Fire Is Lit

The fire is lit and should burn through pretty quickly, because if I am correct about this being the second chance peak (see HERE) then the mirrors from history reveal the end of the topping process gave way to rapid, deep declines:

Dow 1929: 3 weeks 44% declines

Dow 1937: 8 weeks 38% declines

Dow 1968: 8 weeks 18% declines

Dow 1987: 2 weeks 34% declines

Nikkei 1989: 6 weeks 27% declines

Nasdaq 2000: 3 weeks 35% declines

SP500 2011: 2 weeks 18% declines

They average out at 30% declines over 4.5 weeks. If it seems unlikely that we could see such a swift collapse after seeing such persistent strength, then know it is exactly what happened under these historic instances of similar extremes in valuations, sentiment, allocations, leverage, divergences and – for some – the peaking of the solar cycle. The lop-sidedness in sentiment and allocations, the excess leverage, the levitation above the 200MA, the mature divergences in place since the start of January: all together produce the ideal set up for waterfall declines or panic selling.

Yesterday, 31 July, finally delivered the kind of day I’ve been waiting for: a big gap down, selling that ran, a close at the lows and a major distribution day. It is also significant because I believe it is likely to cement the margin debt peak as February (all the indices ended down for July bar NDX, which was flat) along with bull market peaks in IBB, SOCL and RUT at the Feb/Mar turn. Plus, I believe it will cement the SP500 peak at 1987 (likely to get some coverage once the panic selling erupts) on July 24, which fell very close to the new moon and seasonal inverted geomagnetism (i.e. a twin optimism peak):

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All the indices look to have made ultimate highs or lower highs around those twin peaks in the middle of that chart. My seasonal chart then shows the potential for weakness from here down to October, as does the Presidential chart below:

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Source: Stock Traders Almanac

That gives us a window of 2-3 months in which we could see market falls, but the ranges from the historical mirrors further up are shorter at 2-8 weeks. So might I be wrong about the significance of yesterday (could we now rally up and print a new high in August before seeing the hard declines?) or might I be wrong about this being the ‘second chance’ peak (could large caps fall some more but then rally up again to a lower high in August/September, before hard falls erupt?)? I can’t rule either out, and the window we have (August-October) allows for both possibilities. However, my analysis puts us at the second chance peak, and the speculative-target sectors and indices of IBB, SOCL and RUT have all made clear lower highs making them likely to erupt from here into heavy falls. Could they potentially diverge from large caps? Also not impossible, but I suggest it is unlikely that small caps see panic selling whilst large caps rally or consolidate.

This is how the Dow stands after yesterday’s selling:

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 Source: Stockcharts

The wedge is clearly broken, so horizontal dotted support or the 200MA might now come into play. Nymo and Vix:Vxv are showing a potential bounce:

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Source: Stockcharts
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 Source: Cam Hui

However, if that was the second chance peak giving way, then there should be little chance given now to either get out of longs or add short, i.e. any bounce should be short-lived and the down days very unforgiving.

If the markets were to sell off again today, then historically we have seen some instances of heavy falls on the Monday following weekend worrying, so something to bear in mind. We have another week of negative lunar pressure next week, which adds to the bearish set-up. But let’s see if a bounce can be mustered today per those indicators.

If I am correct about the waterfall declines hitting now in this Aug-Oct window then drawing on those historical mirrors again, we ought then to expect a subsequent slower partial retrace of those falls lasting around 4 months. So hard falls averaging 30% over 4 weeks followed by a 50%+ retrace of those falls averaging 4 months, before we tip conclusively into a full bear market. The key then will be trying to gauge by when and at what level the panic selling leg is complete. As an initial marker, the lightest falls in those historical analogs were 18% which would be 1629 on the SP500 from the 24th July top. So as a guide I will be looking to refrain from taking any short profits until we hit at least there, but indicator readings will help refine that as we progress.

All subject to confirmation of course from the markets. It was just one day yesterday, but it does look like a killer punch, at the right time.

Three Peaks

By the end of 2013 we saw various divergences emerge that warned of a potential trend change ahead, and still do:

1jl1 1jl2The first major peak point occurred at the turn of the year, around the 2 Jan new moon and at the inverted seasonal geomagnetism peak (i.e twin optimism peaks), as these charts show:

1jl6 1j18There were inversions at this point in different assets and sectors, and the Nikkei peaked-to-date 31 Dec. Various risk-off, defensive and late cyclical assets and sectors have been the dominant money flow targets since then.

The second major peak was the central peak: where the solar maximum, margin debt and the speculative-targets of RUT, IBB and COMPQ likely made aligned tops, close to the 2 Mar new moon optimism peak:

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1jl10 1j12

The third peak, I believe, occurred at the end of June, close to the 27 June new moon optimism peak and the mid-year inverted geomagnetism seasonal peak (again, twin optimism peaks), to complete the topping process:

Screen Shot 2014-07-01 at 08.16.14 1jl9

Indicators showing the three peaks:

1jl15 1jl3 1jl5Screen Shot 2014-07-01 at 08.15.22The four main US indices aggregated also show the three peaks:

1jl20

And this echoes what happened in 2000, where there was a first peak around the turn of the year (real Dow, Nikkei and FTSE all peaked 31 Dec), a second central peak around March (hot sectors, margin debt and smoothed solar maximum), and a third and final peak around August:1jl19So could stocks then run higher yet and postpone the final peak until late summer or even further out? I can’t rule it out, and it is the main threat to my positions: greater drawdown before it swings definitively my way. However, the trend in leverage suggests further price gains from here are unlikely. The COMPQ is at a suitable double top, whilst the RUT and IBB should make lower highs here to honour the Feb/Mar central peak. Various indicators are stretched to levels that are suggestive of ‘all-in’ or imminent reversal. We have mature divergences seeking satisfaction and fundamental doubts through Q1 GDP, negative economic surprises and Q2 earnings warnings.

The bull case: low rates, benign leading indicators, cumulative-advance declines. But the rhyme with 1937 is still very applicable here in my view. Low rates and a/d breadth accompanied stocks to a high overvaluation peak, like today, front-running a return to normal growth and earnings that didn’t happen, and peaking out with the solar maximum. Q1 GDP has gone some way to puncturing that normalisation assumption again, adding to the other factors being in place. Earnings season could now add to that. Once stocks fall, the wealth effect from a rising equity market will evaporate, helping tip the fragile economy over, as it did in 1937.

Dow Jones $INDU

The Dow Jones Industrials stock index so far continues to honour both the May 13 DeMark price exhaustion high and the December 31 inflation-adjusted high, set against a backdrop of deteriorating breadth (top and bottom indicators):

29m20Yesterday’s potential new moon reversal tantalisingly sets the scene for renewed declines, to keep all in tact.

The relevance of the last-trading-day-of-the-calendar-year high is shown in the next two charts:

29m30 29m31…and the Nikkei peaked again on 31 December 2013, as did various risk-on / risk-off ratios shown here:

29m21

Just the Dow-Gold ratio is a little in danger now, which adds to the scenario: if the Dow stumbles again here, that 31 Dec peak will likely be maintained.

Time is ticking on US large caps, as various divergences are now mature, and so I have my doubts that a summer rally can be mustered here:

29m15

Source: Oppenheimer / Annotation: John Hampson29m40Source: DecisionPoint / Annotations: John Hampson

In short, the Dow is within easy reach of taking out both the 31 Dec real high and the 13 May nominal high to invalidate the above, and yet those risk-on cross-asset peaks of 31 Dec have not been taken out some five months later. So are we seeing the last gasp of a topping process, or consolidation before an overthrow leg higher? The answer lies right ahead.

Fake Out Top

By my work, that completes the cyclical stocks bull market peak.

The solar maximum is looking likely to have run from Dec 2013 through to April 2014 (smoothed peak ~Dec, monthly peak ~February, daily peak ~April). The real inflation-adjusted Dow peak stands at 31 Dec, along with the Nikkei, at the new moon. Various cross-asset measures also inverted at that turn-of-the-year, which has been historically potent, as the inverted geomagnetism peak. The Nasdaq and Russell 2000 peaks were at the turn of Feb-Mar, also at the new moon. The nominal SP500 and Dow peaked-to-date at the full moon of two days ago, making for an inversion.

If the solar maximum, inverted geomagnetism peak, and lunar phase extremeties rule the markets, then all four indices are now likely in bear markets, and whilst we won’t know that for sure for some time, we will know soon enough if those peaks are taken out.

It is the cross-referencing of the timing measures (solar max, geomag, lunar phase, DeMark) with the technical and fundamental indicators (valuations, sentiment, equity allocations, leverage, divergences, cross-asset performance, bull market measures, demographics) that makes this so compelling. The technical/fundamental indicators suggest the top timing should be now (Dec-May), the timing measures in turn suggest the indicators ought to be flashing red in that window, and they are. Indicators on red began to accumulate towards the end of 2013 and the last few recently fell into place: a decline in margin debt, a waning in the monthly sunspot count, a snapping of the parabolics (biotech, internet), DeMark exhaustion.

For these reasons, it is unlikely that the markets can extend longer or higher, and whilst I cannot rule out higher prices, the attempted break-out by the large caps of several days ago was an important test that looks to have failed. I still remain confident that waterfall declines will erupt, as the historic leverage is unwound, but the question is when. I was too early in their prediction as the solar maximum extended beyond solar scientists’ expectations. Assuming the solar cycle continues to wane from here, then I have two possibilities in mind. The one is those sharp falls erupt imminently, once technical price supports are broken. The other is they erupt around Sep/Oct at the inverted geomagnetism seasonal low, which has hosted most of the major historic waterfall declines. I am specifically talking about 3-4 weeks of panic selling, differentiating that from a more measured bear trend.

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Dow 1929 vs Nikkei 1989 vs Nasdaq 2000 vs Today

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:

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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:

25fe13If 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:

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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:

25fe7Alongside I’d like to remind you of the relevance of the (inverted) seasonality of geomagnetism for the timing of peaks and falls:

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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.

25fe8By 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.

Nasdaq 2000 vs. Nikkei 1989/90 vs. Dow 2013/14

The dot.com boom peak in 2000 occurred on a monthly sunspot spike at the ~11 year solar maximum, with the familiar topping process pattern of primary distribution – shake out – second chance – waterfall declines. The major declines and flash crash occurred in March/April, with associations of Mondays and the new moon (correlations that hold up in wider stock market history).

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The Nikkei boom peaked on the last trading day of 1989 on a monthly sunspot spike at the ~11 year solar maximum, with the same topping process waves. The major declines were centered around March, with associations again of Mondays and the new moon.

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The Dow peaked so far on the last trading day of 2013, on a monthly sunspot spike at the ~11 year solar maximum (11 years is average and this was a longer solar cycle), with a similar topping process so far.

13fe3With the historic associations of Mondays and new moons, we have a potential major down day Monday 1st March, which is the new moon (CORRECTION: Monday 3rd March, 1st trading day after the Saturday 1st March new moon), and based on the percentage drops of the Nikkei and Nasdaq we could potentially waterfall to 11,000 by the end of April. The relevance of March and April is captured here:

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Just as the seasonal peak of geomagnetism (inverted) corresponds to peak stock market seasonality and a clustering of major tops having occurred at the turn of the year, so the seasonal lows of March/April and October have corresponded to worst seasonal stock market performance and a clustering of market crashes.

The Second Chance

Into the end of last week we saw a two day rally for the stock market, making for a partial retrace of 2014’s declines. So how do things stand heading into this week?

1. Capitulative Breadth has reset from 10 to zero. So no further edge from this for the bulls: its rallying potential from Wednesday fulfilled.

2. Both volume and breadth on the down days in 2014 have exceeded volume and breadth on the up days, which is bearish.

3. The volume surge in January dwarfs anything from 2012 and 2013, suggesting this correction has further potential.

4. Citigroup’s panic/euphoria model is still in Euphoria, suggesting further declines are required for mean reversion:

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Source: Barrons/Citi

5. Put/call ratios (both CPC and ISEE) did not wash out sufficiently in the correction-to-date, suggesting further downside:

10fe2Source: Fat-Pitch

6. Nymo also failed to reach typical wash-out levels for a 5%+ decline.

7. Investors Intelligence latest bull-bear spread down to 29, but some way from the levels of previous correction bottoms:

10fe3Source: Astbury Research / UKarlewitz / My annotation

8. NAIIM sentiment down to 51, but durable lows historically sub 30, suggesting a deeper correction (Source: Fat-Pitch)

9. Skew remains historically elevated, suggesting more of a wash-out required

10. From Sentimentrader “Every time, since 1928, when SPX went from a 52-week high to a 70-day low within two weeks, it was higher in three-months, averaging gains of 8%”:

10fe4Such a drop from 52WK high to 70D low has occurred again in 2014. U Karlewitz has added the green dots to show that when these instances occurred there was some of kind of second low, before the rally to new highs.

In short, I have listed 8 indicators that argue for a deeper correction from here, and 1 indicator that argues for new highs, but before that some kind of second low, in the form of a double bottom or lower low. Plus 1 indicator now neutral: capitulative breadth. So that’s pretty good odds that the rally of the last two days of last week gives way to renewed declines ahead, and maybe we can time that.

11. Drawing on the 1929, 1987 Dow and 1989 Nikkei analogies (see previous posts), the peak of the ‘second chance’ partial declines retrace (the last chance to exit longs and the optimum point to short) occurred around 28-30 trading days from the high in each case. From the 31 December 2013 highs in the Dow and Nikkei, that would take us to this Wed 12 February – Fri 14 February, as a guide.

12. Looking at the biggest down days in history, there is a clustering around both new and full moons, as well as Mondays (after weekend reflection). This coming Friday 14 February is a full moon, and gives us the potential set up of falls into the Friday close, followed by a major heavy down day on Monday 17th February.

13. There is a geomagnetic storm in progress this weekend, for which we typically allow a lag of up 5-6 days on the markets. The pessimistic influence of geomagnetism together with the negativity into and around full moons, makes for dual negative pressure in the week ahead.

In short, I have a case for rally of the end of last week to give way to renewed declines during the week ahead, potentially making for large falls in the window Fri 14 Feb to Mon 17 Feb.

So what news or events are coming up as potential triggers for market movement?

14. Earnings season continues and currently shows a positive 65% earnings beat rate and 64% revenue beat rate, which may bolster the bulls, but we should be aware that this is set against a very low bar through record low earnings guidance. A more valuable picture comes from the blended earnings growth rate (8.1%) and blended revenue growth rate (0.8%) which is the sum of earnings reported and the projections for those still to come. So sales continue to be weak, as companies get by on cost-cutting, and that remains a negative for the markets.

15. The postponement of the debt ceiling issue ended on Friday and the US is projected to run out of funds to pay its bills by the end of this month, unless the Republicans and Democrats can agree on the criteria for increasing it. Whilst neither party would wish to risk default, this issue may now become a market mover again until resolved.

16. Emerging market issues may return to the fore as they continue to simmer.

17. Sunspots remain strong. This would become a threat (to the bearish case) if February produced the highest monthly spike in solar activity of solar cycle 24, understanding this is a driver of excitement and speculation. However, as previously noted, forecasts are fairly united in expecting the solar maximum to wane as of the turn of the year, and the fairly comprehensive set of cyclical bull topping indicators that already congregated support this from a different angle.

In conclusion, even if we allow for the lower probability of the solar max continuing to strengthen and a higher high in stocks still to come, we can nonetheless draw together all the points in the post above and argue that the stock market should first decline, likely starting in the week ahead and probably to a lower low, to fulfil a more satisfactory wash-out and based on a cluster of bearish signals. That would make the current ‘rip’ a sell, and thereafter we can assess again the clues for whether the ‘dip’ would be a buy. However, drawing together all the evidence of my recent posts, I maintain the balance of probability is that we have just experienced a major stock market top and that such a ‘dip’ will in fact turn out to be waterfall declines, and as such I will be adding to my short positions this week. I believe the current partial retrace of 2014’s falls-to-date will turn out to be the ‘second chance’, or rather last chance, to move from long to short on equities.

Timing Major Market Peaks

Starting on the smallest timescale, and working up to the largest.

1. Timing within the month

Lunar phasing influences human sentiment. It produces fortnightly oscillation in the stock market: positivity/optimism around the new moon and negativity/pessimism around the full moon. The cumulative influence of this can be seen in stock market returns over the last 20 years:

LE1

In keeping with this, we find that major market peaks typically occur close to new moons, around maximum optimism/positivity:

NewMoonMajorPeaksThis adds to the case for a peak having occurred in equities on 31 Dec 2013 (Dow and Nikkei, plus SP500 double top with 15 Jan), associated with the Jan 1st new moon. If that proves to be false and equities break higher, then a future new moon (next one Jan 30th) may produce the timing of the major peak.

2. Timing within the year

Geomagnetism influences human sentiment, with higher geomagnetic disturbance associated with negativity/pessimism. The inverted seasonality of geomagnetism correlates closely with stock market seasonality, and typically we find that major market peaks occur close to the peak in both, around the turn of the year:

13jan50

13jan11Gold made its secular peak on 21 Jan 1980.

Again, this adds weight to equities having peaked 31 Dec 2013, but if that proves false, then we might expect a final peak still to be at hand, in January, before the seasonal model turns down.

3. Timing within the decade

Solar maxima occur roughly every 11 years and produce human excitement, which translates as protest, war, and speculative excesses in the markets. Major market peaks typically occur at the solar maximum, close to the smoothed peak and on a monthly spike in sunspots.

SolarMaximaParabolicPeaksWe can measure speculative excesses in terms of market valuations, sentiment readings, leverage and technical indicators and we see a cluster of these in US equities currently. Solar forecasts, solar pole flips and sunspot counts collectively suggest the smoothed maximum and monthly sunspot spike may be occurring Dec 2013 into Jan 2014, which in association with those speculative excess readings, again adds to weight to a possible peak in the Dow, SP500 and Nikkei.

4. Timing within the century

Demographics drive secular bull and bear markets, as swells in investor or disinvestor age groups produce periods of upward or downward demand for equities. Japan’s secular stocks bull ran through 4 solar cycles due to a long positive demographic trend from the late 1940s to around 1990. Japan’s middle-to-old, middle-to-young and net investor ratios all peaked in the late 1980s, and accordingly we saw Japanese equities terminate with a speculative excess at the 1989 solar maximum, and thereafter move into a secular bear in line with demographic downtrends.

US demographic measures for equities demand peaked around 1965. The real SP500 peaked November 1968, terminating with the solar maximum of November 1968. Thereafter US equities entered a secular bear market, whilst gold, as the anti-equities or anti-demographic asset, entered a secular bull market. Demographics and equities bottomed around 1980, whilst gold made its secular speculative peak, all timed with the Dec 1979 solar maximum.

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US demographic ratios were collectively positive from 1980 to 2000, enabling a secular bull market in equities lasting 2 solar cycles through the speculative finale of March 2000, which was again a solar maximum. Gold endured a secular bear market through those two decades, bottoming out as demographics turned down around 2000, and entering a secular bull market.

Looking forward we see a slight divergence in the 3 charted demographic measures: the middle-to-young ratio bottoms out around 2015 but the middle-to-old and net investor ratios not until around 2025 (shown boxed above). When we draw in collective downward demographic trends for Europe and China, the greater likelihood is of a secular bear in US equities (and a secular bull in gold) lasting through to around 2025, rather than ending now. Solar cycle 25 is predicted to peak around 2023-2025, which would provide the timing for a speculation secular peak in gold.

There is a correlation between solar cycles and birth rate, with evidence of an 11 yearly peak in births. There is also evidence of a link between economic prosperity and birth rate, whereby births decline in recessions and bear markets and increase in the good times. Combining the two, we have the framework for alternating positive and negative demographic swells which peak or trough around solar maxima, and hence we have historically reliably seen demographic trends and associated speculative asset bulls/bears peak and terminate around sunspot peaks.

Therefore, the secular bear in US equities that began in 2000 is likely to continue through to around 2025, and the secular bull in gold that began in 2000 is likely to continue to and peak around 2025. In support of this we see current historic overvaluations in US equities that argue for further reset in stocks ahead, and a lack of speculative mania for gold at the current solar maximum.

17ja1 17ja2Both charts above model the historic trends in US demographics and the terminations at solar maxima, and the projections forward are the extensions of these phenomena. The ‘mean reversion’ common to to them both reflects the transience of demographics (a young dependents swell headwind will become a middle-age swell tailwind which will become an old-age swell headwind) and the double-excess produced by solar maxima (demographics stretch demand by population, solar maxima stretch demand per capita) before sunspots cycle down again. The biggest mania of all-time is clear to see on that second chart: the dot.com boom. Not only does mean reversion subsequent to that mania have some way to go (a wash out to -50%) but demographics support this occurring.

To summarise all the above, and make it useful looking forward, we can time major asset peaks by probability (there are no dead certs, and exceptions occur). Any major asset peak will probably occur close to a new moon, typically around the turn of the year, and normally at a solar maximum. Demographics guide at which solar maximum a secular asset peak will likely occur and whether a solar maximum should deliver a secular or cyclical speculative excess.

Forecasts for gold and equities

We are currently at the likely solar maximum for solar cycle 24, at the turn of 2013 into 2014. Demographics are supportive of a secular bear in equities (that began in 2000) continuing through to the next solar maximum circa 2025, and similarly a secular bull in gold (2000-2025). The speculative excess in equities that we are seeing in association with SC24 maximum should be a cyclical peak. The timing of that cyclical peak in stocks has good odds of being around the turn of the year (2013 into 2014) and close to a new moon. That makes a top close to Jan 1st 2014 a contender, and failing that one near Jan 30th 2014 (the next new moon). Again, these are just probabilities, but if we take a different angle and look at indicators such as II sentiment, put/call ratio, skew, deviation above MA, yield-tightening ROC and margin debt, then we have a case for equities to begin to fall ‘imminently’, regardless of solar maxima and lunar phasing. Combining both, the case becomes more compelling for a top here.

Gold’s secular bull began in 2000, and like all secular bulls, it has been in a strong dominant uptrend punctuated by occasional cyclical bears or corrections. Below we see the US equities secular bull progression 1980-2000 contrasted with gold’s secular bear in that period (cyclical bulls and bears within an overall downtrend).

17ja3Source: Stockcharts

Gold’s secular bull of 2000-2025 should be a strong dominant uptrend like stocks 1980-2000, or like an extended version of gold’s last secular bull of the 1970s.

17ja4The cyclical bear of Dec 1974 to Aug 1976 occurred as the Dow rallied from a Dec 1974 low to a Sept 21 1976 top, with gold’s secular bull momentum resuming as equities topped out. We could therefore expect something similar to be occurring now, and this is supported in the oversold, overbearish extremes reached in gold and miners and the technical basing that appears to be currently taking place.

A threat to bullish resumption in gold is the current excess leverage we see in evidence in margin debt, net investor credit and Rydex leverage. If sharp falls erupt in equities then a period of forced redemptions could mean blanket selling of assets, as occurred in Autumn 1929 and Summer-Autumn 2008. Gold /miners escaped neither, in short-lived but sharp pullbacks. In THIS post I compared the topping process analogies of 1929, 1987 and Nikkei 1989 to the Dow today, and based on that we might expect sharp falls to erupt as of mid-February. There is a history of steep falls occurring at the seasonal geomagnetism peaks of around March/April and October, and occurring on Mondays once investors have had a weekend to mull over doubts. So by probability we might this time look to the particular potential of Mondays in the period March-April 2014 for heavy falls to erupt. Potentially then, we could see gold and miners rally until then, but be dragged back during such heavy stocks selling, thereafter resuming the secular gold bull in earnest.

Equities should now enter a new cyclical bear market, and continue to alternate cyclical bulls and bears within a secular stocks bear through to around 2025. By demographics (and as is becoming evident in economic data) this should be under deflationary rather than inflationary conditions, and this makes an important difference to nominal prices. The path of US equities for the next 10 years should look similar to the 1990s to early 200s Nikkei or the real inflation-adjusted 1970s SP500, with lower highs and lower lows:

17ja5Source: SeekingAlpha

Using Russell Napier’s maths (taking valuations back to historic washout levels), then we have a target of around 3500 on the Dow by my target of around 2025. Again drawing on history, odds are we get there in a couple of cyclical bull-bear oscillations, and hence something like this:

17ja6It is an initially shocking chart, but it is in keeping with deflationary demographic projections and valuations washout. Plus, this has already happened before: to the Nikkei, under the same twin circumstances.

Expecting the Dow to be sub 4000 by 2025, and gold to be making a parabolic solar-max finale to a strong secular bull, the Dow-gold ratio should bottom beneath 0.5, potentially even beneath 0.1. But the one factor that I have not mentioned so far is central bank intervention.

It is certain that a tipping over into deflationary recession and equities bear will draw further response from central banks. If equities start to decline for the next couple of months but in a measured way and economic data disappoints (as predicted by certain leading indicators) then I would expect the Fed to stop tapering QE and wait-and-see, and otherwise little change. If equities then start to accelerate declines and economic troubles escalate and we enter a dangerous feedback looping, then we should expect the Fed, and other central banks, to up the ante and go more unorthodox. Quite what that will entail remains to be seen, but drawing on history, recent and past, this could mean imposing restrictions on shorting shares, preventing capital from leaving the country, ‘strong-arming’ into treasuries, and more direct, targeted inflationary tactics. There is of course the potential for increased nationalism and for hostilities between certain nations to increase (USA-China, China-Japan) as internal problems escalate.

I don’t want to speculate too far ahead, but I see major lasting opportunities at hand in short equities and long gold, tempered by realism over what central banks will do should my projections come to pass. Monetising debt whilst tipping over into deflation under unprecedented collective demographic downtrends which should mean a further decade of secular stocks bear and global economic weakness is a very bleak outlook. As a trader, I think the biggest gains are potentially to be made at the front-end of that, in case the rules get changed. Speculators making money out of an economic crisis are an easy target. It very much depends on how things come to pass, whether we are nursed through another ‘lost decade’ or whether things are about to become acute, under a global deflationary recession, a debt-monetisation end-game or a de-railing and bubble-bursting of China’s economy.

In the near term, I continue to look for clues in the markets for the equities/gold, bull/bear switch. I am long gold, short equities, and looking to add to both on further confirmations of reversals in fortunes.

US Equities Bull Market Peak, New Bear Market At Hand

First, a compilation of indicators and flags warning of a major market top in US equities:

Bull Market History Statistics

Dow is up more than 5% five consecutive years now and a sixth such year has not happened before in history.

A 5-year bull trend only occurred once before, in the 1990s, and was followed by 3 down years.

Last 2 years rally in US stock indices has been made up of less than 20% earnings growth and more than 80% multiple expansion. The last 2 such occurrences in history were 1985:1986 (leading into 1987 crash) and 1997:1998 (leading into 1999 real Dow peak)

Compound annual growth rate in equities since 2009 was only exceeded in 1929, 1937, 1987 and 2000, all of which led to steep market declines

Valuations

Crestmont P/E is the 3rd highest in history after 2000 (market peak) and 1929 (market peak), and in 97th percentile

The 2nd highest market capitalistation to GDP valuation outside of 2000 (market peak)

The 3rd highest Q ratio valuation in the last 100 years outside of 1929 (market peak) and 2000 (market peak)

The 3rd highest CAPE valuation in the last 100 years outside of 1929 (market peak) and 2000 (market peak)

Russell 2000 trailing p/e ratio 88; Amazon trailing p/e 1440; Facebook trailing p/e 148; Twitter reached $40bn market cap with zero profits

Earnings guidance for US Q4 most negative on record

Technical Indicators

US stock indices are in an unsustainable compressing parabolic / Sornette bubble price formation

6 month breadth divergence on US indices in the percentage stocks above 200MA

Declining breadth in the number of countries participating in world equities rally

Dow, FTSE and Nikkei are all at long term resistance levels (connecting 2000 and 2007 peaks)

Treasury Bond Yields Rate Of Change over last 12 months is at a level that previously led to market tops in 2000 and 2007

Second highest Skew reading ever (protection against outsized move)

Cluster of extreme Skew readings not seen since June 1990 before recession began July 1990

Put/Call Ratio 10 day average is at an extreme that previously marked significant corrections, including May 2010 flash crash

SP500 distance above 100MA is the highest of all time

Sentiment/Euphoria

Investor Intelligence percentage bulls are at 2007 levels (market peak)

Investor Intelligence percentage bears and bull-bear spread are both at 1987 levels (market crash)

NAAIM survey sentiment is in the 98th percentile = extreme optimism

Citigroup Panic/Euphoria model is now 2 months above the Euphoria threshold

Credit Suisse Risk Appetite US model is into Euphoria

Greedometer aggregate of macroeconomic, fundamental and technical data is at a record level exceeding the 2000 and 2007 market peaks

Equities Exposure And Leverage

US household exposure to equities has risen to the same levels as the 2007 top

Fund manager allocation to global equities is at levels that previously led to a market peak or correction

Rydex bull-bear and levergaged bull-bear ratios are at an all-time record

Margin Debt has escalated to 2.5% of GDP, only exceeded at the 2000 market peak

Investor Credit balances are at an all-time record negative

Second, the US economy is in trouble (click to view larger):

13jan40

Third, this is reflective of both the record levels of debt and unprecedented collective demographic downtrends which are now in place in US, Europe and China and are deflationary, recessionary and equities-bearish.

DemographicsDowGoldRatioGlobalGDP

Fourth, equity markets have historically made major peaks at the turn of the year:

13jan11Market peaks at the turn of the year correlate with the seasonal yearly lows of geomagnetism, which inversely correlates with market sentiment. Market crashes in October (also shown above) correlate with the seasonal yearly highs of geomagnetic disturbance, and there is a close fit in the full yearly seasonality of global stock indices to the annual pattern of geomagnetism (inverted):

13jan50Most analysts are unaware of this underlying cause of stock market seasonality. Geomagnetic activity is demonstrated to make people more irritable and aggressive, and can affect melatonin synthesis and blood pressure. There is a correlation between geomagnetic storms and depression in humans. Here is a chart showing daily geomagnetic disturbance versus the SP500 over the last 5 years:

13jan52The bigger the geomagnetic disturbance, the bigger the spike. By turning this into a trend line we see the ebb and flow of the SP500 correlates with the ebb and flow of actual geomagnetism, with the only exceptions marked in blue:

13jan51The correlations of the Singapore STI stock index and the TR CRB commodities index to the geomagnetic guide are closer still, which demonstrates the link between geomagnetism, sentiment and risk asset performance:

13jan53 13jan54Fifth, major speculative peaks have historically occurred at the solar maximum, which is occurring now.

Peaks in solar sunspot activity occur on average every 11 years and have historically correlated with human excitement peaks in the form of protest, war, growth-flation and major speculative parabolic peaks. Again there is biological evidence for this in elevations in oral temperature, pulse rate, blood pressure, and respiration rate, and again few analysts are aware of this critical influence.

The majority of the famous secular speculative parabolic peaks in history took place on monthly sunspot spikes close to the smoothed solar maximum:

SolarMaximaParabolicPeaksWe see a spiking in sunspots from late 2013 currently taking place, and this is predicted to mark the smoothed solar maximum and the high of this solar cycle:

9ja2The evidence for a peak in speculation can be seen at the top of this article, in the congregation of extremes in sentiment, leverage, technical and valuation indicators.

Sixth, drawing all together, there is a case for the US stock market having peaked on the 31st December 2013.

A) We see a wide range of indicators and flags, ranging from valuations to sentiment to leverage to technicals, all pointing to a major peak, right at hand. B) The assumption that the US economy will return to normality this year is one of hope, neither reflected in the data nor in the demographic/debt backdrop. C) Historically major peaks often occurred around the turn of the year, with a cluster falling exactly on the last trading day of the year, and this reflects the annual seasonal peak which is caused by the seasonality of geomagnetism. D) Historically, major speculative parabolic peaks have terminated at the solar maximum on a monthly sunspot spike, which is likely occurring now in Dec 2013 / Jan 2014.

Specifically, where solar maxima have fallen near the turn of the year, speculative parabolics have tended to terminate on the last trading day of the year, in line with the seasonal peak. The real highs of FTSE 31 Dec 1999, Dow 31 Dec 1999, Nikkei 29 Dec 1989, and Dow 31 Dec 1968 were all such occurrences. This is a dual confluence of peak sunspots and peak inverted geomagnetism.