Indicator Updates

Posted on March 4, 2014 Posted in Indicators, Stocks40 Comments

Yesterday we saw a gap down in European and US stock markets on fears over Ukraine. Stocks then continued to sell off during market hours, but US stocks managed to recover some of the losses into the close. At the time of writing US futures are up on news that Putin ended military exercises near the Ukraine border. In fact, it had already been announced that those exercises would be completed today. News typically buffets the market but major trends and turns are set by other factors. If stock markets topped out on Friday then I suggest more relevant is the telling developments in indicators and the relevance of new moon peaks. If stocks have not yet topped out then it also won’t be due to news in the geopolitical arena, and we might point to the strength in cumulative advance-declines and renewed interest in cyclicals. So let’s put Ukraine to one side and see how things look after yesterday’s action.

1. SPY shows what looks like a bull trap. My suggestion last week was that the marginal new high on divergences would be the bait to lure in the last of the ‘dumb’ money. The rip in the overnight futures could set the scene for the gap left yesterday to be filled before downside renews. Volume and RSI divergence are bearish. Cyclicals repaired their January weakness, particularly in the last week, which is bullish, but there is a divergence with the higher high on SPY as shown. If SPY breaks higher again and cyclicals make a new high, then that top may be postponed.

Source (and other charts below): Stockcharts

2. The Nasdaq 100 (black line) has room to pull back further before retesting the January high, whilst the breadth divergence continues:

3. On the longer term view, the Nasdaq 100 is creeping along the top of its bull channel since 2009. If it can break up and away from here that would be a particularly bullish development, but I put higher probability on it being dragged back down into the channel, with the RSI divergence joining the breadth divergence.

4. The Dow and Nikkei continue to honour my 31 Dec top call, with their charts still mirroring the topping processes of the historical analogs. 31 Dec was 1 day from the new moon and at the inverted geomagnetic seasonal peak, and if Friday turns out to have marked the peaks in the other US indices then that was also one day from the new moon and at the turn into the seasonal lows of March and April.

5. My bull market peak call was also very much related to timing the solar maximum, and below are the updated sunspot charts of NOAA, SIDC and my own. It now looks more certain that the smoothed solar peak (blue line on NOAA, red line on SIDC) will turn out to be around now rather than the earlier peak of Feb 2012, which fits with speculation peaking out now rather than back then. Historically, markets tend to peak close to the smoothed solar maximum and on a monthly sunspot spike. A top at the end of December fits both, and we see evidence of accompanying developments as we turned the year such as Bitcoin peaking, trend reversals in treasuries and gold, and historically high trading volumes and insider selling in January. However, we actually made a higher monthly sunspot spike in February, and that could partially explain why other stock indices made higher highs in that month. NASA agree with NOAA and Solen in predicting the smoothed solar maximum to be behind us and waning from now, but SIDC still have that as one of two options, with the other being a mid-2014 smoothed maximum. If that turned out to be the case then that, for me, would be the strongest reason for bull market continuation until then. However, I consider this lower probability than the smoothed maximum turning out to be the end of 2013.

6. Gold and treasuries continue to outperform stocks and is supportive of the 31 Dec relevance:

7. Rydex cash levels and put/call 21 day average share similarities. They are not just at low levels consistent with market peaks, but at historically extreme low levels, that suggest high complacency, the kind of which could be a catalyst for the waterfall declines that I predict are imminent. The 2013 exuberance rally was key to generating these historic readings, whilst similarly postponing any meaningful correction into what I believe will be a super-correction. If we look at the the 2007 peak in the put/call chart we see less extreme complacency than now but also complacency resetting during the corrections in the topping process (the two spikes to over 1.2). This did not occur in the January 2014 sell-off and is another warning of an impending much deeper correction to come.

Source: Sentimentrader

8. Peak excess in equities is also reflected in these 3 charts. Retail investors have belatedly joined the party, as is typical at market tops, and global stock market capitalisation is back to 2007 peak levels whilst achieved on dwindling demographics in the major nations. We see lower overall trading volumes whilst investor net debt, real margin debt and margin debt to GDP (now at 2.72%) exceed 2007 and 2000 market top levels, i.e. less participants but more indebted and leveraged, and this fits with the historic complacency above.

Source: Ispyetf

Source: U KarlewitzSource: Scott Grannis

Biotech And Russell 2000

Posted on March 2, 2014March 2, 2014 Posted in Biotech, Indicators, Russell 2000, Stocks50 Comments

Just as the defining sector of the 2000 solar maximum speculative mania was Internet, a case can be made for both Small Caps and Biotech as defining manias at the current solar maximum. In 2000 the Nasdaq Composite made a parabolic blow-off and hit p/e >80 as companies were ‘revalued’ on expectations rather than earnings. The Russell 2K currently trades at p/e >80 and the index of Biotech companies trades at p/e>160, with both having a significant weighting of companies trading on expectations.

The Russell 2K trades at its most expensive historic valuation:

Source: Karla Tango

The Nasdaq Biotech sector is in a parabolic trajectory signalling imminent exhaustion:

Source: Blogspot

Marrying the two, the strength in the Russell 2K in 2014 has been dominated by Biotechs:

Source: Bespoke

Similarly the Nasdaq Composite has been significantly driven recently by Biotech strength. So a pop in the Biotech bubble would have significant ramifications for the Russell 2K and Nasdaq, and the wider markets.

On Friday, Biotech had a significant down day on high volume, having built up a negative divergence in RSI:

This occurred at the new moon and as we head into the inverted geomagnetic seasonal lows of March and April. Add in the near vertical trajectory of the parabolic on the longer term view and we have the potential for a top having occurred on Friday, but subject to follow through next week.

Similarly, the Russell 2K experienced a high volume reversal on Friday and shows other topping signals:

Source: Stocktwits

To further judge the likelihood of a top, a key question is: could the R2K and Biotechs rise materially higher yet? Whilst we cannot calculate a precise answer to that, we can look to various indicators to build up a case for a limit.

The Biotech sector has risen approx 150% in the last 2 years, which is very similar to the gain in the Nasdaq Composite from 1998-2000. Real margin debt and net investor credit have both now exceeded the 2000 market peak (and 2007 peak), whilst real margin debt to GDP is at the same level as the 2000 peak.

Source: DShort

Citigroup’s panic/euphoria model, which aggregates short interest, put/call ratio, retail money funds and more, is above 2007’s peak but remains some way off 2000’s mania; whilst their CEM model points to a market correction right ahead which would fit with Friday having marked a peak:

Source: Citi / Fat-Pitch

Sentiment as measured by Investors Intelligence with 10 week smoothing is above or at levels that have previously marked tops, with an exception in 1986-7 where the market first rallied higher for several months before ultimately crashing.

Source: CMG Wealth

Solen’s updated solar cycle progress and prediction chart still suggests a peak at the end of 2013, which is consistent with the Dow and Nikkei having topped out then and other indices now rolling over to join, and my own daily sunspots chart also reflects this:

Source: Solen

The waning of the solar maximum has historically given rise to a recession in the US. ECRI’s leading indicators rolled over in early 2013 and have recently reasserted that downtrend. Any further deterioration from here would suggest such a recession is coming, and that sort of timing would be a general fit with the business cycle:

Source: DShort

In keeping with that prospect, 20-year treasury bonds look to be breaking out following an 8-month basing:

Source: Fat-Pitch

Drawing all together, I have a reasonable case for the Russell 2000 and Biotech to have peaked out on Friday, with the latter feeding into the former, and both into the wider markets. The Friday candles and volume and the negative divergences in both the R2K and Biotech suggest a peak. The Citi CEM, new moon and inverted geomag seasonal lows of March and April suggest follow through could then occur this coming week forwards. The rate of trajectory of the Biotech sector suggests terminal exhaustion should be close at hand, and that would then feed into the R2K’s fortunes as per the Bespoke table above. Valuations, leverage and sentiment collectively suggest significant further gains are unlikely. Solar speculative maximum timings suggest other US indices should now be ripe to join the Dow in rolling over, or more specifically began a topping process at the end of December which is now completing, and in so doing becoming leading indicators of a looming recession.

Higher Close Implications

Posted on February 28, 2014 Posted in Indicators, Stocks58 Comments

Yesterday the SP500 finally closed above 1850 with a rally in the last 15 minutes of the US session, and in so doing carved out a marginally higher high than December/January, in a club with the Russell 2000 and Nasdaq 100 indices. I do not see a bullish breakout that sets the scene for a new round of gains, because as per my note before yesterday’s session, it is indeed achieved on multiple divergences and is likely to be short-lived.

Volume on yesterday’s SP500 up-day was again inferior to the down-days, whilst treasuries had another up-day despite equities and continues to be a signal. Economic data was again poor and remains divergent. There is a momentum divergence in the SP500 new high versus the previous whilst breadth measures of % stocks above 200 MA and 52 week new highs continue their divergent downtrends. The VIX also shows divergence and the trend exhaustion indicator suggests any further gains will be hard to come by currently.

Current Skew reading:

Source: Barcharts

Current NAAIM reading:

Source: U Karlewitz

Current Investors Intelligence bull-bear reading:

Source: U Karlewitz

Plus ISEE equity only call-put reached an extreme yesterday. In short, the rally has lured back in the ‘dumb’ money and I suspect yesterday’s new high close on the SP500 will turn out to be the final bait for ‘all-in’.

The Dow and Nikkei continue to honour my 31 Dec 2013 top call, and are both several hundred points away from a challenge to that. They also both continue to carve out the ‘second chance’ peak of the historic analogs topping pattern. The FTSE, Dow, Russell and Nikkei remain at long term resistances.

I remind you of this:

Tomorrow is the new moon and that sets up the possibility of the other US indices now topping close to it: either yesterday, today or the first couple of days of next week. As March and April are inverted geomagnetism seasonal lows and another geomagnetic storm is currently in progress adding to the recent upswing in disturbances, I have additional reasons for the markets to top here as we exit February.

If we look behind the price action at internals, valuation, sentiment, leverage, technicals and fundamentals (all of which I have covered in detail in posts since the turn of the year) then the short opportunity is clear: this a rip to sell, and there won’t be many opportunities as golden as this.

Let’s see how today unfolds. I prefer to comment once the action is complete because there are many intraday swings currently, as evidenced by all the tails on the daily candles recently (another clue for a trend change), but I will comment intraday if I see something more decisive in progress. A reminder that some sharp selling into the close would set up the potential for a big down day on Monday, particularly with the geomagnetic storm aiding again.

Indicator Updates

Posted on February 26, 2014 Posted in Bonds, Commodities, Gold, Indicators, Stocks55 Comments

1. Dow daily candles and Monday’s volume print at high reversal:

2. Nasdaq 100 and breadth divergence:

3. SP500 and defensives outperforming cyclicals:

4. Russell 2000 (my largest short) P/E:

5. Gold outperforming stocks:

6. Treasuries outperforming stocks:

7. Inflation expectations cast doubt on longevity of commodities (CCI index black line) rally:

8. Smart money sold into 2013’s equities rally and outflows accelerating into this month’s upleg:

9. Rydex bull ratio exceeds levels previously associated with significant corrections and 2013’s anomalous levitation raises risk of sharp collapse:

10. Put/Call ratio (21 day average) also exceeds levels of previous significant corrections, and at best suggests period of consolidation with downward bias ahead for equities:

Dow 1929 vs Nikkei 1989 vs Nasdaq 2000 vs Today

Posted on February 25, 2014 Posted in Commodities, Demographics, Geomagnetism, Gold, Indicators, Macro, Solar Cycles, Stocks55 Comments

Yesterday saw a failed breakout on the SP500 on high volume which suggests exhaustion. The Skew print came in still historically high and the put/call print historically low again, which continue to signal bullish complacency and high risk of an outsized move to the downside. Economic data disappointed again, and the latest economic surprise readings are below:

Source: Citi

The geomagnetic storms over the last week broke the model’s multi-month uptrend (red line) and along with the NOAA forecast reveal downward pressure this week:

If you are new to the site my models are updated weekly.

The significant outstanding bubble in the markets remains the Nasdaq Biotech sector, but the unsustainable parabolic is ripe to pop:

Source: Yahoo

Less than one third of this sector’s 122 companies earned any money in the last 12 months.

The last 2 years gains in the wider US markets were approximately 80% multiple expansion and 20% earnings growth. The justification for the multiple expansion was (1) ‘Fed policy trumps all’ and (2) stocks frontrunning a ‘normalisation’ in economic growth and earnings. Now: QE is being wound down, Q4 2013 GDP and Q1 2014 GDP estimates are being revised downwards, earnings estimates are being revised downwards and for Q1 2014 82% of companies so far have issued negative earnings guidance. Those justifications have largely evaporated.

The lesser known reason for the big run up in price into the end of 2013 is the speculation peak driven by the solar maximum, and this was shared in the superpeaks of Dow 1929, Nikkei 1989 and Nasdaq 2000. A reminder that there are 3 ingredients for a superpeak: (1) speculative mania by solar maximum (2) increasing number of buyers through demographic swell and (3) increasing use of leverage amongst buyers. Both (1) and (3) apply to the current US markets but (2) is absent. There is a shrinking rather than swelling demographic pool, and for that reason we do not have a supersized peak. Otherwise, the analogies are very much applicable.

In 2013 US markets ran up in a parabolic shaping, generating historic levitation above moving averages and producing an anomalous lack of a ‘proper’ correction. Sentiment reached levels not seen since previous major peaks, and euphoria only historically exceeded in the dot.com boom. We have reached valuation levels in the Q ratio equivalent to the TOP in 1929 and in stock market capitalisation to GDP equivalent to the TOP in 2000. Leverage levels equal the TOP in 2000 as measured by margin debt to GDP and beat the 2000 top in other measures. The blow-off topping process in the current Dow so far mirrors that shared by the 3 analogs, and the peak-to-date occurred at the solar maximum.

In short, the ‘size’ of the peak in current US markets does not compare to the analogs because of the key demographic difference, but in many other ways these analogs are particularly apt. What comes next in the analogs is waterfall declines, and we have a case for the same in the current US markets due to (1) historic levitation away from moving averages or parabolic rise on long term view (2) historic time since significant correction and historic compound gains and bull duration (3) 80% multiple expansion 3-pronged justification case shattered (4) ‘all-in’ measures of sentiment, leverage and fund flows ripe for unwinding. We are likely through the solar maximum peak and the speculative excess into the peak is now vulnerable to pop.

Here are the analogs on a 10 year view centered around the peak:

Alongside I’d like to remind you of the relevance of the (inverted) seasonality of geomagnetism for the timing of peaks and falls:

Nikkei 1989: Waterfall declines from second chance lasted about 6 weeks, centered on March (geomagnetism (inverted) seasonal low), and took off 27% from peak; Recovery rally then lasted 3.5 months from April to July, back up 20% (through seasonal high); Then 2.5 months more waterfall declines, mid July to beginning of October down 40% (through seasonal low).

Dow 1929: Waterfall declines from second chance lasted 1 month, centered on October (seasonal low), and took 48% off from peak; Recovery rally then added back on 50%, lasted 5 months from November to april (through seasonal high); Then long period of declines lasting a couple of years.

Nasdaq 2000: Waterfall declines from second chance lasted about 6 weeks, March-April, and took 36% off (seasonal low); Recovery rally lasted about 3.5 months from May through to beginning of Sept, adding back on 34% (through seasonal high); Then long period of declines lasting a couple of years.

So, averaging them out and applying to the current US markets, we could expect waterfall declines of around 35% lasting around 5 weeks, and this should occur in the seasonal low of March-April. That would then be the time to take off short positions for a recovery rally of around 35% lasting around 4 months from April to August or so, through the seasonal high. A second set of steep declines should then unfold through the seasonal low of September-October.

By that model the initial waterfall declines should wipe out all of 2013’s gains in the space of a month. I refer you to the case for waterfall declines further up the page as to why this is reasonable, and I suggest the consensus view once this occurs will belatedly point to similar factors. However, once the recovery rally then erupts, as can be seen from the 3 analogs on the 10 year view, it will keep the ongoing bull market option in play. I suggest 1987 will likely be quoted as benchmark: a harsh correction that was a golden buying opportunity. But, once the recovery rally tops out short and rolls over into more steep declines, there will be broad acceptance of the new bear.

What will happen to commodities under waterfall declines? Understand that such unforgiving drops will bring about forced liquidations as leverage is unwound so there will be some blanket selling. In all 3 analog waterfall decline periods, commodities (including precious metals) fell too, whilst the US dollar largely rallied. The same occurred in October 2008’s sharp falls. That suggests it may be prudent to pull back on or even exit commodities long positions once we get a whiff of steep declines erupting.

Previous major commodities peaks have been speculative to a large degree, but also typically founded on a fundamental supply/demand case. For energy and industrial metals the latter is currently weak, and we see oil and copper in long term ranges rather than in major breakouts. Various soft commodities have enjoyed steep moves up as shorts have scrambled to cover, but whether there can be an enduring supporting story this year remains to be seen. I am skeptical as to whether commodities as a class can make a major rally to beyond 2011’s CCI peak this year, anticipating they may sell off under the waterfall declines and perhaps struggle for a case under deflationary recession fears. However, maybe they can outperform during the ‘recovery rally’ over mid-year and particularly if the US dollar is less seen as a safe haven this time, so I remain open to the possibility that maybe they can beat 2011’s peak, but currently see this as less likely. The case for previous metals differs from other commodities, and as I have outlined before I see gold’s 2011-2013 bear as a pause in a longer term secular bull market likely to terminate at the next solar maximum. My tactics will be to reduce all commodities long positions bar precious metals once it looks likely that equities are on the cusp of waterfalling, anticipating some blanket selling across all assets in that period, and then review again as we approach the end of that event.

Looking back to the Great Depression, banking panics began in 1930 and swapping dollars for gold in 1931. In other words, it took time for things to unfold, and I would expect similar this time around. Whilst I cannot be sure, I do not expect a sudden chain of bankruptcies under the first waterfall declines, but for the real ‘trouble’ to unfold gradually and likely after the recovery rally peaks out. First things first then: I expect a major short equities opportunity to unfold swiftly from here through March and into mid-April, and am positioned for that. I will be looking to exit all equities shorts as I try to time the end of that event.

Sunday Charts

Posted on February 23, 2014 Posted in Commodities, Indicators, Stocks44 Comments

1. Bearish candles on US stock indices on Friday with volume continuing to be greater on down days versus up days:

Source: Stockcharts

2. Put/call ratio finished at extreme low again, which is more consistent with peaks rather than breakouts:

Source: Stockcharts

3. Trend exhaustion indicator also suggests breakout now unlikely:

Source: Rory Handyside

4. Skew finished at extreme high again, which signals amplified risk of an outsized move ahead:

Source: Barcharts

5. Two breadth measures remain in six month divergences:

Source: Stockcharts

6. Economic growth is also divergent, and this is reflected in the advance in commodities being weighted to precious metals and agriculture rather than industrial metals and energy:

Source: Citi

Source: U Karlewitz

7. Long term view of Rydex bull/bear ratio points to a market top, specifically a solar-maximum speculative-excess market top:

Source: U Karlewitz

Max Short Equities

Posted on February 20, 2014 Posted in Indicators, Lunar Cycles, Solar Cycles, Stocks56 Comments

A reversal in equities at the right time, right place. The closes on the Dow peaked at Friday’s full moon suggesting an inversion may well have occurred. A big up day yesterday for commodities, including 10% gains in natural gas and coffee. US economic surprises slipped below zero as data once again disappointed, and rising input prices (commodities) are, in line with history, threatening to tip an already weakening economy over as 2014 progresses. A significant geomagnetic storm played out yesterday, with another one in progress at the time of writing, and the timing of these disturbances is notable.

I believe yesterday will turn out to be the spot for optimal maximum short equities. Maybe you disagree with the timing, but if you have been a reader of my posts for the last couple of months then you will know I am acting on a multi-angled, multi-layered case. Maybe you disagree with being short at all, but having done a little tally I have published about 50 different indicators since the turn of the year which all individually suggest a shorting opportunity in equities is at hand (either for multi-week, multi-month or multi-year gains), and collectively produce something compelling. Whilst it would be unwise to rely on any one indicator as anomalies can and do occur, I feel pretty confident with fifty. If my specific timing of the optimal shorting point turns out wrong, then that aggregate of indicators calls for that spot being near both in time and price. Until disproven I have now two specific calls: (1) Stock market topped 31 Dec 2013 (Dow, SP500 (double top) and Nikkei) and (2) Optimal shorting opportunity (peak of the second chance) was 19 Feb 2014. A reminder: I am not an advisory service and I am short equities, long commodities.

Click on the two charts to view larger:

History In The Making

Posted on February 18, 2014February 18, 2014 Posted in Indicators, Lunar Cycles, Solar Cycles, Stocks34 Comments

1. Crestmont P/E valuation only exceeded at 1929 peak and in 2000:

2. CAPE / Shiller PE / PE10 valuation only exceeded in 1901, 1929 and 2000:

3. Compound annual growth rate since 2009 bull start only exceeded into 1929, 1937, 1987 and 2000 peaks:

4. Q ratio valuation at major historic peak levels, barring 2000 outlier:

5. Stock market capitalisation to GDP from Fed data second highest in history:

6. Stock market capitalisation to GDP based on Wiltshire 5000 (the broadest and most comprehensive US index) equal highest in history with 2000:

7. Margin debt as a percentage of GDP joint highest in history with 2000 (and net investor credit at all time low):

8. US household equities exposure at level of previous major peaks, barring 2000 outlier:

9. Skew readings cluster highest ever:

10. Panic/Euphoria second highest ever euphoria after 2000:

11. Highest ever Investors Intelligence bull-bear sentiment spread:

12. Sunspot, geomagnetism and lunar phase potential historic convergence:

Solar maxima deliver speculative peaks but as these peaks in the sun’s activity occur only around every 11 years, we see cyclical market peaks in between. More often than not markets peak in the seasonal (inverted geomagnetism) highs around December and July, and within the month they typically fall close to new moons. If the Dow peaked 31 Dec 2013, the closest parallels as highlighted in the table are 1980 gold and 1989 Nikkei. Both these were secular peaks occuring at a solar maximum, at the turn of the year and close to a new moon. The Nikkei is particularly pertinent as it peaked on the last trading day of the year and led Japan into a period of deflation, which I believe awaits the US now. US deflationary recessionary demographics should break the Dow out of a very long secular run that has been in place from the 1940s to now.

If the Dow and Nikkei did not peak on 31 Dec 2013, then the next new moon would be 1 March 2014, by which those indices would need to be at new highs. However, by that point we have moved into the (geomag-inverted) seasonal lows, and, based on current solar forecasts, gradually away from the solar maximum. The caveat to that latter point is if solar forecasts are wrong and we see a stronger sun in the weeks or even months ahead, making for a higher cluster of sunspot spikes. We might then look to the next seasonal high period of June-August and future new moons in looking at top-timing probabilities (note probabilities, as the table shows exceptions). However, the stronger case is for the 31 Dec 2013 top, and the evidence that has built up since then is supportive, including January spikes in trading volume and insider selling, 2014 money flows into treasuries, gold and defensive sectors and a downtrend in economic surprises. The last piece of the puzzle is for price to now confirm, with the Dow rolling over again this week, and in doing so adding a lower high to the Jan/Feb lower low, marking a trend change. Prices on the US indices hit technical targets on Friday, and volume for the rally remained divergent, setting up that roll over potential. We had a geomagnetic storm for the second weekend in a row too. However, we are clearly very delicately poised: either a definitive bullish breakout (with bullish internals) from here postpones a market top into the future, or we are at the top of the ‘second chance’ and staring at a major bearish opportunity.

Friday Morning Update

Posted on February 14, 2014 Posted in Bonds, Commodities, Gold, Indicators, Macro, Stocks45 Comments

Yesterday was an up day for bonds, commodities, gold/miners, and equities, i.e. both pro-risk and anti-risk. Confused?

Retail sales came in weak, not just for last month, but for the revised previous month too. The string of poor economic data, in line with leading indicator forecasts of growth having peaked out, has resulted in progressive revisions to Q4 2013 GDP estimates – here is Barclays:

Source: Business Insider

Q1 2014 GDP estimates have also been cut, with Credit Suisse reducing from 2.6% to 1.6%.

The latest picture for the Q4 earnings season shows blended revenue growth at just 0.8%, and of those companies who have given forward guidance for Q1 2014, 80% have given negative rather than positive guidance.

Source: Ed Yardeni

Last year’s multiple-expansion rally in equities was justified on the stock market front-running a return to ‘normal’ economic growth and earnings growth, as well as the underpinning of ‘Fed policy trumps all’. With QE now being wound down, economic data worsening rather than improving, and earnings still disappointing both in terms of revenues and forward guidance, the case for anti-risk is strengthening, and the rally in stocks suspect.

Yesterday ahead of US stock market open, futures were down and equities around the world were struggling to attract buyers, then the retail sales data hit and the scene was set for a bearish US session. But the opposite occurred: a ‘stick save’ as short stops were run and bulls delivered a trend day up. We saw this occurring in January:

Eventually this gave way to the high volume decline days.

Yesterday’s volume was again weak, relative to the declines leading into the 6 day rally:

Source: Stockcharts

Complacent put/call went lower, Skew remains elevated, and defensive rather than cyclical sectors continue to lead in 2014:

Source: Charlie Bilello

From a bullish perspective, small caps outperformed yesterday and advance-declines continue to be strong:

Source: Charlie Bilello

Today is the full moon, which could spell an inversion in equities. The Nasdaq 100 joined the Nasdaq Composite yesterday in making marginal new highs, but it did so on a divergence in breadth (as measured by % above 200MA). So I now watch to see whether the other US indices follow suit or all roll over from here. If the latter, then it could turn out to be the sweet spot of the top of the ‘second chance’, namely the optimal time to short, but if the former, it would open up the prospect of a longer topping process in equities. That makes it a fairly delicate position. If you have been reading my recent posts, then I have a multi-angled case for equities to roll over from here, and the developments behind the price action (volume, defensive asset flows, economic data, etc) have strengthened that case rather than weakening it. So I continue to gradually add shorts into this rally and rebuild towards my intended ‘full’ short position, until the ‘clues’ change.

The case for commodities making a late cyclical charge now looks more compelling, with new broad momentum in the class, and siginificant breakouts. Commodities typically top out after equities and once the economy has begun to weaken, sucking the remaining life out of it. On the chart below we can see the last two such occurrences. In 2007 commodities broke out of their consolidation and into a steep rally as equities topped, and I expect similar developments this time. We have been seeing the US dollar weaken on the down days for equities, which should accelerate commodities as equities fall.