Bounce

Posted on July 28, 2015 Posted in Indicators, Stocks134 Comments

A bounce looks likely here, and a significant one at that.

Capitulative breadth (Rob Hannah) hit 20 yesterday, which is extreme. See other extreme readings here:

In the past, they typically occurred after major falls, but October last year and now have been more shallow. The Dow fell yesterday to just 3% off its July peak or 5% off its May peak. Capitulative breadth is made up of a count of large cap stocks in the index showing capitulative selling. Quite why this has occurred after only shallow nominal price falls is unclear.

Also, bullish percent (SPX) reached a level suggestive of a low.

Source: Urban Camel

Plus, CPC on Friday hit an extreme also only seen at previous lows, and the recent little cluster of such readings further points to a significant bounce.

Source: Stockcharts

Draw it all together and it looks like the Dow (and other indices) is going to get a decent bounce here at long term rising support.

On the flip side of the equation, gold miners bullish percent hit zero again, like the boxes in the past shown:

But note the norm in the past was for a lower low on positive divergence before a true bounce.

Therefore, it appears likely we will see a rally back upwards in broad stocks imminently whilst gold miners go on to form a lower low on positive divergence. The bigger picture of a major top in equities and a major bottom in gold remains unchanged.

No Change

Posted on July 19, 2015 Posted in Gold, Indicators, Stocks356 Comments

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.

The 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.

Topping Process

Posted on July 9, 2015 Posted in Indicators, Stocks413 Comments

Some big moves in commodities, China stocks, Japan, and a change in character in US equities whereby nothing is currently working for the bulls. It begs the question where we are in the topping process, specifically is the market going to fall apart from here, or do we yet get another rally back up to a lower high.

Dow Jones World looks like this:

Source: Stockcharts

Like other recent major peaks, it shows a topping price pattern with negative divergences on the second higher high. We can pinpoint the first peak in the topping process as June/July last year:

Junk bonds, oil and financial conditions all peaked out then too. The second peak in nominal equities was May 2015, making for a 10 month topping process. That’s not dissimilar in duration to 2000 and 2007.

If we look at near term clues, the triple confluence of spikes in CPCE, Trin and Vix:Vxv to current levels (specifically all three together) hasn’t been seen since the breakdown in 2011.

Their spiking could represent a near term low for equities, from which they get a decent bounce now. Or, they could represent the first stage of a large fear move, like in 2011. Right now the SP500 is just 4% off its high, whilst in 2011 it made a 19% correction.

If we look at the bigger picture, all major indices around the world are now off their highs, most topping out in May or June. Is this about news out of Greece and China? They are providing a narrative for short term buffeting, but we can see equities have been in a typical topping process for a year. The under the hood peak was around last year’s solar max, as it was in 2000. Then as now stocks continued to levitate for several months following, whilst internals deteriorated, and the writing was on the wall. We know that allocations, sentiment, valuations and leverage have all been at saturation levels for some time. I suggest that the worries about Greece and China have initiated a trickle of bulls over to the bear camp. At some point this will become a rush and that’s when panic selling will make for swift, harsh falls. If you don’t believe that, then this will be the first time from such levels of leverage, valuations, sentiment and allocations that we don’t see a crash period averaging around 6 weeks taking around 35% off stock prices.

A fairly common topping pattern at major peaks in the past was primary distribution – peak (shake out) – second chance peak – crash, normally lasting around 6-8 months, like this:

Source: Financial-Spread-Betting

If we think of it as less of a roadmap and more of similar waves of crowd psychology playing out, it’s the ‘second chance’ which is my focus, namely are we though that or is it still to come?

If we are through it, then the market ought to quickly fall apart here, with any up days quickly engulfed. That’s kind of what we have been seeing the last 2 weeks. Plus, the heavy falls in China and commodities could be the initation of wider heavy falls. On the flip side, those spikes in near term indicators could provide a bottom here for stocks from which to rally back up into mid or late July, making a second chance peak ahead.

So what am I doing? Attacking but with stops (short Dow, RUT, IBB, long gold). If we are post second chance then there is no time to lose. The stock market should rapidly fall apart with increasingly big lurches downwards. On the other hand, if we have a second chance rally back up, I don’t want to be too exposed and save my big positioning for a little longer.

Lastly, might all this be way off and we are still safely in a bull market? Well, financial conditions just turned negative. The Ted spread is now higher than it was when stocks tanked in 2011. US economic surprises are still negative and ECRI leading indicators are flirting with zero. Earnings season starts this week with predicted 4.5% yoy falls in both earnings and revenues. With sentiment, allocations, valuations and leverage so extreme for such a prolonged period now, even a safe bull market is more likely to see a sharp correction here, something like 1987 or 2011. But I don’t believe that: the case is much stronger for a fully fledged bear market, within which Biotech retraces its whole move of the last 2.5 years.

Gold And Gold Miners

Posted on July 3, 2015 Posted in Demographics, Gold, Indicators, Solar Cycles185 Comments

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.

Therefore, 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.

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.

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

Source: Incrementum

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

Source: 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.

Charts Update

Posted on July 1, 2015 Posted in Indicators, Solar Cycles, Stocks96 Comments

It’s a picture of a major market top. The ‘real’ peak was mid-2014 at the solar max, as it was at the last solar max of Spring 2000. The supports for price since mid-2014 have been dismantled and evidence suggests the nominal price peak in equities occurred May 2015. Annotated, so no further comments.

Selling Exhaustion Signs

Posted on June 30, 2015 Posted in Indicators, Stocks58 Comments

The first day of decent selling…. but exhaustion signals appear.

Yesterday was the highest downside volume day since March 2012. It ended the longest streak of no >2% up or down day on the SP500 since May 2012. It was the 8th largest daily percentage move in the Vix of all time, at >30%.

Equity put/call hit an extreme in fear. Here is the indicator’s history:

Source: Stockcharts

Now here is a zoom on those previous instances of prints >0.90:

Typically they marked lows or were a precursor to a low within a few sessions.

Next is bullish percent as a ratio to total put/call. I’ve previously highlighted the divergence in this indicator with the market since January 2014. However, because it has been in decline, yesterday’s selling took it to the kind of deep level associated with previous bottoms.

I also previously highlighted the divergent breadth in stocks above the 50MA. Again, because it has been in decline, yesterday’s selling has now put it in a zone that could spell a bottom, particularly if we combine it with the reading on Tick. The most similar such pairing from recent times would have been last August’s low.

The picture from stocks above the 200MA isn’t dissimilar.

Source: Charlie Bilello

Lastly, here is Vix to Vxv. It too has spiked to the kind of level associated with previous lows, with the exception of the 2011 falls.

Here is a zoom on recent incidences of this indicator spiking over 1:

We can see that a bottom occurred within several sessions of Vix:Vxv coming off its spike high.

Drawing all these indicators together, odds are that we see a rally from a low within a few sessions. Thursday’s full moon would fit with this too. As per my note yesterday I entered short RUT and IBB early and took a chance. They and the Dow positions are all in profit but in light of the above indicator readings I will be looking to cut back again later this week, anticipating a lower low from here within the next several of days but then a rally back up in July, perhaps to the mid-July new moon.

The Bubble Within The Bubble

Posted on June 26, 2015 Posted in Biotech, Indicators, Stocks129 Comments

Namely, the Biotech sector within the wider stock market.

Is the wider stock market in a bubble? Valuations in the 97th percentile, record extreme leverage, allocations second only to the dot.com bubble, all time record cluster of readings in sentiment, and more. Bubble deniers point to the context of ZIRP and QE as this time it’s different. Or they argue the froth we are seeing is of a new secular bull, with the stock market leading the economy. But ‘this time is different’ has rarely worked out historically and there have been many indicators acting like they did at the peak in 2000 or 2007, which I have published on the site in recent months. Here’s one:

Source: Sentimentrader

That surge in unprofitable IPOs looks a lot like 2000, and whilst then it was particularly concentrated in dot.com companies, this time round there is a lot of Biotech.

Source: Biospace

As we all know, into the dot.com peak of 2000, the mantra was that traditional valuations didn’t apply any more, and that stocks were ‘revalued’ on potential and expectations, justifying the crazy prices. Ultimately, traditonal valuation methods did still apply, and the pop was fairly unforgiving.

Today’s Biotech bubble is the same. Take a look at the constituents of the Nasdaq biotech index:

Source: ZeroHedge

Just a handful of companies are making any money and the vast majority none or a loss.

Now look at how Biotech has outperformed the wider markets:

And see how that run up in price has been solely multiple expansion, i.e. valuation rising hand in hand with price:

Source: ZeroHedge

The price to sales ratio in Biotech is now over 10. Compare that to the SP500 which is around 1.8, which in itself is at the very top end of its historic range and close to the 2000 peak.

We can all see the parabolic, and we all know how parabolics end.

IBB is the vehicle that mirrors the Nasdaq Biotech index.

I want to short Biotech. But we have to be careful with a parabolic because they can steepen further before collapsing. So do we know when the game is up? One is a technical breakdown. Here’s how the Shanghai Composite looks today:

It broke mid-June. There was a divergence in strength leading into the peak, and there is such a divergence on the current Biotech chart.

The other clue is the wider market.

Source: Stockcharts

Source: John Kicklighter

The last couple of days delivered another telling bearish reversal. Those negative divergences are all still in tact. We await the news on Greece and whether some kind of deal announcement would pump the markets back up again in the short term. So whilst I’m looking for short entries on Biotech and Russell 2000, the timing has to be careful. Plus, it will be a little at first, then building up. That building up may happen swiftly, as when Biotech breaks there are reasonable odds it will be quickly ugly.

If you have been long Biotech then sincere congratulations. It’s been the trade of the decade so far. But I would equally expect that short Biotech will be the trade of the next couple of years. It’s going to be about nimble and accurate timing and attacking. Will let you know when I enter.

Comparison to 2000

Posted on June 19, 2015June 19, 2015 Posted in Indicators, Macro, Solar Cycles, Stocks224 Comments

The biggest stock market mania of all time peaked out in March 2000, which was the exact month the smoothed solar max of SC23 peaked. Solar cycle 24 appears to have made its smoothed peak in April 2014, into which we experienced another mania in equities.

Below we see put/call (smart to dumb money variants), allocations (Rydex, as a proxy for the wider market), valuation x2 (real SP500, and relative to bonds) and strength (TSI) all displaying similar behaviour to 2000. What’s interesting is the extremes reached in these indicators have hit levels very close to those reached in 2000, as designated by the horizontal arrows.

Source: Stockcharts

And we can add margin debt to GDP for one more:

Source: Octafinance

In all the indicators, we see the intermittent 2007 stock market peak printed lower or milder. The difference? No solar max to drive speculation.

In short, various measures and indicators reveal a close mirror of 2000, both in behaviour and level. The question is whether those levels represent ceilings or whether we go on to see all new extremes. So back to the opening comment: 2000 was the biggest stock market mania of all time, and in various ways we are matching it. Wow, no? This is despite a demographic headwind (rather than tailwind into 2000) and despite a weak world economy (versus strong growth into 2000). Can we really go higher?

Timewise, equities are on borrowed time since the solar max of mid-2014. Although nominally they have not topped out, various measures under the hood (see previous posts) reveal a peak back then, and the divergences remain. The TSI divergence back at the SC23 peak lasted from mid-1998 to the top in 2000; the current TSI divergence began in mid-2013, making for a similar duration. Drawing it all together, I maintain the likelihood of a mid-2015 switch into an equities bear and I am staying on the attack.

Comparison to 1929

Posted on June 17, 2015 Posted in Demographics, Indicators, Solar Cycles, Stocks, Uncategorized55 Comments

Hat tips to Mark, John Li and Chien Jen.

So what’s similar to 1929?

A stock market mania to extreme valuations.

Source: D Short

A similar low intensity solar cycle.

Source: Chien Jen

Stock market breadth peaked very close to the smoothed solar maximum (May 1928 vs April 1928, Mar/Jul 2014 vs April 2014) whilst stock index prices didn’t peak until at least a year later.

Source: RW NelsonSource: Stockcharts

Maybe stock prices are following a similar technical pattern.

The timings within the year fairly closely match too. 1929 began with a range. The final push was June to Sept. Therefore, the onus is on the bulls here to push prices back up into the range and out, to prevent the breakdown from the current position.

Now what’s not similar.

Economic growth was stronger in the 1920s.

The fed funds rate was around 4-5% in 1928/9 versus zero now.

It was a demographic climax produced by peak immigration at the start of the century of the age bracket that would buy the stock market in the 1920s.

Leverage reached 12% of GDP by the peak, versus 3% now.

All things considered, I believe 1929 has more in common with 2000, which was a demographic climax following strong economic growth with fed funds rate similarly around 5%. Post 1929 we saw the Great Depression, post 2000 the Great Recession, then following both we experienced a valuations-led stock market mania into the next solar max set against easy money conditions. Hence 1937 is a better all round fit to now (see HERE for details).

However, what’s common with 1929 is important, specifically that breadth peaked out 16 months before prices, and that is was ultimately leverage that delivered the craziness into the peak. Here in 2015 margin debt is hitting new highs so maybe the game isn’t over yet.

There was always a question mark over why prices didn’t peak with the 1928 solar max but made the anomalous extension into 1929. However, now we can see that breadth peaked at the 1928 solar max, like it has at the mid-2014 solar max, so in both cases marking some kind of speculation peak. The majority of other solar maxima delivered peaks in both breadth and prices close to the sunspot peak. Assuming prices peak out within the next several months (and don’t keep going, new secular bull style) then we are again producing that kind of anomaly that we saw in 1929, namely a fairly long period of degrading internals whilst prices continue to levitate or rise. Why? It’s leverage. Saturation levels in sentiment, allocations and valuations have been in place since the start of 2014. Buybacks were significant for much of last year but now it is leverage which is left holding things up.

So what stopped it in 1929? Answer: nothing in particular. One day the market topped out without any notable trigger, like most tops. Ultimately it was a combination of the fuel for higher prices being spent, leverage at unsustainable levels, prices for stocks being fairly unpalatable, and the whole thing having become a ponzi scheme. Then I would argue that the twin downward pressures of post solar max and the geomagnetic seasonal lows of Sept/Oct produced the timing.

Which brings us to today. What’s to stop prices making a final major leg up like in June-Sept 1929? Nothing, if leverage can keep rising, and the appetite amongst participants is there. However, that ‘appetite’ is under threat due to our positioning post smoothed solar max and the seasonal downtrend from July to October.

Solar cycle 16 had a sting its tail with a final surge in sunspots from September to December 1929. As this rather fits with the declines than the final run up in prices, I don’t think it’s relevant as a cause of the last leg up.

I would summarise that stocks are on borrowed time since the solar max of mid-2014. Breadth, volatility (inverted) and various risk measures all peaked out then. Buybacks also peaked out around then, leaving leverage as the key driver. This kind of anomalous extension post solar max was only seen before in 1929. Given most things in the world are now ‘bigger, better, faster, more’ than back in the 1920s, what’s to stop us blowing that reference point out of the water with an even dizzier anomaly now? Well, I would argue that in the context of negative demographic trends we already have.

A common historic technical topping pattern looks like this.

Bottom right is a chart from last year when it appeared to have formed into early 2014, but was a red herring. Drawing together several indices from around the world we could argue it is there again, with the primary distribution across last year and the final leg up in 2015.

Or we could argue the final leg needs to go higher yet, or has to happen yet on the main US indices. Not easy to call.

So if we stick to what we know, I suggest it’s this. Stocks are on borrowed time since mid-2014 as divergences continue to grow. The geomagnetic downtrend from July to October 2015 together with the post-solar-max downward pressure has a strong chance of killing the bull. The two things to watch are these. Can prices be bid back up into the 2015 range and out of the top? If so, a final leg up would gain weight. And can leverage keep rising? It needs to, if another leg up is to happen.

S O L A R C Y C L E S

Category: Indicators

Bounce

No Change

Topping Process

Gold And Gold Miners

Charts Update

Selling Exhaustion Signs

The Bubble Within The Bubble

Comparison to 2000

Comparison to 1929