Equities Bear Began July 2014

It’s becoming clearer with hindsight and this is what I see.

1. The bull market topping process in equities kicked off January 2014:

6ja7Source: Stockcharts

2. Speculation peaks with the solar maximum, which was April 2014, putting equities on borrowed time after that:

6ja9Source: NOAA

3. US stocks measured in USD and relative to bonds both peaked mid-year 2014, compare to previous major peaks here:

6ja1 6ja24. Multiple world stock indices peaked at the turn of July, most of the rest by September:

6ja4 6ja55. US stocks composite, breadth, volatility and oil all turned at the start of July:

6ja20

6. The very last global indices peaked out at the end of 2014, with the peaks largely fitting the geomagnetic seasonal model (mid-year, end of year) and close to the new moons of June 27 and Dec 22:

30dec127. These final peaks were delivered on saturation in sentiment and allocations:

6ja3

(AAII equity allocations in December reached their highest since June 2007 too).

8. The final push from mid-Oct to late Dec was purely multiple expansion as shown below, as falling oil and rising dollar both cut earnings forecasts.

Screen Shot 2015-01-06 at 07.28.50

Source: Yardeni

9. US leading indicators have dropped sharply since mid-year and echo previous major peaks:

6ja6

Source: DShort

10. Ditto financial conditions:

6ja12Source: Charlie Bilello

Plus, the US yield curve has flattened more sharply in December, whilst German and Japanese bond yields have reached record lows.

11. Meanwhile sentiment and relative value in the precious metals sector mirrors the 2000 major reversal in gold:equities.

6ja13

Source: Inflated Temper6ja10Source: Gold Trends

Therefore, in keeping with the geomagnetic model, equities should tumble from here to a low around March-time, whilst gold breaks upwards. However, this does not preclude further oscillations in the near term. Short term, we are reaching several oversold readings in equities plus we are now through the full moon.

6ja15

Trin and put-call could produce a bounce here. Capitulative breadth hit 3 yesterday, so not yet at a reversal reading but perhaps getting there with some more selling today/tomorrow.

To sum up, I see the effective peak in equities as the start of July 2014 and any rips in stocks to be sold (whilst gold should rise). Stocks may get a short term bounce but we should finally see the major drop in equities as we head towards March. Earnings season begins 12 Jan and ought to be a sell due to the sharp downward revisions. Historically, major price drops were swift, lasting just 2-8 weeks, so we need to be alert for signs the allocations and leverage is starting to be disorderly unwound.

 

 

 

 

 

 

End Of 2014

I’m back and refreshed. Thanks for all the messages, and for all the comments in my absence. Here is the big picture.

1. Primary shift to defensives and away from risk occurred as of January 2014, as measured by stocks to bonds, cyclical to defensive sectors, small caps to all caps and high yield to treasury bonds. Clock ticking from that point.

30dec2

 Source: Stockcharts

2. Solar maximum looks to have occurred around April 2014, marking peak speculation. Equities mania on borrowed time thereafter.

Screen Shot 2014-12-30 at 06.16.52

 Source: Solen

3. Game over effective start of July. World equities, crude oil, high yield bonds and the US dollar all turned at that point. Deflation in charge.

30dec44. US equities composite, breadth measures and volatility all show the same reversal at the same point: start of July.

30dec1

5. Those twin peaks in risk appetite at the start of the 2014 and mid-year fit the seasonal model which is from the influence of geomagnetism:

30dec12

6. Which sets us up for a final peak at the end of Dec 2014 / start of Jan 2015 for those remaining stock indices which have yet to top. I referred to this as my worst case scenario (latest peak) in 2014.

30dec15

7. Developments in December support this now happening: sharpening falls in crude and government bond yields, flattening of yield curves, blow-off top in equities allocations.

30dec530dec10

8. A new bear market in stocks will be a cyclical bear within an ongoing secular bear market. No new secular bull market as many believe.

30dec16

9. This secular position is dictated by demographics.

30dec20

10. The other play from this is that gold should enter a new cyclical bull within an ongoing secular bull, and this is supported by recent signals such as miners:gold ratio, gold/miners sentiment and price basing patterns.

12se1

 Source: Glenn Morton / My projections

11. A sampling of stock indices from around the world, below, shows 2014 has been clearly either a large topping process or a large consolidation range. If the latter, then we should have seen excesses in valuations, sentiment, allocations and leverage worked off with time rather than price, yet all those measures remain highly stretched, suggesting this is a topping process.

30dec3012. Plus, the two strongest sectors of 2014 are the two that are historical associated with outperformance after bull markets peak out:

30dec7

Source: Macromon

13. The peak-to-date in margin debt remains close to the solar maximum. This leverage, along with major extremes in sentiment, allocations, tail-risk, valuations and our post-solar-maximum status, is the set-up for a market crash. To repeat what I have said before, until/unless these measures are reset without a crash, then history dictates that is the most likely outcome. Crashes don’t occur often, but when they do, the set-up looks like the current.

30dec9

Source: DShort30dec8

14. Leading indicators and the longer term stocks:bonds ratio resemble 2000, 2007 or 2011, suggesting a minimum 19% drop in equities. This is the percentage figure I quoted as my general target for short positions because, stretching the view to the last 100 years, this is the minimum we should expect without being greedy by aggregating various angles on the market. To be clear though, the set-up is compelling for a bear market, not just a sharp correction, so I refer you to the secular bear chart above for the bigger projection.

30dec40

Source: DShort30dec41

15. Which brings us to the value of history as our guide, because 2014 taught us one key lesson: 100 years of reference points may not be enough, we need to allow for the unprecedented. An aggregation of angles shows how unprecedented 2014 became:

30dec50

 Source: Hussman

So what caused this? The most common view is that central banks brought this about with their policies of ZIRP and QE and unwavering verbal support. However, I maintain that ‘central bank policy trumps all’ was rather the mantra for this solar maximum mania than the driver. To prove this, we should now see equities collapse and gold rise despite central banks, and that is the final part of the real time test for the power of the solar maximum. If I am incorrect, then equities should continue their bull market in 2015 as central banks policies overrule. However, I refer you back to all the topping indicators and angles in equities that have amassed, together with the examples of 1930s US and 1990s Japan which revealed central banks’ true relative impotence. Ask yourself if typing numbers into a computer (ZIRP and QE) and saying a few soothing words can really work.

The crazy stretching of indicators delivered this year made for the most difficult year of trading since 2000, the last solar maximum. So if I can make one prediction for 2015, it is that it will be easier and more predictable. I am short equities and long gold and expect patience to be finally rewarded. I wish you all the best for the coming year.

In Perspective

1. The start of January brought the shift to defensives, measured here in 4 ways: stocks to bonds ratio, cyclical to defensive sector ratio, small caps to all caps ratio and high yield to treasuries ratio.

9nov10Source: Stockcharts

2. The best performing sectors in 2014 all year have been health care and utilities, the two defensive sectors that perform best once the stock market peak is in.

9nov15Source: Macromon

3. The yield curve, measured here by 2y versus 10 yr treasuries and 2m versus 10 yr treasuries, has flattened ever since 1st Jan. We won’t get an inverted yield curve under ZIRP so flattening takes over as a topping warning.

9nov114. The best performing asset class in 2014 has been government bonds and the chart below shows this has been a global phenomenon (Germany, Japan, UK and US quoted by 10 yr yields (bonds inverted)), again since Jan 1st.

9nov85. Looking at stock market breadth, deterioration has been under way since almost the turn of the year in the Nasdaq indices.

9nov126. Whilst the NYSE, SP500 and Dow picture reveals breadth issues since the turn of July. We can also see there was an earlier bad-breadth run into the turn of 2014 which was subsequently repaired: like an attempt at a bull market peak but it wasn’t quite ready.

9nov137. Turning to sentiment, NAAIM manager exposure to equities has been dwindling since Jan 1st, whilst Investors Intelligence bulls made a double peak 1 Jan and start of July, since which they have dwindled too. Meanwhile, Vix made its low at the start of July and has been in an uptrend since then and Skew has stayed elevated for a year, with triple peaks in Jan, July and Sept.

9nov148. Commodities have been in sharp decline since the turn of July, as the US dollar sharply rallied, in a deflationary wave.

9nov69. For US earnings, a rising dollar and falling oil prices is overall doubly negative. Q4 earnings growth has recently been accordingly cut in half to 4.5% and sales growth cut in half to 2.2%. Earnings growth has missed target in each of the first 3 quarters of this year. The average of 5 valuations puts US equities the joint second highest in history after the 2000 mania. There is a big gulf between price and earnings.

10. Global stock indices look like this. European indices peaked out by the start of July and have since made a lower high and lower low, the definition of a bear trend.

9nov2

11. The Hang Seng, Bovespa, Kospi and Australian index all made peaks at the start of September.

9nov4

12. However, the US SP500, Dow and Nasdaq, as well as the Japanese Nikkei have all made new marginal highs since then.

9nov1

13. The Russell 2000 double topped at the start of March and start of July, whilst the overall Dow Jones World double topped at the start of July and start of September. Junk bonds and leveraged loans also made July/Sept double tops and lower highs and lows since.

9nov5

Across all the above charts in this post, three dates consistently stand out: the start of Jan, start of July and start of Sept. The topping process began the 1st January and additionally the Sornette bubble end flagged on the SP500 at the start of July and on Technology at the start of September. Insider selling peaked at the turn of the year and we have seen six major distribution days since then without any major accumulation days. Put/call ratio, bullish percent and the summation index additionally point to the relevance of the start of Jan and start of July:

9nov19

Now draw in the solar cycle. The likely smoothed maximum was April 2014 (based on SIDC, Solen, NOAA, IPS and polar switch). Here’s why the smoothed sunspot maximum is important, it generates peak speculation events:

9nov22

Either side of the expected smoothed solar maximum of April 2014, we have two seasonal peaks (inverted geomagnetism peaks) of turn-of-year and mid-year:

5nov40

Homing in on the new moons of those two periods we get specific dates for a triple peak confluence of speculation/optimism: 1st January 2014 and 27th June 2014. I believe this is a compelling cross-reference for all the market charts above. We see multiple index and indicator peaks clustering at the very start of Jan and very start of July (both within two trading days of the new moon).

So I maintain this is the true picture of where we are, mirrored on the last solar maximum stock market peak of 2000:

30oc6

30oc5

And I still expect stocks to reverse here like they did at the same point in 2000:

9nov17

We have had several days of small range consolidation with a slight upward bias (averaging the 4 US indices), whilst sentiment and allocations are bumping up against invisible limits. I therefore believe the next move is down, like the subsequent red candle above. Furthermore, I believe that is then the end of the topping process in global equities. It effectively ended at the start of July, and really did for various indices shown further up, including the overall Dow World. But we have now seen new highs again in US large caps which on the surface look bullish, but underneath not.

I believe the unprecedented extremes in levels and durations of price levitation, sentiment, allocations, leverage, tail-risk, and negative divergences mean a crash is coming. Like an elastic band stretched to the limit. The superficial 2014 bull trend in US large caps is nothing of the sort under the surface, but has served to fool most into a false sense of security. This last rally from October to November has sucked everyone in again (sentiment, allocations) and we have extreme lop-sidedness in the markets. I believe equities will tip over here and fall hard and fast, with no reprieve this time. No dragging on until year end: the megaphone formations on the US large caps are ripe for resolution now and overbought/overbullish indicators support this.

7nov120

The October monthly hanging man candles suggest November should be a significant down month. I maintain the view that the evidence is too compelling now for consideration of an alternative scenario. If you remove me from the equation then there is an awful lot of fact in the above charts and many other recent charts that I have relayed that a bull needs to explain away. Simply, too many. However, we can argue there is a middle position in accepting all the warning flags but predicting prices can still yet go higher into year end under dual positive seasonality. Perhaps a scenario of increasingly thin volume and increasingly bad health but still scraping higher.

The problem with that is that whether we look at Nymo, Rydex, II, AAII, RSI or the ascent and shape of the Oct-Nov rally we see the same tell: exhaustion. Stimulative action from the BOJ and ECB in recent days have failed to catapult global equities higher. So I believe the middle position’s best hope is that equities retrace away from these exhaustion levels but then quickly washout, to enable a December rally into year end. However, I would refer you again to our positioning in the topping process. There is no case for another rally. If we tip over this week I believe that is it: equities won’t come back again. This is what I expect to happen.

Screen Shot 2014-11-04 at 07.53.54

SP500 Monthly

Game Over Start Of July

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.

4nov3Source: Stockcharts

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

4nov21

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

4nov44. 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.

4nov95. Ditto the Mclellan Summation Index and the trend change in put/call ratios:

4nov7

6. Nasdaq breadth significantly diverged at that point.

4nov8

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

4nov18

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

Screen Shot 2014-11-04 at 08.00.44Source: 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.

4nov15

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:

4nov16

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:

Screen Shot 2014-11-04 at 07.53.54

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:

4nov19 4nov1Whilst 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.

4nov2 3nov1Stocks should roll over this week. Then November should be a big down month. This really should be game over for the bulls.

The Week Ahead

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:

Screen Shot 2014-10-19 at 06.23.42

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:

19oc1Source: Schaeffers

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

19oc2Source: 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):

Screen Shot 2014-10-19 at 06.51.28

Source: MRCI / My annotations 

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

19oc5Source: 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.

Screen Shot 2014-10-19 at 07.17.40

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.

19oc10Source: 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.

Last Quarter Of 2014

September finished as a down month for all US stock indices, which means the peak in margin debt should remain as February. Cross-referencing: SOCL, RUT and Nasdaq breadth peaks are still signalling a likely Feb/Mar speculation top, whilst biotech remains tentatively supportive, at a double top with March. The smoothed solar maximum continues to look like it occurred around March, so the whole picture remains strong for a sun-driven speculation peak around March and a period of ‘borrowed time’ for equities since.

1oc9

1oc2 1oc3

The SIDC chart shows that they are still running with an alternative in which the smoothed solar max double tops ahead at the end of the year, but the majority of other solar scientist models are aligned to their SC prediction (smoothed max behind us, circa March). By cross-referencing with measures of speculation above, the behind-us scenario gains further weight.

The Russell 2000 has now reached the key technical level around 1100 for triggering potential waterfall declines, and it arrives here at the most bearish point in the year, the seasonal geomagnetic low of October supplemented by downward pressure into the full moon of next Wednesday 8th.

1oc1Conversely, if the RUT and other US stock indices can hold up through the full moon and the rest of October, then a year end peak in large caps would gain weight, with the seasonal upward pressure out of November. As things stand though, the recent collapses in junk bonds and inflation expectations, the September declines in all stock indices and the acuteness and maturity of many different stock market indicators (which I have detailed on this site) all support the October breakdown option.

Turning to other markets, the US dollar is in a parabolic ascent, the Euro a parabolic descent, and the slide in precious metals continues. All three show extremes in positioning and indicators that are suggestive of a reversal, and the parabolic trajectory of the FX pair suggest a snapback should be imminent, but when?

1oc8 1oc5I see it as linking in nicely with the situation in equities. If US equities break down through the key technical supports (to clearly kill the prospect of another v-bounce), then gold should at that point reverse course, and the dollar may then be sold off. Much of my recent work on stock market indicators shows that the case is strong for equities to break down without delay, suggesting these intercorrelated reversals ought to indeed occur here in this pertinent window at the beginning of October.

The rising Dollar negatively affects 45% of S&P companies. Earnings season for Q3 gets underway next Wednesday, and the predicted earnings growth rate is 4.7%. This stood at 8.9% on June 30th and 12.2% at the start of the year. For the YTD picture, US earnings growth forecasts at the start of 2014 were Q1 4.4%, Q2 9.2%, Q3 12.2%, Q4 13.5%, whilst actuals are Q1 2.2%, Q2 7.7%, Q3 4.7% (est). In other words, to justify valuations, average quarterly 10% earnings growth was required and projected, but the reality looks like less than half that. As earnings season typically have a ‘sell’ or ‘buy’ theme, I suggest odds are this one will be a sell (as reality dawns), and help pull down equities in October.

At the macro economic level, economic surprises in Europe and China continue to languish negative, whilst the US remains positive. The global real narrow money leading indicator predicts a slowdown once we hit 2015, whilst ECRI leading indicators for the US remain poised at a low level from which a fall in equities would likely tip then negative. This brings me back to what leads what. I recently covered that equities in fact tend to lead leading indicators by a month on average and that previous major tops reversals in leading indicators only occurred once equities had made initial hard falls, which in 2014 they have yet to.

This in turn leads me to the question of whether equities could yet have a second chance peak ahead, like in August 2000 (after the first March peak) or October 2007 (after the June top). In both those scenarios, large caps dropped around 15% before rallying to the second chance peak, whilst leading indicators diverged negative into the second chance peak. The possibility here would be for large cap stocks to break down in October, perhaps 15% again, but then rally back up towards the recent peaks by year end, perhaps for a 31 Dec second chance (lower) peak.

Well, the speculative targets of RUT, SOCL and IBB all show second chance peaks already. Developments in margin debt, HYG:TLT, NAAIM, Rydex and various mature divergences also suggest we should be at second not first chance peak. But the price patterns in large caps don’t really fit. UBS side with the year-end second chance prediction, shown below, yet beneath that their TNX divergence chart is another indicator conversely suggesting we should be at second chance peak already:

Screen Shot 2014-10-01 at 12.12.28 Screen Shot 2014-10-01 at 09.56.18I suggest that if we are post-second-chance but having ‘cheated’ a decent first chance correction (and this is the picture painted by most stock market indicators), then the falls from here should be twice as hard and echo action post-second-chance in 1929, 1987, or 1989 (Nikkei) whereby the falls become waterfall declines or panic selling. If the selling is more measured and back and forth then we should alternatively look to indicators to washout and align for a bottom at perhaps a 10% or 15% correction, before a potential rally into year end.

This last quarter was the best quarter so far for viewing stats on solarcycles.net. The best month was this last month (shown below), the best day just yesterday. So, thanks for reading my analysis and thanks to all those who contribute and make for a good discussion board.

Screen Shot 2014-10-01 at 10.01.55

To sum up, I’d give 80% odds to equities falling in October through technical supports and cementing a new bear market. I’d give 20% odds to equities holding up into or making a second chance peak at year end (both around 31 Dec). I don’t have a case for a bull market extending into 2015, as this would invalidate a variety of historically reliable indicators with different angles on the market.

As this is the last quarter, it seems appropriate to stick this up: predictions from the professionals at the start of 2014 for year-end. We can see that all were bullish on equities, predicting an up-year (accepting that they largely play it safe and align with each other). As you know, I was bearish at the turn of 2014 and always expected us to end the year in a bear market, so it’s a black mark against me if we don’t. But I believe the weight of evidence still supports the markets swinging to me by year-end, so let’s see at 31 Dec.

Screen Shot 2014-10-01 at 13.10.46

As Things Stand

The stock market topping process began at the turn of the year:

4se44se3

Speculation peaked in Feb/Mar along with the likely smoothed solar maximum:

Screen Shot 2014-09-02 at 16.34.44

So, topping process phase 1: turn of the year risk peak; topping process phase 2: Feb/Mar speculation peak. Topping process phase 3: mid-year bubble end peak:

Screen Shot 2014-09-04 at 10.13.48

The major stock indices peaked suitably at the seasonal highs close to new moons, either side of the speculation peak epicentre:

4se7The SP500 and Dow peaks are tentative at the time of writing but the signals are promising.

4se1 4se2

The Nasdaq has been the leader but also put in a potential topping candle yesterday.4se5

Has normality now been resumed? By normality, I mean negative divergences, volume patterns, sector rotation, lunar phasing, excessively frothy sentiment and allocations would all typically pull down the market. But the power of the solar maximum has trumped all, keeping the market levitated despite these being in play since the turn of the year. If the market still continues higher from here, then the sun’s influence isn’t through. But if the solar effect on humans is now waning, then the market should return to respecting those indicators of an imminent correction, and in doing so honour the phasing of the topping process as outlined above with a final roll-over here, into the typical period for market falls, Sept-Oct.

As previously noted, the aggregation of indicators and analogs suggests we should be in for a minimum 18% correction but most likely a bear market, and here is one more chart in support of that:

3se13

 

Timing Major Market Peaks: Revisited

In the original post (HERE) I showed that major market peaks typically occur:

1. Within the month – at new moons (optimism peaks)

2. Within the year – at inverted geomagnetism seasonality peaks (optimism peaks)

3. Within the decade – at the solar cycle maximum (speculation peaks)

Demographic trends determine which asset is the speculative target and whether the peak at the solar maximum is cyclical or secular.

My case is that stock indices have now all peaked out in 2014 and we are post smoothed solar maximum, so on those assumptions, here is how things stand.

The major world stock indices largely topped out close to new moons between Jan and July 2014 as shown in bold in the table, aligning with historic norms:

Screen Shot 2014-08-11 at 07.48.57The major indices, with the exception of the Russell2K, also peaked out at the seasonal geomagnetic peaks of the turn of the year and mid-year as shown below:

10au2The R2K peaked along with the hot sectors of IBB and SOCL, and margin debt, at the turn of Feb/Mar which is the projected smoothed solar maximum:

Screen Shot 2014-08-10 at 16.30.44

To complete the picture, demographics show us that this is a cyclical bull peak within a longer secular bear:

10au6In summary, equities were speculated up to a solar maximum major peak, making a cyclical bull peak within an ongoing secular bear that began in 2000. The topping process lasted from January to July 2014, centred around the smoothed solar maximum / margin debt / RUT / IBB / SOCL peaks of Feb/Mar. The Nikkei and various risk measures such as high yield:treasuries and dow:gold all peaked at the turn of 2013-14 at the year end inverted geomagnetism peak, and the remaining stock indices peaked throughout the month of July at the mid-year inverted geomagnetism peak. The majority of peak closes fell around new moons.

In short, the market peaks in 2014 align well with historic norms, if they were the ultimate peaks. If higher highs are still ahead in equities, then we are moving away from the (likely) smoothed solar maximum and out of the mid-year seasonal peaks into a less typical zone. We could make an outside case for final higher highs around the new moon of Aug 25, but this possibility is weakened further when we cross-reference with market indicators (see HERE), which also point to the topping process completing in July. Therefore, the case is strong for the top being in.

So to the short term. Markets appeared to invert at the full moon (Sat) on Friday, starting with a big drop in the Nikkei and ending with a firm close and downtrend breakout in the US. This has relieved the oversold indicators that were gathering, but paves the way for further gains in the first part of this week. If I am correct about our positioning post-second-chance then bull action should be weak and bears should regain control fairly swiftly. So I am looking for fresh lows later this week.

Market Crashes

Here are some of the all-time records delivered in 2014:

1. Highest ever Wilshire 5000 market cap to GDP valuation for equities

2. Highest ever margin debt to GDP ratio and lowest ever net investor credit

3. Record extreme INVI bullish sentiment for equities

4. Record extreme bull-bear Rydex equity fund allocation

5. All-time low in junk bond yields

6. All-time low in the VXO volatility index (the original Vix)

7. Highest ever cluster of extreme Skew (tail-risk) readings in July

8. Highest ever Russell 2000 valuation by trailing p/e

9. Lowest ever Spanish bond yields

10. Lowest ever US quarterly GDP print that did not fall within a recession

And this week:

11. Lowest HSBC China services PMI since records began

12. Lowest ISE equity put/call ratio since records began


What I have been pondering is, what are the chances that we see not just a market crash but an all-time record market crash, given the elastic band is more stretched than ever?


Here are the biggest crashes in history, covering US, UK and Japan stock indices:

2011 August world indices

2010 May flash crash US

2008 Sep-Nov world indices

2001 Sep FTSE

2000 Mar-May Nasdaq

1990 Feb-Apr and Jul-Sep Nikkei

1987 October world indices

1929 Sep-Nov Dow

1907 Feb-Mar, Aug-Oct Dow

Draw them together and all the crashes happened in two windows in the year: Feb-May and July-November, with the latter period being the most dominant. This fits with the seasonal model of the stock markets, where geomagnetism influences collective optimism and pessimism. The two red dotted lines show the scenes of the crashes, both running from peak optimism to greatest pessimism.

5au1What also unites those historic market crashes is the preceding extremes in valuations, sentiment, leverage, allocations and complacency. The current US stock market set-up is a mirror in all those regards and global stock indices appear to have finally rolled over in July as we entered the most common window for market crashes. So it is fairly clear that we have a crash ‘set-up’ if not a crash.

Additionally, those crashes of 1907, 1929, 1990 and 2000/1 took place in the waning of the solar maximum, with the sun first driving the speculative mania to achieve the extremes and then pulling the rug from underneath. Based on the latest solar data, we appear to be a similar position now, i.e. through the smoothed solar maximum.

2au11

To realise the biggest crash in history we would need to see the market halve in value in this window between now and November, which would mean the SP500 dropping to 1000 to August 2009 levels, i.e. the majority of the 5 year bull wiped out in a couple of months. That sounds utterly crazy, yes, but at the heart of a market crash is panic selling, whereby the selling reaches sufficient momentum to bring about a critical mass of forced redemptions and rapidly unwinds all the leverage. Sell levels trigger further sell levels and the process becomes unstoppable and out of control until exhausted. Given we are in many measures at the extreme of extremes, that process of exhaustion may cut deeper.

Amongst the historic crashes we see a cluster of big down days occurring on Mondays and Tuesdays (after weekend worrying) and close to new moons and full moons (at sentiment extremes). Also the waterfall selling typically erupted with the breaking of a notable technical support level following the passing through of a second chance peak (a failure high). I have argued that we have passed through the second chance peak as evidenced on RUT, IBB and SOCL and behind-the-scenes indicators for large caps. If I am wrong about that and large caps need to yet rally up again to a lower failure high then it would delay the initiation of the panic-selling. If however I am correct then the panic selling should be close at hand and we might then look to these possible dates for initiation, based on those historic patterns:

Mon 11 Aug, 1 day after full moon

Mon 25 Aug, new moon

To sum up, IF we were to experience the worst market devastation ever, then the set-up that we have would be pretty ideal for it, namely all-time extremes in valuation, sentiment, leverage, complacency, cross-asset valuation and allocations, the waning of the solar maximum, and the period of the year July-November.  Initiation for waterfall selling could potentially trigger around one those August dates.

I am not peddling fear, I am just drawing together the common themes of historic crashes and pointing out how we fit in. We fit in well, so we need to consider the range of potential results. I am not predicting the worst crash in history, but I am predicting there will be a period of waterfall selling at some point to wash out the leverage and I see no compelling case for that episode to be mild and anomalous compared to the others. We are flirting with deflation and nominal values are therefore at greater risk. Therefore, considering the possibility of the worst ever crash does not seem inappropriate.

Would central bank reactive measures nip a crash in the bud more easily now? These crashes all happened quickly: between 1 day and 8 weeks. That doesn’t allow them to do much. Would circuit breakers and exchange closures alter things now? They may cap the devastation on any one day, but spread it out to the following days or weeks. Might any crash be restricted to the hot targets of RUT, IBB and SOCL? It could be worst there, but unwinding leverage should affect all assets. Could any crash and unwinding of leverage be postponed until 2015? I can’t rule it out, but it doesn’t fit with the patterns in those historical mirrors. We could look to the end of October 2014 as a marker for that: if hard falls have not erupted by then, the likelihood would transfer to such steep declines not occurring until the Feb-May 2015 window.


Turning to the near term, yesterday’s bounce was in line with indicators, and sufficiently contained to be no real threat to the bear case so far. I have no expectations for today but want to see the markets turn down again into the coming weekend’s full moon. If I am correct about our positioning post-second-chance then essentially we should see bears resume control quickly. Another two day’s rallying from here, clawing back much of the 31 July falls, would not be in keeping with that.