Comparing the 2000, 2007 and 2011 peaks to 2014-15.

Taking 2000 first, as that was the last solar maximum pre-2014 and therefore the most relevant, I’m using several measures that stretch back that far and show divergences pre-peak, namely Nasdaq breadth, 10 year treasury yields, cyclical to defensive sector performance and all set against the Dow Jones World stock index. Clear topping process progression and timings are labelled on the chart:

Source: Stockcharts

Now here is 2014-2015. Amazingly it is almost identical in progression and timings in both the stock index and the indicators.

The only difference is that the July/Sept peaks in 2014 exceeded the solar maximum peak in nominal terms whilst in 2000 they were lower peaks.

Here are the 2007 and 2011 peaks to complete the comparison. No solar maximum in these two years, but otherwise a similar topping process with leading divergences in the indicators and a notable peak in July every time.

With margin debt for December finally released here is the picture for net investor credit:

 Source: Doug Short

We see another leading indicator for the 2000, 2007 and 2011 peaks, varying from 2 to 6 months on the monthly SP500. Currently we have a 4 month divergence versus the December 2014 existing SP500 monthly high, fitting in the historic range.

Lastly if we compare stocks:treasuries and stocks:dollar, we see additional leading indicators in a relative defensive shift with 0 to 3 month lead time for the 2000, 2007 and 2011 peaks.

Both measures show a 5 month divergence on our current December 2014 Wilshire 5K high. Yet both measures tie in exactly with when the Dow Jones World made its peak-to-date, July 2014.

All this strongly suggests the ‘real’ peak in stocks occurred back in July 2014. So how can we square fresh nominal highs in European indices and several US stock indices challenging for new all-time highs again? We can square it if European indices are making a final blow-off top and if US indices fail to make new highs here. Back in 2001 the DJW index turned down again at the start of February, heading for Mar/Apr lows, and that fits with the geomagnetic seasonal roadmap that I have presented before. It really means stocks must be repelled back down here, whilst gold ought to break upwards from its consolidation of the last 2 weeks. Drawing together time and price factors I suggest we have just a few trading days for this to transpire. As per my last post, if price and indicators start instead to break upwards then the picture changes and breaks with the logical case.

Extremely stretched valuations, highly lop-sided sentiment and allocations, excessive leverage, long-standing negative divergences, persistent shift to defensives, negative leading indicators, disappointing earnings, declining financial conditions: these are some of the ‘old’ rules that dictated stock market peaks. Yet, many months in their presence, equities still haven’t dropped in any meaningful way.

Looking at the SP500, there has been no fall of even 10% in the last 2 years.

Source: Rachael Shasha

Yet those indicators/rules would historically dictate a fully-fledged bear market. Add in the smoothed solar maximum timer, which now looks fairly definitively April 2014, and the continued levitation is even more surprising.

Source: Solen

Do the old rules still work? I still believe they have to. There are too many different angles amongst them for them to now all be redundant, even with central bank intervention distortion. But this really feels like the last chance for them to hold.

A selection of global stock indices shows what may turn out to be a long distributive topping process, if this isn’t to be a consolidation by time.

Source: Stockcharts

A selection of risk-off negative divergences in play for a year would echo this:

If we argue the correction or ‘bear’ has been by time not price then such indicators would now be poised to break upwards again. The problem with that angle is that there has been no resetting of allocations, leverage, valuations, sentiment and various negative divergences. Corrections by time gradually neutralise such indicators to refuel the bull, yet this has not happened.

A look at breadth shows what appears to be an initial attempt at a stock market peak at the start of 2014, followed by a breakout to the upside. We have then had a second attempt at a peak in the last 6 months, but potentially NYAD is showing another breakout which would reset the topping attempt again.

This would fit with developments in European stocks indices which are breaking out and look positively bullish. Potentially, the Eurozone’s QE and improving leading indicators could keep US stocks from falling significantly here in early 2015, as we could argue the US did for European stocks in 2014.

The big picture still looks like this: a definitive trend change in major asset classes in mid-year 2014. But we need to watch to see if the up-ticking of the last week could potentially spell a break from, or pause in, the downtrend.

US economic surprises versus valuations looks like this. See how stocks largely ignored a breakdown in economic strength in the first half of 2014. Will they ignore the current trip into the negative? Also note how valuations have risen at their steepest rate since the October 2014 low: the move up in prices has been very much counter-earnings.

Source: Yardeni

Draw it all together and I still have to favour the ‘last gasps of the topping process’ angle. I refer to my 3 key dates of the turn of Jan 2014, the end of June 2014 and the end of Dec 2014 as they three key milestones in this, all anchored to the 2014 smoothed solar maximum.

However, if equities (meaning US equities joining European) and indicators break upwards again, then it would raise the prospect of a final blow-off top, a parabolic termination that could perhaps take us to mid-2015. I base this on the 1929 experience post-1928-solar-max, the failed topping attempt in breadth in 2014 perhaps failing a second time here, and the geomagnetic seasonality of the markets. Something like being here (circles):

I just still find that very difficult to make a case for, given how super-stretched sentiment, allocations, valuations and leverage already are. From where is the fuel for another significant leg up?

The next few days are key. Did yesterday’s full moon mark an inversion top from which we now decline, keeping US indices from making new highs, whilst European indices in hindsight will show a blow-off top? Or do we now have a clear 2 week period of typical strength ahead into the new moon making for a comprehensive global breakout in equities? If the latter I would expect gold would be repelled downwards again.