Short Term US Update

The breakout in equities is likely to become a fake-out or short final up leg, based on historical indicator patterns. Breadth and strength have negatively diverged:

26apri19Source: Stockcharts

Volatility relativity also suggests a correction or consolidation should now come to pass:

26apri1Source: Fat-Pitch

‘Smart money’ bearishness is off the scale:

26apri20Source: Dana Lyons

US economic data surprises remains deeply negative. Two updates from this week:


Source: Sober Look

26apri5Source: Alhambra

Blended earnings for Q1 are so far better than expected: -2.8% versus -4.6%, but of course still shrinking. Blended revenues are worst than expected -3.5% versus -2.6%. ECRI leading indicators have improved but are still negative.

On the bullish side, leverage has been on the increase again.

26apri7Source: DShort

And real narrow money indicators point to economic improvement ahead.

26apri3Source: Moneymovesmarkets

There are two scenarios currently in my mind. My first and highest probability scenario is as per the first several charts above plus all the charts in my last post, namely that stocks are right at the end of a major topping process, and under the hood they already topped. That means last week’s apparent price breakout will quickly fail. I have smallish short Dow and long gold positions aligned to this, looking to build on reversal and momentum.

My secondary or outsider scenario is that US stocks have yet to join Chinese and German stock indices in a parabolic blow off ending pattern, fuelled by potential improvement in economic fortunes/prospects into summer-end. This would be similar to the lag of the Sep 1929 stocks max versus April 1928 solar max, a kind of maximum outsider in the historic range. Should this appear to be occurring I would step aside and continue to try to identify the top.

Ultimately, as things stand right now, I consider all the key supports for the bull have been removed. Earnings, economic data, smart money, allocations, sentiment, valuations, solar max, geomagnetism. We are left with dumb money on leverage, plus expectations that both the economy and earnings will recover in the remainder of 2015. We might consider the latter is key: whether data does improve again – and maybe it is. However, recall the evidence shows that the stock market leads the economy rather than the other way round. The wealth effect of the stock market. The question then is what will cause participants to pull the plug on equities? We are now in a phase of ultra-complacency where most traders can see nothing that would cause that to happen. Yet that ultra-complacency makes us at highest risk of the collapse.

A final chart: the collection of countries now paying negative returns on government bonds. Swiss 10-year bonds are amazingly now paying a guaranteed negative return. It should be clear that when money is being invested in a bond paying an assured loss for several years then it is because deflation, recession and relatively larger losses in other asset classes are expected. Either that, or investors are making a foolish mistake. So who has it right, stocks or bonds? Smart money flows, valuations, allocations and sentiment all continue to show the bubble is in stocks, not bonds. Bonds and commodities are accurately reflecting the harsh reality of current global demographics, trade, and economics, whilst equities have become a ponzi scheme divorced from fundamentals.


Source: Emma Masterson







All Change At The Solar Max

1. The solar maximum peaked out mid-2014


2. Geomagnetism intensified since then

19apri313. That’s twin negatives for risk assets, reflected in the drop in commodities


4. It’s also twin negatives for the economy, reflected in data surprises


Source: Charlie Bilello



Source: Alhambra

5. And in earnings

Screen Shot 2015-04-19 at 05.40.59

Source: Factset

6. And in Fed money printing



Source: Spiralcalendar

7. And deteriorating financial conditions


Source: WSJScreen Shot 2015-04-19 at 05.19.44

Source: Bloomberg

8. Although nominal stocks continue to appear to be in a bull market, measured versus bonds and dollar the top appears to have formed at the same time as all the above

19apri2 19apri3

Source: Stockcharts

9. Plus a look at breadth, volatility and risk appetite also suggests a reversal has occurred


10. European stocks appear to be making a blow-off top at high valuations

19apri15 19apri21

 Source: Gavekal

11. And forward earnings for all the main regions bar Japan (the only major that has a positive current demographic window) are negative


Source: Shortsideoflong

In short, I still see strong evidence for a reversal in financial markets and economy fitting with last year’s solar maximum, with the final piece of the puzzle being the missing sharp drop in nominal equities. Whilst Friday’s sharp down candle serves only to keep us in a sideways price range, it was another failure high attempt in US equities and I expect will form part of the final roll over in stocks, to fulfil what all the charts above are telling us. Sentiment and allocations remain maxed out:


Source: Charlie Bilello

19apri5Source: Stockcharts

Big Picture USA

The solar maximum peaked out mid-2014:

Screen Shot 2015-04-05 at 07.15.14Source: Solen

Speculation should peak out with it, and that appears to have been the case with trend changes in stocks, commodities, dollar and treasury bonds:

5apri50Source: Stockcharts

The speculative target into the solar maximum was primarily equities, as evidenced in allocations, sentiment and (here) valuations:


Source: DShort

Stocks are now at risk of a sharp reversal, due to the twin supports for lofty valuations of earnings and (here) economic data having turned negative:


Source: Not_Jim_Cramer

However, analysts are predicting both will improve as 2015 progresses. The first chart shows they have been downgrading Q1 GDP forecasts whilst slightly upgrading the next 3 quarters. The second chart shows they expect a significant recovery in earnings in H2 2015:


Source: FT5apri16Source: Charlie Bilello

Narrow money trends are also predicting an economic recovery by H2 2015, in part due to the benefits of lower commodity prices.


Source: Moneymovesmarkets

Counter to that, a range of economic data has already dropped into recessionary levels:

5apri1 5apri2 5apri3Source: Alhambra

The latter two charts play into the global picture, which is one of dwindling world trade:


Source: ATimes5apri8Source: Stockcharts

Financial stress in the US is not yet apparent but has crept up in a way similar to 2011 pre stock market falls:

5apri11Source: Charlie Bilello

Supportive to the bull case still are cumulative advance-declines, outperformance of certain cyclical sectors and small caps in 2015, and a current rechallenging of 2014 highs in both leverage measures of margin debt and (here) leveraged loans:

5apri9Source: Stockcharts

However, most other indicators show continuing degradation and divergence.

5apri60Source: Stockcharts

So, piecing it together, I believe the key is whether earnings and the economy do recover again or whether we are in the early part of a negative spiral. Solar theory would argue the latter, whilst analyst opinion favours the former. Either the sharp falls in commodity prices are deflationary and recessionary, or they are to become a new form of easing as 2015 progresses, with positive benefits for the economy and most sector earnings.

I suggest it is unlikely stocks will advance whilst the reporting of Q1 earnings and economic data plays out. Rather, at such lofty valuations, we will need to see evidence of the anticipated improvement first. That sets the scene for either a meaningful correction here, or a sideways range trade in the weeks ahead.

My opinion remains the same: we are in the last gasps of a topping process in equities. We see ample evidence in both indicators and economic data of the shift in behaviour post-solar-max. The negative feedback looping is underway but needs a significant drop in equities to complete it. That should now come to pass, post Equinox and post-second-chance (last post). April is clearly a window for a meaningful drop, set against earnings reports beginning on Wed and anticipated further bad economic data.

If somehow stocks can hold up and range trade over the next several weeks whilst early evidence of a pick up in the US does start to trickle through then maybe this mania can continue for even longer. But I still find it extremely difficult to make a case for that.

The SP500 now needs to break down beneath the March lows. The divergences suggest this should occur.

5apri70Source: Stockcharts

Meanwhile, the commercial positioning on gold suggests a rally, which would fit with a drop in equities:

5apri5Source: Ispyetf