typical second chance peak should stocks now roll over.


Here’s why stocks should be ready to now finally roll over. The McClellan Oscillator has diverged as it did at previous recent peaks:


Source: Andrew Kassen

ISEE put/call ended over 200 again on Friday, making for 4 prints over 200 in the last 2 weeks. These extremes are signs of topping.


Source: Andrew Kassen

Rydex allocations made a new all-time record at the end of Friday. Take a look at the Rydex history in conjunction with AAII bears and II bears history versus current readings:

15nov41 15nov89 15nov98

All at absolute extremes. If a bull market top occurs when there are no bears left to convert then these three proxies are screaming exactly that.

However, here is short interest, which appears to reflect the opposite:


Source: PFS

Either this is supremely bullish, like previous major lows, or something else is going on. It should be clear that we are not at a significant low like 2009 or 2011, and the October correction didn’t get close to a washout in sentiment or allocations like the other two lows shown, so how can we explain it? Look at the rising trend since the turn of 2013 which is when the mania began. I suggest this is hedging. Similar to the persistently high range in Skew that has been in place.

On a related note, look at foreign buying of US stocks, below. This also diverged from the turn of 2013 when the mania began. PFS see the current reading as bullish, but it should be clear again that something else is going on. Foreign purchases trended closely with the SP500 until the turn of 2013, after which they stopped tracking. Again the idea that this level is synonymous with a major low in stocks is clearly wrong. We know that buybacks and US retail clients have been the two main drivers of the mania phase and that leverage and allocations have been take to record extremes. We know that institutions have been net sellers in the mania phase and the below chart reveals there has been dwindling fuel from overseas too. Therefore, the combination of companies borrowing to buy their own shares back and retailers buying high and going all in on leverage is the worst possible foundation for current prices.


Treasuries rallied on Friday, precious metals burst upwards, and junk bonds had another down day. All these developments suggest stocks should be about to fall.


Vix rose last week and continues its overall divergence which again warns of a change in trend in stocks. Look at the similarities in stocks:volatility to the previous major peaks:


In short, I still think stocks will see a voluminous down day in the next few days and kick off the new and final leg down. There is no fuel for higher by various indicators above, so I believe the flattening out of the SP500 last week is the prelude to the next big move: down. I am not a fear-monger but given the incredible extreme state of multiple indicators, the ferocity and exhaustiveness of the rally since mid-Oct, and the large megaphone formation on US large caps, I believe an almighty crash is going to occur. In the last solar maximum mania of 2000, the Nasdaq’s mania from the start of 1999 to March 2000 was all retraced by the end of 2000. I equate us to November 2000 but here in 2014 we have postponed any true correction as the year has progressed, making for what may become a mega-correction right at the end of the year. How the mania reversed hard in 2000:


ECRI leading indicates for the US have dropped further. Their shaping level now mirrors 2011, 2010, 2007 or 2000: all significant market peaks.


 Source: DShort / ECRI

Lastly, the Sornette bubble end flag remains at July for the SP500 and September for US Tech. There has been no rebubbling since.

Screen Shot 2014-11-15 at 05.20.34Source: Financial Crisis Observatory

Looking for an analog where the Sornette bubble ended before stocks made marginally higher highs and then fell, there are only a couple of examples from history. In 2007, the bubble-end flagged in June/July and then stocks made their marginal higher high on multiple divergences in October 2007. In Russia 1998, something similar:


Screen Shot 2014-11-15 at 05.20.07

It was the same phenomenon: marginally higher highs but on multiple negative divergences. Same as now: a lot of divergences have developed since the start of July whilst we have gone on to make marginally higher highs.


So, it’s more support for the case that stocks should turn down here at their marginal higher highs in a final manner, rather than breaking upwards.

We have a week left until the new moon. Can equities hold up or even rally into then? Hold up with a few more dojis whilst we see further deterioration? Maybe. Rally? I just can’t see it when allocations and sentiment are so super-stretched. Rather, I still expect we will end November down and follow through on the large monthly October hanging man candle. That would imply stocks should fall before we get to the new moon. I am looking for a large red daily candle early next week, with the behaviour in gold, junk bonds, European indices and small caps last week as the lead in.

A Topping Candle

Yesterday produced a topping candle in US stock indices, but was it the topping candle?

The SP500 closed with a marginal 0.04% gain but advance-decline volume was 1:2 (Urban Camel). It was the 2nd-worst breadth day ever when the S&P 500 was up and so near a 52-week high (Jason Goepfert).

ISEE put/call closed over 230 for the second day in a row, suggesting major contrarian lop-sidedness. Previous instances in 2014 marked below reveal they occurred near tops but tended to be markers of subsequent sideways churn.

Screen Shot 2014-11-14 at 05.30.51That chart also shows the RSI divergence which ought to eventually lead to a leg down.

Small caps and junk bonds had the biggest down days yesterday, both risk-off flags which argue a notable drop in large caps should follow sooner rather than later.

14nov9Source: Stockcharts

European indices moved further to the precipice in European hours yesterday. At this point European indices and US small caps topped out by June 2014, and most other major global indices in September, just leaving US large caps, the Sensex and the Nikkei as the notable indices still to peak. Drawing on previous major tops (2007, 2000, 1989, 1968) stock indices peaked out within 4 months of each other. Therefore, if I am correct in my assessment of where we stand then those remaining indices should top out without delay and this fits with the picture painted by most indicators: November ought to end as a down month.

Rydex allocations hit the highest ever level yesterday aside from mid-January 2014, which suggests a top in equities should occur:


Here is the comparison of the 2000 topping process, confirming that Rydex spikes to extremes typically marked tops:

Combining the current extreme readings in II and AAII sentiment, these are the mirrors from history:


Source: Dana Lyons

1987 marked an important top. January 2011 was an early warning of an important top. 2003-2004 was ‘healthier’ froth that sometimes occurs during early bull market progress, so I suggest that cluster is less relevant here.

MACD on the Dow produced a reading only seen 3 times before. All were pullback signals on the short term, but different results in the medium term.


Source: Northman

Four headwinds for US equities: a) monetary trends point to a weakening ahead in the US economy relative to Japan and the Eurozone (chart below), b) QE support has ended, c) the rising US dollar and falling oil prices have resulted in a cutting-in-half of earnings and revenue forecasts for US Q4, d) the US stock market is the most expensive in the world of all major countries (table below).


Source: Moneymovesmarkets

Screen Shot 2014-11-14 at 08.23.06

Source: Telegraph / ZeroHedge

If we could argue that until now a relatively stronger economy in the US coupled with the relatively most aggressive / supportive central bank made for outperformance in US stocks (shown below relative to the rest of the world equities) then that fundamental case looks to be reversing here.


The case for the US dollar to reverse too is added to with the below contrarian Euro positioning and sentiment.


 Source: Nautilus

And this would fit with a reversal in gold which looks to be basing. Here is another angle on gold that suggests we are at a similar point to the secular bottom in gold at the end of 2000.


Source: Sentimentrader

Drawing in other evidence from previous posts, there is a compelling case for a major cross-asset reversal here, out of the USD and into gold and out of equities, particularly US equities.

In the very short term, yesterday’s US equities intraday reversal candle together with the Rydex spike, junk bonds drop and very precarious European indices technicals set up the potential for a follow through to the downside either today / early next week. My case is that this is the last peak in the topping process and if so we should see at least one large voluminous down-day over the next several sessions. If instead we churn sideways in a range for the remainder of November then support would grow for an end-of-year peak, but with every man and his dog expecting positive Nov/Dec seasonality to take stocks higher the stage is set for the opposite, particularly as actual geomagnetism (the underlying source of seasonality) is trending downwards currently.

Cyclical / Secular

The short term first. The Dow Jones World stock index looks like this:


Source: Stockcharts

The current high is someway beneath the July/Sept highs and the lower high lower low trend in tact. The last week and a half has produced negative divergences in RSI and ULT and the previous highlighted instances add to the case for the rally imminently failing.

Bullish percent to put/call ratio and cyclical sector to defensives ratios also show a telling divergence since we turned into November, suggesting the edging up in price over the last few days will be reversed.


By cross-referencing indicators I’ve previously explained why the most relevant analog puts us equivalent to November 2000, and I am still looking for the bar following this box to be delivered this week to mark the trend change:


Interestingly, precious metals and miners have built out a potential reversal base these last few sessions, and back in 2000 at the exact same point gold made its secular bear market low, marked above.

We can cross-reference this with the gold/miners ratio that has reached the same washout level as 2000:


 Source: ShortSideOfLong

And gold miners sentiment which also reached bottoming levels:

Screen Shot 2014-11-05 at 12.54.51

With equities at the end of their bull market topping process, this set-up looks compelling as the launch point for gold into a new cyclical bull within an ongoing secular bull. By demographics, the cyclical bear in gold from 2011-2014 has just been a pause in a longer term bull market that should extend to the next solar maximum of circa 2025.


On the flip side of that, equities should now enter a new cyclical bear within an ongoing secular bear. One of the most common misperceptions out there is that stocks are in a new secular bull market. But demographics, inflation-adjusted stocks and p/e valuations reveal otherwise:

Screen Shot 2014-11-11 at 19.05.37

Viewing stocks relative to treasuries reveals more clearly the major tops and bottoms. Below, RSI and TSI show an early warning system for the major peaks. They flagged again by the end of 2013 and have since been divergent, as stocks:bonds has made an identifiable topping process.

11nov22The Nasdaq 100 index has had the most parabolic shape of all the major stock indices, but we can see below the same telltale buy/sell pressure and momentum divergences as the previous major peaks have been in place since the turn of July 2014. Those divergences lasted 3-5 months in the earlier events, and the current divergence has now been 4 months.


Finally for today, here are the smoothed solar maxima of the last 11 cycles plotted against Q ratio valuation for equities. Barring the 2000 outlier it has reached the same topping valuation level here at the 2014 solar max as previous solar cycle highs, and should be destined for a true washout level of circa 0.3 before the secular equities bear is over.


Underlying chart: Doug Short 

Cross Asset Position

No reversal yesterday in equities but I maintain it has to be close at hand.

The Nasdaq added another day to its small sideways range. RSI divergence argues the next move should be down.

11nov8Source: Stockcharts

The SP500 is at the top of its megaphone pattern and the Dow has edged above it. Gold miners made a megaphone top in 2011 and they also edged out above it, before reversing:

11nov2The combined reading of II plus AAII sentiment is the highest on record, which casts doubt on the fuel for higher prices in equities.

11nov3Source: Lance Roberts

Positioning is extreme in the US dollar, sentiment is extreme, and there is an RSI divergence between the two recent peaks.

11nov15 11nov16

Source: Acting-Man

Gold miners bullish percent reached zero and Friday saw a voluminous bounce. Positioning in gold is also extreme and contrarian:


Source: Acting-Man

Sentiment plus oversold conditions in commodities argue for a broader reversal too:

11nov12 11nov13

Source: Emma Masterson

Plus positioning in treasuries remains at elevated levels more in keeping with a bottom in treasuries than a top:


Source: Zero Hedge

Add all these together and there is a compelling set-up for a major reversal out of equities and the US dollar and into gold, miners, treasuries and maybe other commodities too. If gold and miners can hold above Friday’s low then I believe the move kicked off at Friday’s full moon, but we really should see supportive developments a.s.a.p. if so. There is a geomagnetic storm in progress and the cumulative geomagnetic trend remains down, so the underlying pressure is negative on risk assets.

Here’s a look at buy/sell pressure and momentum indicators for US equities. There have been 6 major distribution days in 2014 and no major accumulation days since October 2013. This suggests underlying enduring smart selling pressure despite the higher prices. Also reflective of this are the negative divergences in the two money flow indexes CMF and MFI:


MFI has been divergent since the turn of July, which puts us on borrowed time for stocks to peak, but CMF shows anomalous long divergence since way back in mid-2013, which I suggest shows the atypically long mania in prices.

The Chaikin oscillator and ULT momentum indicator show the same anomalously long divergence, this time since the start of 2013. I don’t believe these indicators are broken, but rather they again reflect the strength and duration of the mania this time, which in turn suggests a major crash lies ahead.


There are multiple other indicators that reveal the mania in stocks began at the start of 2013 and is now almost two years old. Phenomenal and historic.

If we look back at the Nasdaq into its 2000 peak, to compare manias, then those two ChiOsc and ULT indicators still only made a normal 3-month leading divergence. Their divergence versus the Nasdaq in 2014 is around 12 months, which is unprecedented.

10nov8So what does that mean? I believe these indicators further cement the overall picture of one serious mega-mania which is on borrowed time and heading for a major crash. It’s just a matter of patience and money management in negotiating the short term.

So far in November we don’t see a renewed ramp up in sunspots and the probability remains that the smoothed solar max is behind us.

a2Meanwhile, the collective evidence from sentiment, allocations, negative divergences, cross-asset positioning and other market indicators make it improbable that stocks can grind higher into year end or Q1 2015 for an anomalous late peak relative to the solar max. Rather, the evidence still supports a renewed turn down in equities this week and a significant down November, keeping the bear trends in European indices in tact and completing the megaphone tops in US large caps.

Simply put, I have no case at all for higher prices from here whilst I have a multi-angled cross-referenced case for equities to turn down without delay in a last gasp of the topping process that began 1st Jan. It is what it is. So on we go, it’s a partial holiday in the US today, but stocks and futures are open whilst bonds closed.

In Perspective

1. The start of January brought the shift to defensives, measured here in 4 ways: stocks to bonds ratio, cyclical to defensive sector ratio, small caps to all caps ratio and high yield to treasuries ratio.

9nov10Source: Stockcharts

2. The best performing sectors in 2014 all year have been health care and utilities, the two defensive sectors that perform best once the stock market peak is in.

9nov15Source: Macromon

3. The yield curve, measured here by 2y versus 10 yr treasuries and 2m versus 10 yr treasuries, has flattened ever since 1st Jan. We won’t get an inverted yield curve under ZIRP so flattening takes over as a topping warning.

9nov114. The best performing asset class in 2014 has been government bonds and the chart below shows this has been a global phenomenon (Germany, Japan, UK and US quoted by 10 yr yields (bonds inverted)), again since Jan 1st.

9nov85. Looking at stock market breadth, deterioration has been under way since almost the turn of the year in the Nasdaq indices.

9nov126. Whilst the NYSE, SP500 and Dow picture reveals breadth issues since the turn of July. We can also see there was an earlier bad-breadth run into the turn of 2014 which was subsequently repaired: like an attempt at a bull market peak but it wasn’t quite ready.

9nov137. Turning to sentiment, NAAIM manager exposure to equities has been dwindling since Jan 1st, whilst Investors Intelligence bulls made a double peak 1 Jan and start of July, since which they have dwindled too. Meanwhile, Vix made its low at the start of July and has been in an uptrend since then and Skew has stayed elevated for a year, with triple peaks in Jan, July and Sept.

9nov148. Commodities have been in sharp decline since the turn of July, as the US dollar sharply rallied, in a deflationary wave.

9nov69. For US earnings, a rising dollar and falling oil prices is overall doubly negative. Q4 earnings growth has recently been accordingly cut in half to 4.5% and sales growth cut in half to 2.2%. Earnings growth has missed target in each of the first 3 quarters of this year. The average of 5 valuations puts US equities the joint second highest in history after the 2000 mania. There is a big gulf between price and earnings.

10. Global stock indices look like this. European indices peaked out by the start of July and have since made a lower high and lower low, the definition of a bear trend.


11. The Hang Seng, Bovespa, Kospi and Australian index all made peaks at the start of September.


12. However, the US SP500, Dow and Nasdaq, as well as the Japanese Nikkei have all made new marginal highs since then.


13. The Russell 2000 double topped at the start of March and start of July, whilst the overall Dow Jones World double topped at the start of July and start of September. Junk bonds and leveraged loans also made July/Sept double tops and lower highs and lows since.


Across all the above charts in this post, three dates consistently stand out: the start of Jan, start of July and start of Sept. The topping process began the 1st January and additionally the Sornette bubble end flagged on the SP500 at the start of July and on Technology at the start of September. Insider selling peaked at the turn of the year and we have seen six major distribution days since then without any major accumulation days. Put/call ratio, bullish percent and the summation index additionally point to the relevance of the start of Jan and start of July:


Now draw in the solar cycle. The likely smoothed maximum was April 2014 (based on SIDC, Solen, NOAA, IPS and polar switch). Here’s why the smoothed sunspot maximum is important, it generates peak speculation events:


Either side of the expected smoothed solar maximum of April 2014, we have two seasonal peaks (inverted geomagnetism peaks) of turn-of-year and mid-year:


Homing in on the new moons of those two periods we get specific dates for a triple peak confluence of speculation/optimism: 1st January 2014 and 27th June 2014. I believe this is a compelling cross-reference for all the market charts above. We see multiple index and indicator peaks clustering at the very start of Jan and very start of July (both within two trading days of the new moon).

So I maintain this is the true picture of where we are, mirrored on the last solar maximum stock market peak of 2000:



And I still expect stocks to reverse here like they did at the same point in 2000:


We have had several days of small range consolidation with a slight upward bias (averaging the 4 US indices), whilst sentiment and allocations are bumping up against invisible limits. I therefore believe the next move is down, like the subsequent red candle above. Furthermore, I believe that is then the end of the topping process in global equities. It effectively ended at the start of July, and really did for various indices shown further up, including the overall Dow World. But we have now seen new highs again in US large caps which on the surface look bullish, but underneath not.

I believe the unprecedented extremes in levels and durations of price levitation, sentiment, allocations, leverage, tail-risk, and negative divergences mean a crash is coming. Like an elastic band stretched to the limit. The superficial 2014 bull trend in US large caps is nothing of the sort under the surface, but has served to fool most into a false sense of security. This last rally from October to November has sucked everyone in again (sentiment, allocations) and we have extreme lop-sidedness in the markets. I believe equities will tip over here and fall hard and fast, with no reprieve this time. No dragging on until year end: the megaphone formations on the US large caps are ripe for resolution now and overbought/overbullish indicators support this.


The October monthly hanging man candles suggest November should be a significant down month. I maintain the view that the evidence is too compelling now for consideration of an alternative scenario. If you remove me from the equation then there is an awful lot of fact in the above charts and many other recent charts that I have relayed that a bull needs to explain away. Simply, too many. However, we can argue there is a middle position in accepting all the warning flags but predicting prices can still yet go higher into year end under dual positive seasonality. Perhaps a scenario of increasingly thin volume and increasingly bad health but still scraping higher.

The problem with that is that whether we look at Nymo, Rydex, II, AAII, RSI or the ascent and shape of the Oct-Nov rally we see the same tell: exhaustion. Stimulative action from the BOJ and ECB in recent days have failed to catapult global equities higher. So I believe the middle position’s best hope is that equities retrace away from these exhaustion levels but then quickly washout, to enable a December rally into year end. However, I would refer you again to our positioning in the topping process. There is no case for another rally. If we tip over this week I believe that is it: equities won’t come back again. This is what I expect to happen.

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