I’m back and refreshed. Thanks for all the messages, and for all the comments in my absence. Here is the big picture.
1. Primary shift to defensives and away from risk occurred as of January 2014, as measured by stocks to bonds, cyclical to defensive sectors, small caps to all caps and high yield to treasury bonds. Clock ticking from that point.
2. Solar maximum looks to have occurred around April 2014, marking peak speculation. Equities mania on borrowed time thereafter.
3. Game over effective start of July. World equities, crude oil, high yield bonds and the US dollar all turned at that point. Deflation in charge.
5. Those twin peaks in risk appetite at the start of the 2014 and mid-year fit the seasonal model which is from the influence of geomagnetism:
6. Which sets us up for a final peak at the end of Dec 2014 / start of Jan 2015 for those remaining stock indices which have yet to top. I referred to this as my worst case scenario (latest peak) in 2014.
7. Developments in December support this now happening: sharpening falls in crude and government bond yields, flattening of yield curves, blow-off top in equities allocations.
8. A new bear market in stocks will be a cyclical bear within an ongoing secular bear market. No new secular bull market as many believe.
9. This secular position is dictated by demographics.
10. The other play from this is that gold should enter a new cyclical bull within an ongoing secular bull, and this is supported by recent signals such as miners:gold ratio, gold/miners sentiment and price basing patterns.
Source: Glenn Morton / My projections
11. A sampling of stock indices from around the world, below, shows 2014 has been clearly either a large topping process or a large consolidation range. If the latter, then we should have seen excesses in valuations, sentiment, allocations and leverage worked off with time rather than price, yet all those measures remain highly stretched, suggesting this is a topping process.
13. The peak-to-date in margin debt remains close to the solar maximum. This leverage, along with major extremes in sentiment, allocations, tail-risk, valuations and our post-solar-maximum status, is the set-up for a market crash. To repeat what I have said before, until/unless these measures are reset without a crash, then history dictates that is the most likely outcome. Crashes don’t occur often, but when they do, the set-up looks like the current.
14. Leading indicators and the longer term stocks:bonds ratio resemble 2000, 2007 or 2011, suggesting a minimum 19% drop in equities. This is the percentage figure I quoted as my general target for short positions because, stretching the view to the last 100 years, this is the minimum we should expect without being greedy by aggregating various angles on the market. To be clear though, the set-up is compelling for a bear market, not just a sharp correction, so I refer you to the secular bear chart above for the bigger projection.
15. Which brings us to the value of history as our guide, because 2014 taught us one key lesson: 100 years of reference points may not be enough, we need to allow for the unprecedented. An aggregation of angles shows how unprecedented 2014 became:
So what caused this? The most common view is that central banks brought this about with their policies of ZIRP and QE and unwavering verbal support. However, I maintain that ‘central bank policy trumps all’ was rather the mantra for this solar maximum mania than the driver. To prove this, we should now see equities collapse and gold rise despite central banks, and that is the final part of the real time test for the power of the solar maximum. If I am incorrect, then equities should continue their bull market in 2015 as central banks policies overrule. However, I refer you back to all the topping indicators and angles in equities that have amassed, together with the examples of 1930s US and 1990s Japan which revealed central banks’ true relative impotence. Ask yourself if typing numbers into a computer (ZIRP and QE) and saying a few soothing words can really work.
The crazy stretching of indicators delivered this year made for the most difficult year of trading since 2000, the last solar maximum. So if I can make one prediction for 2015, it is that it will be easier and more predictable. I am short equities and long gold and expect patience to be finally rewarded. I wish you all the best for the coming year.