Capitulative breadth now down to 6 on the rally in stocks, but still suggestive of some more upside for equities to properly neutralise it.


Source: Rob Hannah

Today is the full moon, and lunar phasing for 2015 looks like this:


Not all have been compelling turns but nonetheless shorting each new moon and going long on each full moon would so far have made a profit every time this year. Historically, lunar phasing has worked better in periods of sideways chop like this. Based purely on the moon, we could expect stocks to peak out again in mid-August. But at some point this price range will break one way or the other.

As you know there have been many technical indicators for a bull market peak, suggesting that price range to be a topping process. Here are two more from Dana Lyons:

31juli13 31juli10Source: Dana Lyons

Valuations are crazy high:


And US small caps are the most expensive they’ve ever been.



Source: Meb Faber

But whilst stocks continue to levitate the key question remains whether excesses in valuations, sentiment, allocations and leverage need to be reassessed in the context of ZIRP and QE, and don’t pose the same threat as typically historically. That analysis is further complicated by not having experienced this combination of negligible rates, low inflation, low growth and high debt for over half a century.

However, the reason for ZIRP and QE is that the world economy has been in serious trouble since 2008, with demographic trends in the major nations all having turned negative. Below we can see the break in the long term trends of US growth and employment and how they remain broken:

31juli11 31juli12


Source: Scott Grannis

So, either (1) the stock market is majorly divorced from reality and reverting to mean soon, or (2) the economy finally picks up from here and catches up with stocks having led, or (3) this is a new norm skewed by central banks whereby current indicators of a top that resemble 2007, 2000 and others no longer apply. You know where I stand on this question, but the sideways price range of 2015 has yet to validate or invalidate any of the options.

Leading indicators still largely point to a pick up now and towards the end of 2015.

Screen Shot 2015-07-31 at 08.31.10

Source: Variant Perception

Whereas China looks to be in trouble.


Source: Cam Hui


Source: CNN

Biotech is also wobbling currently, testing the bottom of the parabolic. So are these the last gasps of a topping process? Or is the price range of 2015 in broad equities the pause that refreshes the bull? We saw some evidence of reset by the end of last week: AAII sentiment, bullish percent, capitulative breadth, put-call all suggestive of a significant low. However, in the bigger picture historically, these look like a low in a bear market, i.e. from which a counter rally erupts before lower lows ahead. What’s confusing is their occurrence just 5% from the highs in nominal terms.

Right now I expect stocks can move higher before they move lower again. So I am waiting and watching for evidence they are rolling over again. The key is whether they do so before they reach the July highs and then the May highs. At the same time I am looking for a lower low in gold and miners on positive divergence.

We still have a host of indicators pointing to an underlying peak around the solar maximum of last year:

31juli20 31juli22 31juli30That June/July 2014 peak remains in play unless we see those indicators reverse and reset. 12 months later they still haven’t. So I remain of the opinion that equities will ultimately break downwards. It’s just a matter of gauging the shorter term waves. On which note I have to prudently add that I can’t rule out a final move up to new highs before a collapse. It happened in 1987 and 1929. A range trade over the first half of the year and then a final rally to a peak in Aug or Sept:

31juli70 31juli90

Source: Financial-Spread-Betting

That extreme reading in capitulative breadth may support this occurring, so have to stay open minded. Hence the importance of watching indicators and price for evidence of a roll over before the July highs, then the May highs.





A bounce looks likely here, and a significant one at that.

Capitulative breadth (Rob Hannah) hit 20 yesterday, which is extreme. See other extreme readings here:


In the past, they typically occurred after major falls, but October last year and now have been more shallow. The Dow fell yesterday to just 3% off its July peak or 5% off its May peak. Capitulative breadth is made up of a count of large cap stocks in the index showing capitulative selling. Quite why this has occurred after only shallow nominal price falls is unclear.

Also, bullish percent (SPX) reached a level suggestive of a low.

28juli2Source: Urban Camel

Plus, CPC on Friday hit an extreme also only seen at previous lows, and the recent little cluster of such readings further points to a significant bounce.

28juli3Source: Stockcharts

Draw it all together and it looks like the Dow (and other indices) is going to get a decent bounce here at long term rising support.

Screen Shot 2015-07-28 at 06.56.05On the flip side of the equation, gold miners bullish percent hit zero again, like the boxes in the past shown:

24juli1But note the norm in the past was for a lower low on positive divergence before a true bounce.

Therefore, it appears likely we will see a rally back upwards in broad stocks imminently whilst gold miners go on to form a lower low on positive divergence. The bigger picture of a major top in equities and a major bottom in gold remains unchanged.




No Change

The underlying picture still looks the same. Stocks have rallied back up but there are so many persistent divergences that aren’t supportive. Here breadth, strength and bullish percent all look like the last gasps in 2011.

17juli1The Nasdaq has outperformed the other indices to make new highs with the rally back up, but breadth is flagging a clear warning.


Really, there are so many divergent indicators on US stocks it’s take your pick.



Meanwhile, gold dropped again but the picture is the reverse, with sentiment and positioning at contrarian levels suggestive of a bottom.


Source: Sentimentrader / King World

Therefore, not much expansion needed. We are through the new moon and moving beyond the seasonal geomagnetic peak, and all the indicators are calling time (namely, major reversals in both classes). So just watching for the turn again to resume the attack and that should be the final move.


Topping Process

Some big moves in commodities, China stocks, Japan, and a change in character in US equities whereby nothing is currently working for the bulls. It begs the question where we are in the topping process, specifically is the market going to fall apart from here, or do we yet get another rally back up to a lower high.

Dow Jones World looks like this:

9juli2Source: Stockcharts

Like other recent major peaks, it shows a topping price pattern with negative divergences on the second higher high. We can pinpoint the first peak in the topping process as June/July last year:


Junk bonds, oil and financial conditions all peaked out then too. The second peak in nominal equities was May 2015, making for a 10 month topping process. That’s not dissimilar in duration to 2000 and 2007.

If we look at near term clues, the triple confluence of spikes in CPCE, Trin and Vix:Vxv to current levels (specifically all three together) hasn’t been seen since the breakdown in 2011.

9juli1Their spiking could represent a near term low for equities, from which they get a decent bounce now. Or, they could represent the first stage of a large fear move, like in 2011. Right now the SP500 is just 4% off its high, whilst in 2011 it made a 19% correction.

If we look at the bigger picture, all major indices around the world are now off their highs, most topping out in May or June. Is this about news out of Greece and China? They are providing a narrative for short term buffeting, but we can see equities have been in a typical topping process for a year. The under the hood peak was around last year’s solar max, as it was in 2000. Then as now stocks continued to levitate for several months following, whilst internals deteriorated, and the writing was on the wall. We know that allocations, sentiment, valuations and leverage have all been at saturation levels for some time. I suggest that the worries about Greece and China have initiated a trickle of bulls over to the bear camp. At some point this will become a rush and that’s when panic selling will make for swift, harsh falls. If you don’t believe that, then this will be the first time from such levels of leverage, valuations, sentiment and allocations that we don’t see a crash period averaging around 6 weeks taking around 35% off stock prices.

A fairly common topping pattern at major peaks in the past was primary distribution – peak (shake out) – second chance peak – crash, normally lasting around 6-8 months, like this:

9juli12Source: Financial-Spread-Betting

If we think of it as less of a roadmap and more of similar waves of crowd psychology playing out, it’s the ‘second chance’ which is my focus, namely are we though that or is it still to come?

If we are through it, then the market ought to quickly fall apart here, with any up days quickly engulfed. That’s kind of what we have been seeing the last 2 weeks. Plus, the heavy falls in China and commodities could be the initation of wider heavy falls. On the flip side, those spikes in near term indicators could provide a bottom here for stocks from which to rally back up into mid or late July, making a second chance peak ahead.

So what am I doing? Attacking but with stops (short Dow, RUT, IBB, long gold). If we are post second chance then there is no time to lose. The stock market should rapidly fall apart with increasingly big lurches downwards. On the other hand, if we have a second chance rally back up, I don’t want to be too exposed and save my big positioning for a little longer.

Lastly, might all this be way off and we are still safely in a bull market? Well, financial conditions just turned negative. The Ted spread is now higher than it was when stocks tanked in 2011. US economic surprises are still negative and ECRI leading indicators are flirting with zero. Earnings season starts this week with predicted 4.5% yoy falls in both earnings and revenues. With sentiment, allocations, valuations and leverage so extreme for such a prolonged period now, even a safe bull market is more likely to see a sharp correction here, something like 1987 or 2011. But I don’t believe that: the case is much stronger for a fully fledged bear market, within which Biotech retraces its whole move of the last 2.5 years.

Gold And Gold Miners

Gold as an investment: not straight forward. It was the original money, valued for its rare, precious and indestructible qualities. Fiat money then took over, but convertible to gold. Now, fiat money is purely a game of confidence, and gold floats freely. Gold is a non-yielding, non-productive asset so comes into favour (jewellery demand aside) only under specific conditions, namely when real interest rates are negative (which can be under inflation or deflation), when fiat money is being diluted (such as by policies of inflation or money-printing), when debt is growing significantly (as this is money borrowed from the future) or when other assets are in decline (which chiefly occurs due to demographic trends).

Right now, real interest rates are borderline negative, public debt is at record levels, QE has been rolled out across the developed world and demographics are united negative (i.e. pro gold) in the major nations. So why isn’t gold going up?

By demographics and solar cycles, gold should be in a secular bull from 2000 through to circa 2025, the next solar max.

3juli10 3juli18Therefore, gold’s bear market from 2011 to 2015 would be a cyclical bear within an ongoing secular bull, similar to as occurred in the mid-70s. Gold has been making a long basing, as evidenced in the TSI below, over the same period that stocks have been making a topping mania. When stocks start to fall in earnest, then I expect gold to take off, in a new cyclical bull within an ongoing secular bull.


Source: Stockcharts

A bear market in equities would, through the wealth effect, tip the fragile economy into a deflationary recession, which should then result in negative real rates, additional fiat dilution by central banks, rising nominal debt levels and cash-flow looking for a safe haven. All favourable for gold.

However, contrast that with the common perception currently, which is that we are in a young secular bull in equities, with the economy early in the cycle and about to start growing strongly, and a trend of increasingly positive real rates ahead. Once this perception is revealed to be a misunderstanding, then the narrow interest in gold will become much broader.

A near term look at gold technicals suggests one more washout to the downside may be needed, as evidenced here in the gold put/call. The short interest is already at contrarian levels.

2juli7 2juli6

Source: The Daily Gold / CFTC

I would see this as fitting with a last rally back up in equities into the mid-July new moon (to a lower high), which was predicted by CPCE and Vix/Vxv as highlighted two posts back. I therefore lightened up my equities shorts and gold longs after this week’s full moon. Earnings season starts next week and properly gets going the week after. With a predicted 4.5% yoy drop in both earnings and sales for Q2, this provides a backdrop for stocks to topple over from that second week in July, and in turn gold to finally wake up. I believe that point will mark the definitive trend change in both and currently see that as the point of max attack.

Gold miners sit between the two asset classes: as both equities and tied to gold. In the last 4 years they have very much sided with the latter, declining in the face of a rising stock market. But notably they have performed much worse than gold, as shown in GDX:GLD below.

2juli1In fact, on the long term view, the miners to gold ratio is the lowest its ever been.

Screen Shot 2015-07-02 at 06.23.49Source: Incrementum

However, the major miners have been diluting their shares, making them not the bargain they initially seem.

2juli10Source: Seeking Alpha

Additionally, there is a question mark over how they might perform under sharp stock market falls. With few historic reference points, we can at best draw on the 1929 experience whereby the gold miners didn’t escape the initial falls but broke away later once the stocks bear was more clearly cemented. For these reasons, I stick with gold itself as the pure play and will pass on the miners.


Charts Update

It’s a picture of a major market top. The ‘real’ peak was mid-2014 at the solar max, as it was at the last solar max of Spring 2000. The supports for price since mid-2014 have been dismantled and evidence suggests the nominal price peak in equities occurred May 2015. Annotated, so no further comments.

Screen Shot 2015-07-01 at 08.55.34 1juli6 1juli4 1juli81juli2 1juli1