It’s been a while, so here’s how things now stand.
1. The topping process kicked off at the turn of the year with a gradual shift to defensives, as represented here by stocks:bonds, consumer discretionary:utilities, high yield:treasuries and small caps:all caps.
2. The shift to defensives was a global phenomenon, shown here by German, Japanese and UK bond yields, as well as US.
3. The smoothed solar maximum is likely to have been April 2014. Historically, peak speculation and appetite for risk assets has topped close to that:
4. In keeping with that, margin debt peaked in February, the commodities index peaked in April and certain breadth measures peaked around that time:
5. Then either side of that, the move to defensives occurred as of January and the price topping formation in equities took place in the window from July to November, with US large cap stock prices rising in a megaphone formation whilst the remaining supports for equities were dismantled and many flags were raised. Here shown are breadth, volatility, bullishness, junk bonds and leveraged loans as examples.
6. Considering the final thrust to the peak to be the rally from October to the start of December, then its size and duration fits in well with similar topping thrusts from history:
2000: 17% in 23 days
2007: 15% in 39 days
2010: 16% in 55 days
2014: 14.5% in 37 days
So is this finally it? Dare we dream that equities have topped out and are now in a bear market? Yes we do.
7. A key change in the last two weeks has been that the remaining leaders appear to have finally reversed, such as the Sensex, Nasdaq 100, Apple, USD/JPY and the Nikkei. These are tentative reversals but the point is they have aligned in the declines.
8. Looking at the bigger picture, households are about as exposed to equities are they likely to be (given no demographic tailwind):
9. Dittto, valuations are as high as they likely to reach:
10. Sentiment is as lop-sided as it could be:
11. Leading indicators for the US are negative:
12. Corporate earnings for Q4 have been sharply revised downwards due to both the high dollar and falling oil price.
13. Put/Call ratio is signalling further price declines:
14. Stocks are nowhere near oversold yet:
15. However, Rob Hannah’s capitulative breadth hit 5 at the close of the week, suggesting more selling Monday/Tuesday could take this to exhaustion levels.
16. Which brings us to the phenomenon I have covered before: selling right into the close on Friday can trigger steeper selling on Monday due to weekend reflection. Is this finally going to happen? Allocations, sentiment and Skew are all set for it to occur.
17. But what about the favourable seasonality of year end, the ‘Santa rally’ in the second half of December?:
There is upward pressure into the Dec 22 new moon and a limited history of bull market peaks occurring near the last trading day of the year. Offsetting that, we have downward real geomagnetism pressure at this time of year, and that megaphone price topping formation which ought to now have a destiny with the lower boundary given the overthrow turned out to be just that. Meanwhile gold has built out a compelling bottom and is ready for a rally at the expense of stocks.
The whole topping process is already on borrowed time versus the solar maximum, and indices such as RUT and DAX stretched about as far as they could again in November without jeopardising the topping process. Therefore, I see reasonable odds that the Santa rally won’t happen. In mirror topping years 2000 and 2007, December was a down month both times.
Let’s see if Monday opens the selling floodgates. The key should be a gap down open, with weakness starting from early in Asia/Europe. Should stocks alternatively garner support again then maybe they can hold up into the end of Dec before finally rolling over. But it’s high time we saw weakness into Friday’s close follow through, against that sentiment/allocation/skew backdrop.