The Dow and SP500 are combined flat for the year and the 7 month price range has resulted in bollinger bands that are the closest in 20 years. Behind the scenes we see evidence of a major peak in equities, making the range a likely topping process.
Source: Dana Lyons
Yet we are also seeing signs of a significant bottom.
Data source: Rob Hannah
Source: Dana Lyons
These bottoming signals have formed less than 5% from the highs. So are they a springboard for a break upwards out of the price range before stocks top out? It’s one possibility.
Note that previous incidences of the topping indicators gave rise to at least a 15% sell off, whether it be more like 2011, 2010, 2007 or 2000 in nature. Meanwhile, the bottoming indicators often formed at bear market pauses, at selling exhaustion points. Has a bear market begun then? It’s another possibility, but the shallowness so far of the selling is odd.
What’s also confusing is that some indicators have washed out at this point whereas others remain at contrarian levels, such as Vix. Plus note that some indicators have produced a clustering of extremes for 12 months now, stuck at levels from which mean reversion would have historically fairly swiftly occurred. All told, it’s more history in the making and makes it difficult to call the outcome with high confidence.
Buybacks peaked out in Q1 2014, IPOs in Q3 2014. Data shows that money flows into equities have been flat in this cyclical bull, in line with demographic predictions. Without new buying sources, the bull has been fuelled by buybacks and existing participants leveraging up. With buybacks decreasing, the bull (if still in progress) is reliant on continued increases in leverage.
As things stand right now, stocks may need to move higher to neutralise those bottoming indicators. Therefore I can’t rule out the possibility of a final move higher, an overthrow, before a true rollover. However, stocks are also overdue a deep and sharp correction and the clustering of indicators, both top and bottom, within such a tight price range, could also produce a swift move lower, before a partial retrace upwards. It may be that fuel has been exhausted and certain indicators are therefore not as contrarian as they may be perceived. In short, right now I’m watching and waiting to see which we way we break before attacking again.