Game Over Start Of July

Posted on November 4, 2014 Posted in Geomagnetism, Indicators, Stocks146 Comments

Many charts and indicators say equities finally topped out at the start of July.

1. European stock indices peaked out at that time and have since made a lower high and lower low.

Source: Stockcharts

2. US small caps and the Dow Jones World index show likewise:

3. Whilst Dow Industrials shows a megaphone formation since then, Dow breadth and Vix (inverted) reveal a similar decline since the start of July.

4. The SP500 shows a megaphone too, however its breadth followed the same declining pattern since the dotted line. NYSE advance-decline volume and the high yield to treasuries ratio also reveal the start of July peak.

5. Ditto the Mclellan Summation Index and the trend change in put/call ratios:

6. Nasdaq breadth significantly diverged at that point.

7. Oil took on a deflationary track at the start of July and leveraged loans made their peak.

8. And lastly, the Sornette bubble end flagged on the SP500 at that time:

Source: Financial Crisis Observatory

Why the start of July? It is the mid-year geomagnetic (inverted) seasonal peak, falling close to the June 27 new moon (2 trading days away) and the first such double optimism peak following the April smoothed solar maximum. If we think of the idealised speculation peak being the triple confluence of solar, geomagnetic (inverted) and lunar peaks, then 27th June would be the closest to that.

On which note I’d like to point out the increased recent actual geomagnetism which has caused a declining cumulative geomagnetic trend over the last couple of months, aligning with action in most of the above indicators and indices. Here shown with the Dax:

In short, the ‘red herring’ is the higher highs in price in the SP500, Dow and Nasdaq. They appear to the untrained eye to still be in bull market uptrends, but analysis says otherwise.

By various indicators, November 2014 should be equivalent to the two monthly arrows shown in the last two major SP500 peaks here:

The previous month in each case was a large hanging man candle (long-tailed). November should be a down month in price and the large price megaphones in large caps resolved to the downside.

Bullishness and allocations are back to their invisible limits at this point:

Whilst it is mathematically possible that they could both reach further extremes, these levels – which are absolute historic extreme levels – have so far acted as a cap, so the next move in equities should be down.

We can add to that the diminishing fuel over the last few months from put/call ratios and NAAIM exposure (a smart money indicator), as well as the number of stocks that are serving to rally the markets and the number of stock indices participating, plus the risk appetite proxies such as junk bonds and cyclical sectors versus defensives, all suggesting the rug is being gradually pulled from underneath stocks.

Friday’s gap up in price was a potential exhaustion gap. Add to this that Nymo reached over 80 for the second time in 5 days and previous instances from recent history that suggest a reversal should be swift and decisive. Yesterday’s candle has the look of a reversal candle too. The second chart below shows such combinations of exhaustion gap plus Nymo>80 from 2011, and what happened next.

Stocks should roll over this week. Then November should be a big down month. This really should be game over for the bulls.

November

Posted on November 2, 2014November 2, 2014 Posted in Indicators, Solar Cycles, Stocks, Uncategorized161 Comments

October ended with new marginal highs on the SP500, Dow and Nasdaq. The bottom line is: my analysis doesn’t change. Here’s why.

There are too many stock market topping indicators for this not to be a bull market peak. I refer you to this list:

We can add to this now that ECRI leading indicators have turned negative, financial conditions are in decline and we have various additional negative divergences.

We can then cross-reference the list with the solar maximum for timing. Being able to refine with hindsight, the smoothed solar maximum looks likely to have been April 2014, with SIDC no longer running an alternative model with a higher high ahead. That puts the stock market on borrowed time since April.

Source: Solen

We have evidence the stock market topping process initiated 31 Dec 2013, with a persistent move to defensives since then.

Source: Stockcharts

Plus dumb money flow took over from smart:

Source: Fullertreacymoney

The stock market topping process appears to closely mirror the last solar/stocks peak of 2000, putting us right at the end of the process:

The question mark is over the higher highs in price here in 2014. US large caps have now made yet another higher high in October. However, they do so on negative divergences, similar to 2011 or 2007’s peaking (just marginal highs on clear divergences).

Indeed this powerful rally in price over the last two weeks is weak under the hood, with multiple further divergences:

This rally ought to fail imminently, and this is backed up by overbought stats: Nymo hit over 80 on Friday for the second time in 5 days. Per Andrew Kassen, this twin-occurrence happened 9 times before, resulting in an 11% average fall, with 8 out of 9 of them turning down the day after this signal.

That means Friday’s gap up could turn out to be an exhaustion gap. But it’s fairly unequivocal: stocks ought to turn down at the start of this coming week, and being just several days from the full moon the pressure ought to be downward. We can draw into this picture the position in gold and miners, which appear to be capitulating on heavy volume:

Source: Dr.Cooper

The extremes reached echo the 2000 bottom:

Source: ShortSideOfLong

I’m looking for a high volume intraday reversal candle on gold and miners to tie in with a peak in stocks.

Also unequivocal is that November should be down, per the positioning in the topping process by multiple indicators. October 2014 is matched up with its counterparts in the last two major tops below:

The long tails look the same, but the candle tops do not. Things are different this time. Look at the clustering of V-bounces and of extreme lop-sided sentiment:

Source: Dana Lyons

Source: Ed Yardeni

Unprecedented. It seems fairly certain that both are reflective of a mania but does it mean a stock market topping process won’t play out in the ‘usual’ way? It’s not easy to answer that without a historical precedent.

However, this brings us to the bull case which would advocate that central bank policies have caused this and postponed any bear market. Supporting this we have once again made new highs on large caps following a very strong buying-of-the dip, whilst seasonality is doubly positive from here into year end (geomagnetic, Presidential). The Japanese BOJ shocked the markets with increased QE and the Japanese pension fund announced increased purchases of Japanese equities. So is it a losing battle fighting such intervention and support? Could those 37 topping indicators shown above all be attributed to ZIRP and QE making equities the only home for a decent return, and therefore this time not actually signals for a market peak?

I just don’t believe that. If you don’t agree with me, then I’m fine with that: you’ll find plenty of bullish blogs to follow. Understand that I’m feeling the pain with a significant drawdown on my short positions, so it’s imperative that I try to be as objective as possible. Ultimately, this is about my money and my life. I go over and over the data and come to the same conclusions:

I see a large cluster of market topping indicators aligning with timing by solar maximum. I see multiple negative divergences on this last rally up. I see lower highs and lower lows on US small caps, European indices and junk bonds since July, making the price action in US large caps the anomaly that will be the last to resolve. I see a positioning by indicators right at the end of the topping process. I see a mantra for this mania of ‘central bank policy trumps all’.

Note: I would not want to be short Japanese equities here. I may go long this week with a stop if the Nikkei can hold its breakout. Japan is in a slight demographic tailwind window in contrast to the other majors, and the direct buying of stocks by the Government is notable.

But this doesn’t affect my view on US and European equities where I remain short, and gold where I remain long. By my analysis it’s fairly clear that a renewed turn-down in these stock indices and a capitulative low in precious metals should occur within the next few days and November should be a strong down month for stocks, as this is the only fit by indicators. If this doesn’t happen I will be stepping aside, closing positions and waiting. I am not being stubborn or wedded to a view, I just have such an overwhelming multi-angled bearish topping case that I think even if I was a total delusional, it has to be right.

So, it looks like we are making a megaphone top on the Dow and SP500. There is room for just a fraction higher into the top of the megaphone but the reversal ought to be close at hand. Nymo suggests as soon as Monday, so let’s see.

October 2000 vs. October 2014

Posted on October 30, 2014 Posted in Indicators, Solar Cycles, Stocks436 Comments

By various indicators, equities in 2014 align well with the last solar maximum year of 2000.

The topping process began in January. The solar maximum occurred in March with an associated speculation peak (margin debt peak, speculative target index peak with p/e>100 (Nasdaq in 2000, R2K in 2014)). A double top occurred in July and September, and an initial washout low in October (capitulative breadth spike >10). All this is captured in these two charts, using the Dow Jones World Index:

Source: Stockcharts

The July/Sept double top in price was higher in 2014 than the March peak (vs. lower in 2000), but the indicators reveal the topping process proceeding in the same way since the turn of the year.

We can see the top performing sectors align (defensives signalling a market peak):

Source: All Star Charts

Source: Macromon

The extreme high banding in allocations aligns too. The October capitulative low failed to wash this out, just like in 2000.

Indicators position us equivalent to October 2000 (and January 2008 if we tie in the 2007 peak). Subject to how October closes, the monthly candles look similar:

The long-tailed candle, rather than being a bullish development, instead appears as the first evidence of real selling befitting the end of a topping process. That makes the rally a rip to sell.

The candle comparison unites with the positioning by indicators (solar max, topping process, margin debt, breadth, treasuries, sector performance, allocations), so it seems right. A negative November looks to be on the cards.

Explosive Rally Again

Posted on October 29, 2014October 29, 2014 Posted in Indicators, Solar Cycles, Stocks89 Comments

Another surprising day. Strong bullish action in US stock indices with leadership by cyclical sectors and small caps putting new highs within reach on most indices, and actually achieved by Dow Transports. The monthly candle on TRAN is something to behold, fairly unprecedented in the last 2 decades.

Source: Northman Trader

Ditto on the other US stock indices, which makes drawing on a historical analog for guidance difficult. With 3 sessions left in October, we would need to see a significant reversal to negate this current candle. Should that not occur, then I have to allow for the prospect of a continued bull market into year end, given the seasonal tailwinds, breakouts in Biotech, Apple and a decisive move back upwards in the R2K. However, I still rather see the weight of evidence as supportive of the wider markets having peaked, putting us in the early stages of a bear market.

European indices show a fairly clear lower high and lower low, and the October rally looks like a relief rally and nothing more:

Source: Stockcharts

Turning to the US, here is the Dow (Industrials). We can see clear divergences in breadth and the Vix that still suggest we may have indeed made a switch from bull to bear at the start of July, but the price action is nowhere near as clear cut.

The trajectory of the October rally is powerful but unsustainable. Nymo over 80 is a measure of how overbought we have become and previous such occurrences shown below led swiftly to significant reversals 8 times out of 9:

Source: Jack Damn

Therefore, the rally ought to reverse today or tomorrow and the FOMC output may provide the trigger.

Credit spreads have not confirmed this rally and are also showing a peak at the start of July:

Source: Michael Gayed

Nasdaq breadth diverged significantly at the same time and remains non-confirming of the October rally:

An overall topping process in equities still appears to have begun at the turn of the year, with various angles on this:

Again, there has been little repair from this powerful October price rally.

Skew remains in an extreme high band since late 2013, warning of an outsized move in price.

Source: Barcharts

Investors Intelligence sentiment has been in a similar extreme high band over a similar period. Ditto Rydex allocations:

These are all particularly mature flags now.

The key question is whether US stock indices can rally to new highs here and squeeze the bull market into year end. I have kept this as my worst case scenario for some time. Given the mature divergences and topping indicators that have been in place since the turn of the year, it remains questionable that they can extend that far. When we add in the additional non-confirmations that have been in place since the start of July, the probability further shrinks. However, given the breakouts in certain stocks, sectors and indices and the power of the October rally, I have to respect that it could happen.

The sharp rise in the Vix into early October and the subsequent collapse is unprecedented in speed, magnitude and reversal. Like the monthly candles on the stock indices we don’t have a mirror from history to guide us. If we are set for decisive new highs in stocks then I believe it will be clear with hindsight that the solar maximum was not through yet. If so, maybe that October spike in solar flux holds some weight:

Source: Solen

For now, the weight of evidence still supports the smoothed solar max being behind us, along with the speculation peak in equities. The weight of evidence supports a topping process in stocks that began at the turn of the year and peaked in early July, and a bear market being in progress since then despite wild oscillations in price. If instead price can make new highs here (in US large cap indices), then indicators suggest that much like the September marginal highs they should be short-lived. However, given how overbought the rally has become, it appears likely that price should retreat before this week is out, which would likely create the missing lower high in US large caps. After that, we would then turn attentions to whether price can base above the October lows.

My opinion on today’s FOMC is that it will be a market mover, and that they will stick to their QE exit. It seems the likely point for the markets to reverse back down, in a sell-the-news scenario, but given the power of the October rally, we will just have to see. Either way, the power has generally been in price, not in health. I see no reason to be bullish here unless many of those indicators and divergences can be repaired. However, we are once again at a crunch point, as this is about as high as we could expect for a ‘second chance’ lower peak. We have currently retraced 83% of the October falls on the SP500, exactly like the 1937 second chance lower peak. That, plus the Nymo and FOMC provides a set-up for a reversal here. No change in my positions until we see if that materialises.

Solar And Stocks Update

Posted on October 28, 2014 Posted in Indicators, Solar Cycles, Stocks, Uncategorized128 Comments

Sunspots and the smoothed solar maximum appear to have peaked around March 2014.

Margin debt, Russell 2000, social media and various breadth measures look to have peaked around then, in a speculation peak epicentre, and all major global stock indices have tentatively topped out within 6 months of that.

In line with previous solar maxima we are seeing a particularly hot year globally, with 2014 so far the joint hottest on record globally for land and ocean combined.

Agricultural commodities may have a burst ahead of them.

Equities have run away from the cumulative geomagnetic trend in keeping with a speculation mania over the last 18 months, whilst broad commodities continue to track the model.

The geomagnetic trend just lately steepened downwards, in keeping with the seasonal geomagnetic peak time of year.

This post-solar-maximum, geomagnetic pressure period is likely to drag equities down and maintain the peaks between March and September in the major global indices, implying we are in a new stocks bear market.

I maintain the likelihood of the new moon reversal, i.e. that this week should now see the renewed move lower, making for a lower high in US large caps.

This probability is supported by the picture in Nasdaq breadth, which peaked out around March.

The European indices likely initiated the roll over yesterday.

Whilst the junk bonds rally has possibly petered out the last few sessions.

In summary, I still expect the markets to roll over here, providing the missing lower high in US large caps to go with the lower low (and existing lower highs in other indices). With a doji candle yesterday in US indices, a further doji candle today would provide the roll over set-up similar to 1987 and 1929. The likelihood of the Fed sticking with their QE exit in tomorrow’s FOMC output could then provide the trigger for the falls to initiate. The triple negative of the period into the full moon, the geomagnetic seasonal peak and the post-solar-maximum hangover provide the backdrop for this all to occur. I believe we are already in a bear market in equities but this isn’t going to be clear for a little while.

New Moon Reversal?

Posted on October 24, 2014 Posted in Indicators, Stocks, Uncategorized201 Comments

A bullish day but with a weak close and weak after-hours produced a candle with a tail to the upside that could spell a reversal, with new moons often marking tops. The SP500 has rallied back up to the measured decline trend since September and has made a retest of the broken bull trend of the last 18 months, so adds to this being a suitable spot to reverse:

Source: Stockcharts

Additionally it has made a 61.8 fib retracement of the Sept-Oct falls, and this is in keeping with the second chance peak of 1929 which was a 61.8 fib retrace of the initial falls.

Underlying Source: Ritholz

On the flip side, Apple and Biotech broke out to new highs, so we have to allow for an alternative scenario of wider new highs being ahead, unless the markets swiftly reverse here. However, when we look at Nasdaq breadth as a whole we see a continued pattern of weakening with underperformance behind the current rally, which casts doubt on such broader new highs:

The key question is where we are in the topping process. It’s a process that began at the turn of 2014:

By the majority of indicators we are late in the topping process, equivalent to January 2008 or October 2000. So when we look at the selling climax of last week, the most applicable mirror is that from the turn of 2008, the first true leg down in the bear market:

Source: Sentimentrader

If that isn’t our current position, then we would be looking at a catapult to higher highs. Ditto the reading in capitulative breadth that last week hit a ‘bear market bottom’ level. How do we reconcile those with (1) II bears still being at the (toppish) extreme <20%, (2) AAII bull-bear ratio back over 2 despite last week’s sell off, (3) margin debt and net investor credit still being at levels that exceed previous bull market peaks, (4) the average of 5 valuation measures putting us on a par with the 1929 peak as the second biggest mania after 2000, and (5) allocations such as Rydex and Fund Managers still being too high to have sustained a washout?

Source: Fat-Pitch

I believe we can reconcile if CBI and selling climaxes marked the bottom of the first leg down in a new bear market, because the sentiment, allocations, leverage and valuation indicators have a long way to go yet before they will have mean-reverted.

The wildcard remains the solar maximum, which I believe is the most dominant force in play. It is the reason certain indicators reached all time extremes this year and why speculation once again became of mania proportions. The stamp of previous solar maxima such as Nikkei 1989 and Nasdaq 2000 has been all over this year’s developments. Knowing that the current solar max has comparisons to SC5 which produced a delayed smoothed maximum or that the market resonates with 1929 which was a delayed peak beyond the smoothed maximum, then we have to allow for the possibility of a peak stretching out into 2015. However, this is where the cross-referencing has been powerful…

The most probable scenario by solar models and data is that the smoothed solar maximum is behind us circa March time, and we can cross-reference that with the peaks in the R2K index and margin debt, i.e. it appears speculation did indeed peak then. Generally, indicators reveal a 6-8 month topping process that ended in September, and this timeline fits with previous major peaks. Various indicators aligned already with the solar/market peak in March 2000, not earlier in the process. And through a combination of extremes in leverage, allocations, sentiment and valuations in the face of a demographic headwind, we appear to have reached saturation in the markets, i.e. questionable that there would be fuel to go some way higher yet.

In essence, if we remove the solar maximum from the equation then we have a strong case for a topping process in equities that initially began 31 Dec 2013, had an epicentre around March, and completed by September. If we now add the solar cycle back in with most models pointing to a smoothed solar max behind us around March, then this looks doubly compelling versus the chance of a market peak delayed until 2015. But, if I am to be proved correct, then equities have to now turn down again and not reach back up to new highs.

Year to date sector performance still looks like a trademark market peak. These are the two sectors that perform the best once the market tops out:

Earnings growth for Q3 currently stands at 5.5%. This needs to be over 10% to justify valuations. Don’t take my word for it: analysts projections for this quarter at the turn of 2014 were 13% growth, but the reality means they were gradually reduced to 5% as the year progressed, so now in fact we have a little ‘beat’. I just don’t believe that is enough to propel equities higher, but rather, the gap between valuations and reality has been a flag for 2 years now and with three failure quarters out of three so far in 2014 that gap is at its biggest yet. Hence I believe the repair in price is now underway and we are in a bear market.

The Sornette bubble end flag still shows as July for the SP500 and September for Technology. There has been no move back up with the recent rally.

Source: Financial Crisis Observatory

The European indices are bearish, unless the Dax can break back upwards here. Rather it appears the ideal place for a reversal back downwards, along with the US indices.

The pattern of a lower high and a lower low since June is fairly clear on the European indices and also on the Russell 2000 and the Bloomberg financial conditions index. What’s missing is a definitive lower high on US large caps, so that is what I am looking for. Uniting all the above analysis I believe this has to now occur and that we won’t rally back up to new highs. With the new moon now behind us and stocks arriving overbought and on negative divergences at suitable technical levels for a reversal I expect stocks to reverse back down to last week’s lows. Once that occurs we can judge whether there is evidence of capitulation again and also of positive divergences. I believe there won’t be and that will be the trigger for the markets to then cascade lower. But first things first, let’s see if equities are repelled from yesterday’s peak.

Explosive Rally

Posted on October 22, 2014 Posted in Indicators, Stocks250 Comments

It took me by surprise that the R2K moved cleanly back into the 2014 range and the SP500 back above its 200MA in yesterday’s powerful up day. However, I believe odds are we still roll over here around tomorrow’s new moon only from a little higher up. That would make for a double fake: first below and then above the key technical levels. The weight of evidence still supports this being a second chance peak and that even if that is not the case then the market should first retest last week’s lows.

With history as our guide, here is the mid-2010 correction:

Compare to the current:

Both corrections began measured then collapsed in capitulative style before rallying back up from the purple circles back to the more measured downtrend. If this is repeating then the SP500 should now turn down again and tomorrow’s new moon provides the ideal timing for a reversal.

We can see how in 2010 the market based over a period with the MACD turning up. We lack such a stabilisation currently.

In last week’s analysis I argued for why we are now equivalent to late in the 2000 or 2007 topping processes, effectively January 2008 or October 2000. Both historical mirrors saw a similar collapse to a capitulative reversal point before a rally back up like now:

And in both instances price came back down to the lows, again stabilising against a rising MACD.

So all three analogs suggest price should come back down to retest the lows and stabilise around those levels over a period.

If this is not to occur then we could look to mid-2007 for the more bullish outcome:

A rally all the way to marginal new highs from a single-legged correction. However, I remind you that this corrective leg was the start of the market topping divergences in 2007, whereas now we are mature in those divergences, equivalent to January 2008. Various indicator readings just don’t match up well with mid-2007.

If we draw in the crash analogs, such as 1929 and 1987, then we are still in keeping with the second chance moves to a lower high before the true collapse, but only if we now roll over again over the next several sessions and head back down to last week’s lows. Crashes may not occur often, but I maintain that we have all the conditions in place for one to occur, and I stick with this being the most likely scenario: reversal around tomorrow’s new moon and then major crash into the beginning of November. Stabilisation to occur from much lower.

If we are not heading for a crash then the three analogs at the top of the page show that we should still make a retest of last week’s lows. I think the mid-2007 analog has the slimmest chances of reoccurrence but it will become clear over the next several sessions as if something like that were re-occurring then stocks would consolidate yesterday’s break upwards and rally higher still.

All the other analogs argue for a reversal back down without delay, and this still looks the most likely (geomagnetism is in progress, capitulative breadth is back to zero and various indicators are overbought), so I leave the analysis there for today and we see if that occurs before the week is out. If it looks like we are rolling over again then I will add again to the short positions.

The Week Ahead

Posted on October 19, 2014October 19, 2014 Posted in Geomagnetism, Indicators, Stocks234 Comments

Earnings season continues. So far from those who have reported, EPS growth in Q3 is 5%. I remind you that the projection for this quarter was 12% at the start of the year, down to 9% by mid-year and most recently cut to around 5%. To justify equity valuations, earnings growth needs to come in at over 10% each quarter. Q1 came in at 2.2% and Q2 at 7.7%. If we stay at around 5% this quarter, then average earnings growth this year is less than half that required. In fact, this has been the theme for 2.5 years: price front-running a return to solid earnings that has not materialised. Consequently, valuations are at the historic extreme, and the pending repair in price I believe is now underway. When this occurred in 1937, the repair took 8 weeks post-solar-maximum and dropped equities by 38%. Up the stairs, down the elevator, both ways assisted by the sun’s influence.

The sentiment drags continue. 1. We are (very likely) in the post-solar-maximum hangover, 2. October is the geomagnetic seasonal low, and 3. There is a period of actual geomagnetic disturbance predicted right ahead:

Source: NOAA

It is the new moon on Thursday 23rd. After that we add the 4th pull on sentiment into the mix: the lunar negative fortnight into the full moon. I remind you that 6 of the 10 biggest Dow down days in history occurred in the window now and right ahead:

19 Oct 1987
26 Oct 1987
28&29 Oct 1929
6 Nov 1929
15 Oct 2008

In addition to our positioning in that worst window for sentiment, the other conditions for such a repeat crash are in place:

1. Extreme high valuations

2. A long period of price mania: levitation with no meaningful correction

3. Extreme leverage that historically unwinds in a disorderly manner

4. Very lopsided bullishness and allocations

5. A technical price break

In the last couple of weeks we saw the technical price breaks: the Russell 2000 breaking down from its 2014 range and the SP500 making a lower low beneath its 200MA. However, by mid-last-week we saw some washout in indicators from which a relief rally in price erupted into Friday’s close. However, I believe this will be short-lived.

Rob Hannah’s capitulative breadth hit a dizzy 19 but dropped to 4 by the end of the week. Sub 3 is neutralised, so we have a potential set-up for this to occur at the beginning of this coming week. I refer you back to last week’s posts as to why the correction into last Wednesday is unlikely to be a v-bounce and we should at least re-test the lows on positive divergences in the most bullish scenario. Further supporting this idea, we see selling climaxes spiked last week, but as per 2011, this ought to be just the first spike as the market builds out a bottom:

Source: Schaeffers

New highs-new lows turned negative, other historic instances shown below. Another price low ahead is the most likely.

Source: Andrew Kassen

The 1929 analog not only won’t die but looks at its most potent here, as not only the topping pattern but the dates match up very well (the crash coming at the seasonal sentiment weak spot):

Source: MRCI / My annotations

If we zoom in on the second chance we can see it amounted to just several days of relief rally.

Source: Ritholz

This is just a guide as to how the waves could play out, given the similar conditions of valuations, leverage, seasonal and technical breaks, but it’s not unreasonable for it to play out that way forward too:

What I suggest could occur is a little more upside at the start of this coming week (CBI neutralisation), followed by a move back down towards the lows of last Wednesday (which can be slightly higher or lower), aided by the forecast geomagnetism and in line with typical stabilisation basing patterns (10% corrections are typically not v-bounces, and typically involve Trin spikes and positive divergences before rallying – both missing so far). If a true low is to form there, then we should see positive divergences in indicators and more evidence of washout or capitulation. That would then provide a firm base for a rally. However, if we see no positive divergences or capitulation evidence then we should break lower, and that removal-of-doubt in buy-the-dip potential ought to be the catalyst for the panic selling.

SP500

The period at the end of October into the full moon of November 6th would be the most appropriate window for this to occur: negative lunar fortnight, geomagnetic seasonal low, post-actual-geomagnetism, and of course post-solar-maximum. After that we have a window into year-end in which seasonal geomagnetism provides tailwinds for the market.

So I am suggesting that either the market stabilises at the decision point shown above and rallies back towards the September highs into year end, or the market collapses at the decision point and crashes before a relief rally erupts into year-end from a much lower level. The weight of evidence supports the latter, but indicator readings at the decision point, should we get there, will provide further clues.

I remind you that certain indicators have a long way to go before we could argue for capitulation and washout. Indicators such as Investors Intelligence, asset allocations, valuation measures and leverage measures. A large magnitude drop would be necessary to correct these imbalances. I also remind you that we are now (very probably) in the period post-solar-maximum whereby the preceding mania turns into the resulting crash (Nasdaq in 2000, Nikkei in 1990, gold in 1980). A crash was the norm in the last 3 solar cycles, not the exception. It may be index-specific, but so far no index has crashed.

The most likely candidate for the heaviest falls remains the Russell 2000, I believe. A 14 year outperformance versus large caps, climbing to a mania into the 2014 solar maximum to its most expensive ever valuation and a p/e of over 100.

Source: Stockcharts

It has broken down from a likely topping formation and is now attempting a backtest of the breakdown. A repel here should cement the new bear market, and generate the major sell-off. Invalidation of my case would be a break back up into the 2014 price range.

Comparing Stock Market Peaks

Posted on October 17, 2014October 17, 2014 Posted in Indicators, Solar Cycles, Stocks201 Comments

The most common idea I’m reading on Twitter currently is that the current stock market correction is an echo of July 2007, implying a rally back up to marginal new highs may be next. However, these traders are mistaken in where we are in the topping process.

Comparing 2000, 2007, 2011 and 2014 tops, here are two measures of Nasdaq breadth: cumulative advance-declines and stocks over 200MA (the latter not available for 2000). Breadth diverges at stock market peaks. All 4 periods saw a topping process lasting around 6 months with 3 Nasdaq peaks. Over the 6 months and from the 1st to last peak we saw consistent degradation of breadth.

Source: Stockcharts

The last chart shows that here in 2014 we have also seen a 6 month topping process with 3 Nasdaq peaks and both breadth measures diverging from the 1st to the last peak. If we were now in July 2007 then we should be at the start of the topping process, about to begin the breadth divergences. Instead the comparisons put us at the end of the topping process, akin to December 2007.

Next, here is the SP500 versus three different indicators of a market peak: high yield bonds to treasuries ratio (not available for 2000), consumer discretionary sector to utilities ratio, and Dow-gold ratio. They also all typically diverge during a topping process, showing an underlying shift to defensives. Once again we see in all periods the 3-peaked 6-month topping process, and the divergences beginning at the 1st peak and completing by the final peak.

The last chart shows 2014 has produced an anomaly in the Dow-gold ratio (it is flat, rather than down, for the year), but the other two indicators mirror the previous peaks, and again their progression would put us in December 2007 not July 2007.

I’d like to stress I don’t think 2007 is the best mirror (in case you are now studying the action post December 2007). 2000 was a solar maximum like 2014, and shows marked similarities in Rydex and Q-ratio, amongst others. I have made a case that 1937 is the most appropriate mirror from history, but most indicator data does not stretch back that far. Rather, my aim here is to disprove the idea that we are at the beginning of a topping process.

Next, here is margin debt. Whether we measure from real margin debt peak to real SP500 monthly peak, or from nominal margin debt peak to the end of the nominal topping process (the third peak), the range is between 3 and 7 months from margin debt peaking to the market beginning major declines in earnest. So it is another leading indicator, or divergent during the topping process.

Source: DShort / My annotations

In 2014, margin debt peaked in February and given market declines in September and October we can be confident that peak will continue to be honoured. This again makes a case for stocks now being at the end of the topping process, tipping into the major declines.

And lastly, NAAIM manager exposure to equities is also doing the rounds on Twitter currently, due to the latest reading having sunk to 10% (note this chart below is from 4 Sept so I have added the latest reading). The chart shows that NAAIM is smart money, or again a leading indicator / divergent during the topping process.

Source: Acting-Man / My annotations

The period of divergence in 2014 echoes that in 2007. Once again, this suggests we should be at the end of the topping process, not the beginning. We can see that NAAIM actually went negative in the corrections of July/August 2007 and Sept/Oct 2011, so lower than +10% is possible, but rare. We can also see that in January 2008, just after the topping process completed in December 2007, NAAIM dropped sharply to just over 10%, and this in fact reflected the true start of the bear market, rather than a washout buying opportunity. Given the other indicators above would also position us in January 2008, and around 40 indicators called a bull market peak this year, then this is also most likely the tipping point into real bear market declines, not a buying opportunity.

Finally for today, just a quick note on the 64-month bubble idea (this article). Cal referred this latest update to me and WT suggested the same conclusion that I will. The writer claims that bubbles last 64-65 months from start to peak. Having done my own calculations, I argue he has used some artistic licence, because the range of his examples are rather from 36-85 months. Various start dates that he has used are highly questionable. Nonetheless, if we give him some leeway then the range could be tightened up to perhaps +/-10 months around 64, and this broadly fits with the period from solar minimum to solar maximum, or from a speculation low to a speculation peak. Some of his examples are exactly that, e.g. the Nasdaq into 2000 or the Nikkei into 1989.

Source: Solen

He doesn’t have a compelling reason for why bubbles would last 64 months, and that’s not good enough for me. Whatever the discipline or angle, I want to see a correlation and a scientific or logical reasoning for it. So in short, the data suggests a range for bubble durations, making his quote an average at best, and it fits the solar cycle duration, for which we have evidence of biological effects on humans that cause fluctuations in excitement and speculation. Ultimately, trying to time a peak using a 64-month calculation is likely to fail.

To the markets short term. Yesterday produced a doji candle in US large caps so we roll over to today. The balance of evidence still suggests we are post-second-chance, or post-3rd-and-final-peak in the above analysis today. Therefore, there should be no rally back up towards the highs and I believe we will soon engulf Wednesday’s candle to the downside.

What today’s analysis shows is that the anomaly is in price here in 2014, in that the July and September highs were higher highs in the SP500 and Nasdaq, making for what looks like an uptrend rather than a 3-peaked topping process. But in fact the behind-the-scenes indicators reveal the topping process and that those September highs are equivalent to September 2000, December 2007, or July 2011. Much later in the topping process than many analysts think. What’s also important to note is that those three topping processes all involved a decent correction during their formation, whilst in 2014 a meaningful correction has been avoided until now. That implies we have stored up a mega-correction, and this idea has support from indicators such as Investors Intelligence, Skew and Rydex which have been held at major extremes this year, like highly stretched elastic bands. Therefore, not only are we now most likely already in true bear market declines, but there is a strong likelihood of a crash akin to 1929, 1987 or 2008 at the centre of those declines. Most analysts are going to be completely wrong-footed by what transpires.

Recall that Rydex, margin debt, loan issuance, Investors Intelligence, fund manager allocations, household allocations and other indicators collectively revealed a situation of stock market participants being all-in on equities with totally lop-sided portfolios and having taken on as much borrowing as they could to further invest. Maximum speculation as generated by the solar maximum. I referred to his before in trying to gauge ‘fuel spent’ for the stock market, as it strongly looked like we had reached saturation.

Now here we are in Q4 2014 post-solar-maximum, with people unwittingly less keen to the buy the dip, and even less so at the seasonal geomagnetic sentiment low of October. We saw a change in market character in September, at which point I believe the smart longs got out. The falls in October to a lower low and sub 200MA cemented the new reality and the next level of players exited. The next development I believe is that we see no rally back up towards the highs but instead collapse further and sharper, at which point the remaining dumb money will be scrambling for the exits, resulting in a crash. Because, the point is, all those indicators collectively showed that we had reached effective market saturation: no bears left to convert, no more fuel to buy, and tremendous lop-sidedness. With a demographic headwind, the market needed the steep increase in leverage to push it higher, but this has to be fully repaid and history argues by way of forced redemption panic selling. Who will step in to buy and shore the market up? All those indicators plus collective demographics in the major nations suggest the queue to buy the stock market is now fairly empty. Therefore, the current trickle over to the bear camp, to selling and shorting, has very little counterbalance. Stock market declines should therefore come easy, and once the trickle becomes a flow, the market should accordingly crash.