No Change

The underlying picture still looks the same. Stocks have rallied back up but there are so many persistent divergences that aren’t supportive. Here breadth, strength and bullish percent all look like the last gasps in 2011.

17juli1The Nasdaq has outperformed the other indices to make new highs with the rally back up, but breadth is flagging a clear warning.


Really, there are so many divergent indicators on US stocks it’s take your pick.



Meanwhile, gold dropped again but the picture is the reverse, with sentiment and positioning at contrarian levels suggestive of a bottom.


Source: Sentimentrader / King World

Therefore, not much expansion needed. We are through the new moon and moving beyond the seasonal geomagnetic peak, and all the indicators are calling time (namely, major reversals in both classes). So just watching for the turn again to resume the attack and that should be the final move.



Gold And Gold Miners

Gold as an investment: not straight forward. It was the original money, valued for its rare, precious and indestructible qualities. Fiat money then took over, but convertible to gold. Now, fiat money is purely a game of confidence, and gold floats freely. Gold is a non-yielding, non-productive asset so comes into favour (jewellery demand aside) only under specific conditions, namely when real interest rates are negative (which can be under inflation or deflation), when fiat money is being diluted (such as by policies of inflation or money-printing), when debt is growing significantly (as this is money borrowed from the future) or when other assets are in decline (which chiefly occurs due to demographic trends).

Right now, real interest rates are borderline negative, public debt is at record levels, QE has been rolled out across the developed world and demographics are united negative (i.e. pro gold) in the major nations. So why isn’t gold going up?

By demographics and solar cycles, gold should be in a secular bull from 2000 through to circa 2025, the next solar max.

3juli10 3juli18Therefore, gold’s bear market from 2011 to 2015 would be a cyclical bear within an ongoing secular bull, similar to as occurred in the mid-70s. Gold has been making a long basing, as evidenced in the TSI below, over the same period that stocks have been making a topping mania. When stocks start to fall in earnest, then I expect gold to take off, in a new cyclical bull within an ongoing secular bull.


Source: Stockcharts

A bear market in equities would, through the wealth effect, tip the fragile economy into a deflationary recession, which should then result in negative real rates, additional fiat dilution by central banks, rising nominal debt levels and cash-flow looking for a safe haven. All favourable for gold.

However, contrast that with the common perception currently, which is that we are in a young secular bull in equities, with the economy early in the cycle and about to start growing strongly, and a trend of increasingly positive real rates ahead. Once this perception is revealed to be a misunderstanding, then the narrow interest in gold will become much broader.

A near term look at gold technicals suggests one more washout to the downside may be needed, as evidenced here in the gold put/call. The short interest is already at contrarian levels.

2juli7 2juli6

Source: The Daily Gold / CFTC

I would see this as fitting with a last rally back up in equities into the mid-July new moon (to a lower high), which was predicted by CPCE and Vix/Vxv as highlighted two posts back. I therefore lightened up my equities shorts and gold longs after this week’s full moon. Earnings season starts next week and properly gets going the week after. With a predicted 4.5% yoy drop in both earnings and sales for Q2, this provides a backdrop for stocks to topple over from that second week in July, and in turn gold to finally wake up. I believe that point will mark the definitive trend change in both and currently see that as the point of max attack.

Gold miners sit between the two asset classes: as both equities and tied to gold. In the last 4 years they have very much sided with the latter, declining in the face of a rising stock market. But notably they have performed much worse than gold, as shown in GDX:GLD below.

2juli1In fact, on the long term view, the miners to gold ratio is the lowest its ever been.

Screen Shot 2015-07-02 at 06.23.49Source: Incrementum

However, the major miners have been diluting their shares, making them not the bargain they initially seem.

2juli10Source: Seeking Alpha

Additionally, there is a question mark over how they might perform under sharp stock market falls. With few historic reference points, we can at best draw on the 1929 experience whereby the gold miners didn’t escape the initial falls but broke away later once the stocks bear was more clearly cemented. For these reasons, I stick with gold itself as the pure play and will pass on the miners.


On The Attack

Phasing more into long gold, short Dow, and opened ETF agri long. Don’t follow me… here is my case.

Gold has been making a long base with rising underlying strength since July last year.


 Source: Stockcharts

US stocks have shown an underlying decline over the matching same period, as evidenced by stocks:bonds, stocks:dollar and two measures of breadth.


 Source: Stockcharts

That turning point in both fits well with the solar maximum, a speculative peak.

The latest attempted breakout in equities has much in common with the July peak in 2011, before the sharp falls. Volatility, momentum, strength and breadth all suggest the breakout should fail.


Source: Stockcharts15maya2

 Source: Gavin Parks

Geomagnetism continues to bother and is another telling divergence ripe for resolution, and its overall pattern is reflected in a variety of underlying stock market indicators.


15maya1Source: Stockcharts

The US economy is in big trouble. If you haven’t already seen, Zero Hedge presented 7 charts arguing that the US is already in recession, to which PFS group then countered with 7 charts arguing against. I’m sure you all know to take ZH with a pinch of salt (‘fear sells’) but the charts they reference can be be seen at the likes of Alhambra and DShort on more neutral ground.

My input: the ZH charts are ‘true’ and show the US economy in deep water, whilst the PFS charts are also ‘true’, but on close inpection they mainly historically flagged once stocks had turned. In short, the stock market is precariously holding things together and is the only defence from outright disaster (as things stand) in a very fragile state of affairs. What is beyond argument is that certain economic data items are extremely ill whilst stocks are at all-time highs. In my opinion, that disconnect ‘beats’ any cherry-picking by either side and makes for a looming sharp equities correction.


Source: Not_Jim_Cramer


Source: WSJ

ETF Agriculture shows a similar basing to gold, with historically low current prices in various soft commodities set against a backdrop of a new El Nino and record global temperatures, which historically led to price rises.


Source: Callum Thomas15maya10

Source: NOAA

I can’t rule out equities pushing on a little higher yet here before finally rolling over, but I see it limited to days/weeks due to all the telling flags. So my plan is to phase in rather than load in in one go, and that applies to all 3 markets.

Big Picture USA

The solar maximum peaked out mid-2014:

Screen Shot 2015-04-05 at 07.15.14Source: Solen

Speculation should peak out with it, and that appears to have been the case with trend changes in stocks, commodities, dollar and treasury bonds:

5apri50Source: Stockcharts

The speculative target into the solar maximum was primarily equities, as evidenced in allocations, sentiment and (here) valuations:


Source: DShort

Stocks are now at risk of a sharp reversal, due to the twin supports for lofty valuations of earnings and (here) economic data having turned negative:


Source: Not_Jim_Cramer

However, analysts are predicting both will improve as 2015 progresses. The first chart shows they have been downgrading Q1 GDP forecasts whilst slightly upgrading the next 3 quarters. The second chart shows they expect a significant recovery in earnings in H2 2015:


Source: FT5apri16Source: Charlie Bilello

Narrow money trends are also predicting an economic recovery by H2 2015, in part due to the benefits of lower commodity prices.


Source: Moneymovesmarkets

Counter to that, a range of economic data has already dropped into recessionary levels:

5apri1 5apri2 5apri3Source: Alhambra

The latter two charts play into the global picture, which is one of dwindling world trade:


Source: ATimes5apri8Source: Stockcharts

Financial stress in the US is not yet apparent but has crept up in a way similar to 2011 pre stock market falls:

5apri11Source: Charlie Bilello

Supportive to the bull case still are cumulative advance-declines, outperformance of certain cyclical sectors and small caps in 2015, and a current rechallenging of 2014 highs in both leverage measures of margin debt and (here) leveraged loans:

5apri9Source: Stockcharts

However, most other indicators show continuing degradation and divergence.

5apri60Source: Stockcharts

So, piecing it together, I believe the key is whether earnings and the economy do recover again or whether we are in the early part of a negative spiral. Solar theory would argue the latter, whilst analyst opinion favours the former. Either the sharp falls in commodity prices are deflationary and recessionary, or they are to become a new form of easing as 2015 progresses, with positive benefits for the economy and most sector earnings.

I suggest it is unlikely stocks will advance whilst the reporting of Q1 earnings and economic data plays out. Rather, at such lofty valuations, we will need to see evidence of the anticipated improvement first. That sets the scene for either a meaningful correction here, or a sideways range trade in the weeks ahead.

My opinion remains the same: we are in the last gasps of a topping process in equities. We see ample evidence in both indicators and economic data of the shift in behaviour post-solar-max. The negative feedback looping is underway but needs a significant drop in equities to complete it. That should now come to pass, post Equinox and post-second-chance (last post). April is clearly a window for a meaningful drop, set against earnings reports beginning on Wed and anticipated further bad economic data.

If somehow stocks can hold up and range trade over the next several weeks whilst early evidence of a pick up in the US does start to trickle through then maybe this mania can continue for even longer. But I still find it extremely difficult to make a case for that.

The SP500 now needs to break down beneath the March lows. The divergences suggest this should occur.

5apri70Source: Stockcharts

Meanwhile, the commercial positioning on gold suggests a rally, which would fit with a drop in equities:

5apri5Source: Ispyetf



New highs in US equities despite…

1. Valuations on a par with the 1929 peak

2. Sentiment extreme lopsided (II 3.5x bulls vs bears, NAAIM 84% bulls)

3. Allocations to equities on a par with 2000 peak (household, fund manager, Rydex)

4. The solar maximum speculation peak being behind us in April 2014

5. Leverage having peaked out around then (margin debt Feb 2014, leveraged loans July 2014)

6. Multiple negative divergences in place 6-12 months (shift to defensives, breadth, financial conditions)

7. Economic surprises negative

8. Leading indicators negative

9. Earnings growth forecasts for H1 2015 negative

10. Buybacks peaked in Q1 2014

This is already so anomalous that I can’t offer much more by way of analysis. If there is a blow-off top about to unfold, then what is the fuel, given the extremes in allocations and sentiment and the stall in leverage and buybacks, plus the demographic headwind making for a shrinking investor pool? I believe it would have to come from leverage breaking its 12m ceiling and going to all-new extremes. But why would that occur, given the state of economic and earnings indicators versus valuations? And given we are approaching 12 months post solar maximum? It makes no sense.

I can still only side with logic, which says the real peak was mid-2014 and that this still represents last gasps of a topping process. That would mean nominal stock indices make marginal new highs here but then break down.

Screen Shot 2015-02-05 at 07.09.06

On the bullish side, there have been a couple of supportive developments. Cumulative advance-declines have broken upwards decisively, as they did in February 2014. Plus, cyclical sectors have taken over outperformance from defensive sectors now in 2015. These two developments alone certainly don’t overcome the list above, but, if stocks can now hold up whilst we go through the seasonal lows of March and April then we could perhaps again see economic surprises and earnings start to turn up again. In short, we could continue to see the market advancing in positive economic and earnings periods but not falling in negative periods despite the record lopsidedness, negative divergences and so on. Go figure.

That would in turn likely postpone the bear kick-off until the Autumn/Fall. I can’t compute that, but we have to consider the majorly anomalous here. Of course this can’t continue indefinitely. If stocks do somehow take off again here, then valuations, leverage, allocations and divergences will become yet more extreme, perhaps all-time extreme, making the subsequent crash even bigger and even more pressing.

But survival is key. So I have stepped aside and taken off my positions whilst we see how price action now unfolds. If we see a blow-off mania now somehow take hold, then I don’t want to hold short through that. If, instead, logic reigns, then stocks should only make marginal highs here on negative divergences and then be dragged down to new 2015 lows. We have the new moon on the 18th Feb into which I expect stocks to rise. Then we have the seasonally weak window into March and April. So either stocks make marginal new highs and then fall post 18 Feb into Mar/Apr to new 2015 lows, or they hold up and lift off through those seasonal lows heading for even higher highs in the summer. I will be looking to add back positions on evidence of the former unfolding.

Cross-market, gold’s behaviour will be another tell. If the bottom is in then gold should start to take off again here, making for a compelling higher low. Continued weakness and even a new low would postpone the whole process.

I still can’t regret my analysis, because it is as comprehensive and multi-angled as I could make it, and I still think the only logical outcome is that we do indeed look back on a topping process that kicked off at the start of 2014 but took a long time to play out. I can’t compute anything else, because I bring together such a wide range of angles and draw heavily on ‘fact’. However, it’s been a humbling 12 months and there is not yet sufficient clarity or hindsight to really diagnose it.

I host the website but you guys have created an excellent board, which is always a great read. Different opinions and approaches but there is a good balance and a lot of quality input. So thank you to all who comment.

So, let’s see now whether stocks break out decisively or fail at marginal new highs, whilst watching how gold performs.

3 Exact Dates

As we wait for the ECB decision and market reaction, I see 3 exact dates being revealed that align with my ‘triple confluence peaks’ idea, i.e. we are seeing major market peaks form at the new moons closest to the geomagnetic seasonal highs (inverted) closest to the smoothed solar maximum.

The smoothed solar max is likely to have been around April 2014.


The seasonal peaks (inverted geomagnetism) fall at the turn of the year and mid-year.


The new moons closest to these seasonal peaks were 1 January 2014, 27 June 2014 and 22 December 2014, so it follows that we should see major speculation peaks at these dates in the year of the solar maximum, 2014.

Bullish percent to call/put, cyclicals to defensives, high yield to treasuries and small cap equities to bonds all peaked very close to the 1 January 2014 date.

22janu2Stocks:dollar, stocks:bonds, FTSE Eurostox and NYSE composite indices, NSYE breadth, volatility and junk:treasury bonds, oil, US dollar (inverted), leveraged loans and junk bonds all peaked very close to the 27 June 2014 date.

22janu7 22janu5


The final date, 22 December, has tentatively topped out the remaining key indices and speculation measures, namely SP500, Dow and Wilshire 5000 (plus an associated bottom in gold) and a blow-off top in sentiment and allocations.

22janu4 22janu6If this ‘dumb’ model of the markets is correct then we should make no new highs from here but rather collapse to a March/April initial bear market bottom (first leg down).

If an anomaly is at hand and the solar max is still ahead or speculation somehow extends further in time, then the next logical peak would be mid-year 2015, likely June 16. However, I rate this possibility as negligible. Look again at the risk measures that changed course Jan 1 2014: they remain in downtrends ever since. Add to these the large range of assets and indicators that peaked June 27 and remain in downtrends ever since too. Then consider the change in market and cross-asset behaviour since the final date, Dec 22, together with that capitulation in sentiment and allocations. This has to be game over, in my opinion. However, if we consider it a game in which central banks can cheat and change the rules, then maybe, just maybe, natural forces can less freely flow through the markets. I don’t think this is likely as central bank members are solar subjects too. However, this is subject to confirmation in a critical real time test in 2014-2015. Market reaction over the next few days to the ECB announcement will be a key tell.




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:


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:


(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:


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.


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.


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.







Perspective Again

Take a step back and the topping process since the start of July can be seen in RSI, money flow and MACD divergences:

25nov1Source: Stockcharts

The same divergence processes in 2007 and 2011 lasted around 5 months. From the start of July 2014 that would equate to a final peak around now.

We also see the same NAAIM manager exposure divergence as the 2007 and 2011 peaks:

Screen Shot 2014-11-25 at 06.33.07Plus we see a topping process more clearly in the relative performance of stocks to bonds:


Junk bonds double topped in July and September and are now divergent to equities, and previous divergences were leading indicators of where stocks were headed next:


We see peak mania at the inverted geomagnetic seasonal mid-year peak closest to the smoothed solar maximum peak, via sentiment and allocations, just like at the last solar peak in 2000:



The sunspots chart shows the waning since around April 2014, putting stocks on borrowed time.

Offsetting the October-November rally in equities, we see gold and miners advancing and treasuries too, with the yield curve flattening further (equivalent to inversion under ZIRP):


Plus we see various divergences in place since the turn of July contrasting with price, including bullish percent, volatility and breadth:


A peak across the pond at the Dax reveals a similar topping process in place as measured by true strength and breadth indicators:

25nov40 25nov41

Source: IndexIndicators

To sum up, there is a ‘normal’ topping process occurring behind the scenes, yet most are oblivious. If your arguments are either that indicators don’t work any more or that central banks’ actions trump all, then history is not on your side. I’m no permabear, rather the evidence is far too compelling to be anything other than bearish on equities here. This remains a truly golden opportunity for ‘reverse value investing’ yet right now appears to be the point at which the least number of participants can see it.

If it seems like price can only go up and that all weakness is bought, then recall just a few weeks ago the situation was similar but in mid-Sept suddenly bears took control with several engulfing down days. The evidence above reveals this is going to happen again, and argues that this time will be definitive. The key point is that behind the scenes and cross-asset we can see that things clearly changed as of the turn of July and that this latest leg up in price is part of a topping process not a bull market trend. It’s just about the timing for capturing what should be the final peak.

Skew is back elevated like mid-Sept or mid-July, the last two times the market rolled over:

25nov2Source: Barcharts

We can add to that recent readings in ISEE put/call and Nymo for evidence a roll over is imminent.

Allocations look truly exhausted:


We are heading into the negative lunar period this week, and the real geomagnetic trend remains down:

a4 a7I am looking for the leading stock and leading index to roll over to cement the trend change, namely Apple and the NDX. Microsoft, the other main driver, has now broken, leaving Apple left to pop its parabolic.


And for the US dollar to break too. It shows the same negative divergences that marked previous peaks:


I believe gold has bottomed in line with October 2000, and that the break in both the USD and equities will send it soaring.

A Topping Candle

Yesterday produced a topping candle in US stock indices, but was it the topping candle?

The SP500 closed with a marginal 0.04% gain but advance-decline volume was 1:2 (Urban Camel). It was the 2nd-worst breadth day ever when the S&P 500 was up and so near a 52-week high (Jason Goepfert).

ISEE put/call closed over 230 for the second day in a row, suggesting major contrarian lop-sidedness. Previous instances in 2014 marked below reveal they occurred near tops but tended to be markers of subsequent sideways churn.

Screen Shot 2014-11-14 at 05.30.51That chart also shows the RSI divergence which ought to eventually lead to a leg down.

Small caps and junk bonds had the biggest down days yesterday, both risk-off flags which argue a notable drop in large caps should follow sooner rather than later.

14nov9Source: Stockcharts

European indices moved further to the precipice in European hours yesterday. At this point European indices and US small caps topped out by June 2014, and most other major global indices in September, just leaving US large caps, the Sensex and the Nikkei as the notable indices still to peak. Drawing on previous major tops (2007, 2000, 1989, 1968) stock indices peaked out within 4 months of each other. Therefore, if I am correct in my assessment of where we stand then those remaining indices should top out without delay and this fits with the picture painted by most indicators: November ought to end as a down month.

Rydex allocations hit the highest ever level yesterday aside from mid-January 2014, which suggests a top in equities should occur:


Here is the comparison of the 2000 topping process, confirming that Rydex spikes to extremes typically marked tops:

Combining the current extreme readings in II and AAII sentiment, these are the mirrors from history:


Source: Dana Lyons

1987 marked an important top. January 2011 was an early warning of an important top. 2003-2004 was ‘healthier’ froth that sometimes occurs during early bull market progress, so I suggest that cluster is less relevant here.

MACD on the Dow produced a reading only seen 3 times before. All were pullback signals on the short term, but different results in the medium term.


Source: Northman

Four headwinds for US equities: a) monetary trends point to a weakening ahead in the US economy relative to Japan and the Eurozone (chart below), b) QE support has ended, c) the rising US dollar and falling oil prices have resulted in a cutting-in-half of earnings and revenue forecasts for US Q4, d) the US stock market is the most expensive in the world of all major countries (table below).


Source: Moneymovesmarkets

Screen Shot 2014-11-14 at 08.23.06

Source: Telegraph / ZeroHedge

If we could argue that until now a relatively stronger economy in the US coupled with the relatively most aggressive / supportive central bank made for outperformance in US stocks (shown below relative to the rest of the world equities) then that fundamental case looks to be reversing here.


The case for the US dollar to reverse too is added to with the below contrarian Euro positioning and sentiment.


 Source: Nautilus

And this would fit with a reversal in gold which looks to be basing. Here is another angle on gold that suggests we are at a similar point to the secular bottom in gold at the end of 2000.


Source: Sentimentrader

Drawing in other evidence from previous posts, there is a compelling case for a major cross-asset reversal here, out of the USD and into gold and out of equities, particularly US equities.

In the very short term, yesterday’s US equities intraday reversal candle together with the Rydex spike, junk bonds drop and very precarious European indices technicals set up the potential for a follow through to the downside either today / early next week. My case is that this is the last peak in the topping process and if so we should see at least one large voluminous down-day over the next several sessions. If instead we churn sideways in a range for the remainder of November then support would grow for an end-of-year peak, but with every man and his dog expecting positive Nov/Dec seasonality to take stocks higher the stage is set for the opposite, particularly as actual geomagnetism (the underlying source of seasonality) is trending downwards currently.