Bull Market Peak

US Stocks:dollar, stocks:bonds, junk bonds and volatility (inverted) all peaked out mid-2014 with the solar maximum.


Source: Stockcharts

Crude oil, put/call, breadth and bullish percent did likewise.


Sornette’s bubble end flagged then too.

Screen Shot 2015-09-24 at 20.18.51

Source: FinancialCrisisObservatory

Global business activity peaked out at the same time.


Source: Thenextrecession

And economic surprises.


Source: Not_Jim_Cramer

So did financial conditions, Europe and US.

Screen Shot 2015-09-22 at 20.28.53 Screen Shot 2015-09-22 at 20.27.06

Source: Bloomberg

And geomagnetism has played a key role in these developments, intensifying since mid-2014.


With united demographic downtrends in the major nations, solar history suggests markets and economy should tumble down to the next solar minimum.


Source: NOAA


Source: Tarassov

Drawing demographics, solar cycles and valuation together we get this:


It fits all three and that’s what makes it fairly compelling.

The mid-2014 peak we see in many indicators and assets is unrecognised by most. They see the August 2015 drops as the first drop in a topping process or a wave 4 in EW, both meaning we head back up. But the drops into last October fit better with this, with a secondary and final peak then forming in May 2015. The nominal price action has been uniquely confusing in this major peak, but the clues are provided by those under the hood and cross asset indicators.

What resonates with me about Elliott Waves is the waves of mass crowd psychology. We see this phenomenon playing out in solar cycles, lunar oscillation, demographics and valuation. But the weakness of Elliott Waves is that on any chart at any time multiple different counts can be produced and are then refined with time to make the count always ‘right’ with hindsight. I simply don’t see evidence that Elliott Waves are reliable market predictors (emphasis on the reliable), but the general underlying idea is very much in play in overall price action, something like this:


Source: ProfitF

We all know an up trend rarely ends abruptly but instead typically peaks, reverses a while and next heads back up. Then, typically, the move either fails before the previous peak, double peaks with it, or makes a marginal higher high but on negative divergences, before the trend reversal takes off in earnest. All akin to turning a tanker at sea: it takes some time. Whatsmore, the last move up is typically the stage on which the retail money makes its usual late and painful act.

Between last July and this May we saw smart money flows weaken, dumb money indicators hit new highs, leverage jump to a new record and stock market internals notably diverge. All evidence of a wave 5, a secondary peak, or the terminal rally after the primary distribution, whatever you want to call it:


That second chance peak is now looking fairly potent on Biotech:

Screen Shot 2015-09-21 at 21.06.18The point is that topping processes share similar characteristics which reflect how humans work. A peak takes time to form with some back and forth, some telltale signs in those leaving early and those joining late, and some health warnings.

Finally, let’s recall that this has been the second biggest mania of all time, as measured by valuations, leverage, allocation and sentiment. The second major error analysts are currently making (to go with the failure to see the topping process began last July) is to see charts like this one as contrarian bullish:

Screen Shot 2015-09-26 at 07.29.22

Source: Yardeni

The jamming of the indicator at record highs last year highlights the mania that was in play. The subsequent crash is the mania bursting. The low reading is bearish, not bullish. It will take some time to recover, maybe even years. Given how ultra saturated the market was in terms of allocations, leverage and sentiment, it is unrealistic to think that the market will now go make new highs. Some of the dumb money was wiped out in the August falls, some more is selling on every move up to get out at break even.

The most bullish outcome is that the market gradually digests the falls and range trades whilst all the excesses of 2014 are gradually mopped up. But, there is no precedent for this in history. From 2014’s valuations, leverage, sentiment and allocations levels we have only seen devastating bear markets in the past. The post solar max and demographic environment add to this likelihood.

Gold looks to be completing its basing. Global stocks are now retesting their August lows. Clearly, if gold takes off here and stocks decisively break down beneath their August lows then the mood will properly change. The most bullish outcome I consider is that stocks range trade and recover some whilst the 200MA gradually arches over, as bear markets often aren’t in a rush, more of a slow bleed. However, written into the record leverage, is a period or periods of panic selling. Biotech is in an ideal technical set up for that to now occur. DAX and RUT look post second chance, which in past major peaks led to waterfall selling. So maybe we fall apart rapidly here – or, my bullish scenario – we hold up (without exceeding the highs) into the end of the year and fall apart in early 2016. Every man and his dog thinks that stocks are going to bottom out and resume bullish in October in line with seasonality so it seems likely that something else occurs. I think actual (rather than seasonal) geomagnetism is likely to play a role in this, so I am watching developments. I favour the falling apart option but you know my positions disclosure. Trades-wise I’ve been increasing shorts and adding to gold on the basing evidence, and adding stops to all of it. I’m going to carry on with this strategy unless the market bounces on positive divergences and shows evidence of a renewed move up for the bulls.

What Causes Bear Markets And Recessions?

Firstly, the definitions of a bear market (20% decline) and a recession (two consecutive quarters of negative growth) are arbitrary, but a line has to be drawn somewhere. Secondly, there is a lot of misinformation spread about this question, so let the evidence speak.

This chart shows US bear market and recessions. Mainly they occurred together but we can see a couple of recessions without stocks bears and a handful of stocks bears without recessions.


Source: Ritholz

The deep recessions always correlated with a stocks bear and the deep bear markets always went hand in hand with a recession.

You’ll hear a lot that recessions cause bear markets, but quarterly GDP prints at bull market peaks say otherwise.

US quarterly GDP growth at past major stock market peaks:

Q4 2007 4.4%
Q1 2000 6.18%
Q3 1987 6.08%
Q1 1973 11.91%
Q4 1968 9.84%

Leading indicators can help us identify the onset of recessions ahead of time. The way it works is the economy does not roll over all at once. Certain activities peak first and others lag (e.g. firing and hiring is one of the last processes). These leading indicator indices identify manufacturing new orders, money supply and interest rate spreads amongst those first to diverge.


In the chart above we can see that CB and ECRI leading indicators have recently diverged from one another. CB is fairly benign currently whereas ECRI has turned negative.


The complete list of differences isn’t published. However, there are two important things to note. First of all, both use the stock market as one of their leading indicators: further evidence that it isn’t the economy that leads the stock market but the other way round. Secondly, all they are doing is identifying the first dominos to fall in a recession, therefore they flag only when the economy and stock market are already flagging in certain ways. So useful, but not a stand alone predictor.

Related to leading indicators are recession models. They too try to pick out the leading variables and typically include the likes of real income, trade sales and industrial production. Once again they flag as these first parts of the economy roll over, so cannot be considered as ‘predictors’.


Next, you’ll hear a lot that tightening, either through oil prices or interest rates, are the typical causes of tipping the economy into recession. The two charts below appear to echo that.

19sepe10 19sepe9

However, we see that further back in time crude wasn’t a major factor in recessions and Japan provides a useful example of recessions occurring despite ultra low rates.



Source: ETF Guide

Associated with the latter is the interest rate spread. The yield curve is perceived to be a reliable recession predictor: when it turns negative recession is looming.


The reasoning is that buyers would rather take up a 10 year bond at meagre rates because they have such little confidence in the economy ahead. If that is so then it is the market leading the economy again.

However, the Japan experience shows that we can have recessions without an inverted yield curve, and again looking further back in time at the US we can see the same occurred there too.


Below we can see the relationship between inflation (with oil prices being a key factor) and interest rates.


Source: Yellowstone Partners

And here the rise of deflation.

Accordingly, our current circumstances have more in common with the 1930s when low oil prices, low rates and non-inverted yield curves were in play and notably were not recession triggers.

The supposed ‘mistake of 1937’ alludes to the central bank tightening to early and bringing on a recession. This is part of the wider misinformation that central bank actions lead us into and out of recession. Once again the example of Japan in the 90s and 00s show us that despite QE and ultra low rates, both bear markets and recessions still took place. Now we see that repeating but on a global scale. The US may have ended QE but it continues in the UK, Europe and Japan, whilst ZIRP is the norm around the developed world and there have been many fresh cuts and easing measures in 2015. Despite all this the world is quietly slipping into recession. Below are the real indicators of China’s economy, notably diverging from the ‘official’ GDP.


And here we see US economic indicator surprises have stayed negative all year.Screen Shot 2015-09-19 at 06.27.32

Negative leading indicators (ECRI) and negative coincident indicators (above). No surprise then the Fed left rates at zero. This is going to help with the myth debunking. If we are now in a bear market and tipping into a global recession, as I believe, then central bank ‘tightening’ can’t be fingered.

Moving on, high valuations are considered a bear market trigger. The chart below reveals this may be so, but with a notable outlier in 2000. Much like the charts of interest rates and crude oil above, if there is a relationship then it doesn’t tell us at what level (oil price, interest rate or equities valuation) or at what point in time the economy or stock market will tumble over. However, high levels in any of the three would represent notable flags that a reversal lies ahead.
19sepe9Similarly, high sentiment, allocations and leverage are flags for a stock market peak. But again they don’t tell us when or at what level the reversals will occur. They are warning signs that mania is taking place, but what causes that mania?

On the chart above are labelled what I consider the real predictors: solar cycles. They enable us to time the market peaks on a longer term view, with the major lows above equating to major peaks in commodities. Below we see that the influence extends to the economy with relations to unemployment and recessions.
19sepe11 19sepe12

But not all bear markets and recessions can be associated to sunspot peaks, which brings us to the other main cause: demographics.

Screen Shot 2015-09-19 at 06.26.55

This is the overarching reason why the global economy is in trouble: the collective negative demographic trends in the major economies. Again, demographics influence both the markets and the economy, and as they are to a large degree set into the future we can predict what lies ahead. As the chart above shows, that would be ‘trouble’.

Demographics and solar cycles are related, with the latter influencing the former, and as we can identify their influence in tipping the market and economy over, we can likewise see how they bring about manias in both into demographic and solar peaks. Therefore into both types of peak, it is normal that oil prices may rise, unemployment may fall, stocks may boom and rates may be tightened.

The major peaks in 2000 and 2014/5 were solar. The major peaks in 2000, 2007 and 2011 were demographic. Perhaps we then we can see why 2000 was so outsized: it was both solar and demographic together.

To summarise, demographics and solar cycles are the main causes of bear markets and recessions. Within that, we can identify those indicators that lead in the economic downturn, which make up the leading indicator and recession probability model components. Notably, these include the stock market. The yield curve, interest rates and oil prices can also be useful such flags but there are circumstances when they don’t apply. Those circumstances are demographic, and that non-application is in play now, as it was in 90s Japan or 30s US. So, should we now be tipping into a bear and recession, that will help invalidate some of the misinformation spread.

There are no dead certs in the economy or markets. The best way to phrase it is that typically stocks bears and recessions occur together, normally the former leads into the latter, usually the cause is either demographic solar or both, and that often we see flags being raised by several of the following: valuations, sentiment, leverage, allocations, oil prices, inflation and interest rates.

Turning to the short term markets briefly to close, the recovery rally in stocks has been enough to neutralise several of those indicators that had turned excessively bearish. Gold has been able to make a higher low last week and the next confirmation would be a higher high. I expect stocks to break downwards again in due course and I maintain the bear kicked off in earnest in May, with the topping process having showed clearly as starting in 2014 at the solar max.


Stock Market, Sunspots And Geomagnetism

The smoothed solar maximum was April 2014. Geomagnetism intensified as of August 2014. This is normal progression: positive pressure up into the sunspot peak, then negative pressure as both sunspots wane and geomagnetism ramps up in the following window. The influence on financial markets is captured here:

Screen Shot 2015-09-11 at 16.29.43

We can see that the solar-inspired speculative mania effectively ended in that window of mid-year 2014, with stocks making a topping process between then and May 2015.

Daily geomagnetism reveals an intensification in recent months.


Something similar happened in 2000.


Stocks were led into a 2 year bear.

Back to the current, the overdue snap in equities in August 2015 changed the picture. No V-bounce like in 2013-2014, plus a sharp escalation in complacent indictors. This is not like those 2013-4 corrections.


Various indicators which were stuck at bullish extremes in 2014 have now not only mean reverted but have moved all the way to bearish extremes. Amongst these are Investors Intelligence bulls, US equity outflows, capitulative breadth, Trin and a cluster of 90% down volume days. Collectively they represent bear market bottom readings, leading some analysts to call time on the current the correction in equities and predict a bull market resumption.

In that scenario we need to square why stocks only corrected 10%. In the first chart at the top we can see a year long stealth bear in progress, more apparent in some markets and indicators than others. So did stocks correct in time rather than price? Proponents of that option then have a problem with big picture indicators, in that both valuations and leverage are still a long way from mean reversion.

29augu10Source: DShort

Due to the lack of demographic tailwind, the bull mania was fuelled by debt: traders leveraging up and companies leveraging up to make buybacks. For the bull market to continue, both those would need to rise to new record highs. Given the sharp snap in equities in August, the appetite for that is likely absent, at least for some time.

Rather, in my opinion, that was the point at which the mania popped, at which record complacency and froth was finally shot down. The bear market bottom readings in certain indicators are indeed a sign of a bear market: a pause in the downdraft. These indicators show selling and fear and are only bullish if they revert. Case in point: in 2014 they were stuck at extreme bullish and did not revert, hence stocks continued to edge up. The question is why they were stuck at record bullish extremes, and the answer is the hidden force of the solar maximum. Now we have the twin powers of waning sunspots and intense geomagnetism, which are likely to keep these indicators bearish.

There is a common misperception that the economy (i.e. recession) causes bear markets, but the data in fact shows that the stock market leads the economy.

US quarterly GDP at past major stock market peaks:

Q4 2007 4.4%
Q1 2000 6.18%
Q3 1987 6.08%
Q1 1973 11.91%
Q4 1968 9.84%

Rather it works like this: demographics and sunspot cycles bring about the major peaks and troughs. In our current case, the rise into the mid-2014 solar max caused the speculative mania in the markets, identified by extremes in valuations, sentiment, allocations and leverage. Then the wane from the solar max and associated intensification in geomagnetism have brought about the burst. That burst isn’t complete until valuations and leverage have reverted sub-mean, a process that is already fixed in demographic and solar trends right ahead.

October is the seasonal peak intensity for geomagnetism. This is the reason for a cluster of major historic drops to lows in October. We are finely poised leading into it. Stocks have made a triangle consolidation following the August drops. Gold has a weak higher low, as a tentative basing. For equities a retest of the August lows would be historically normal following such sharp drops, whether bull or bear bigger trend. But, various indicators are already at bearish extremes, i.e. contrarian bullish, so we could move further sideways or upwards before heading down again. Friday was the new moon, so we are now tipping over again into negative pressure, and this is assisted by current raging geomagnetism. FOMC and OpX this week.

My view. Stocks are in a bear since May 2015. That means no new highs and another lurch down lies ahead. Given the collective shock at the August drop in equities – despite 40+ topping indicators forming last year – another leg down to lower lows would have a major effect on the masses. If indicators can’t pull up now from their current extreme bearish readings, then that’s the recipe for another sharp break downwards in the current geomagnetic environment. Odds are this can transpire as we move into October. Invalidation would be stocks holding up through this window, gold breaking down, and equities indicators pulling away from bearish levels.

The Big Picture

Financial markets are the function of swells and shrinkages in buyers and leverage, brought about principally by demographics and sunspot cycles, additionally with the latter influencing the former.

The big theme in demographics over the last half century has been that the major nations have largely experienced similar swells and shrinkages in key age groups due to the post WW2 baby boom. As a swell of young adults they produced inflation in the 60s and 70s, which then turned into a middle-aged swell producing stock market and real estate booms post 1980.

This chart shows the ratio of middle-aged to all population in the major nations. This ratio experienced a major peak in each of the countries between 1989 and 2011 producing the according stock market and commodity major peaks.


First Japan’s demographics peaked out, producing the Nikkei and Japanese real estate tops. Then the US peaked in 2000 with the resultant biggest ever stock market mania. Next UK and Germany peaked out with the 2007 stock market and real estate peak. Finally, China peaked out and as the world’s biggest consumer of commodities, the commodities index accordingly delivered a major top.

Since then demographics are united in a downtrend, which is the main reason why 6 years post financial crisis we still have ZIRP, QE and easing as the dominant central bank policies worldwide, and why the world economy is under such deflationary and recessionary pressures. Ultra low rates helped give rise to the stock market mania of 2013-2015, but otherwise we have to turn to solar cycles not demographics for the driver.

Each of the sunspot maxima in the era of globalised, free markets produced a peak speculative mania. Between July 2014 and May 2015 we saw commodities, junk bonds, leverage, breadth and stocks peak out, following the smoothed solar max of April 2014.


That lag is not dissimilar to that in 1929: a slight overthrow beyond the solar max. In both instances breadth peaked out at the same time as the solar max but nominal stock prices didn’t top out until a year later.

Drawing on Q ratio valuation for the big picture we can see that solar maxima typically produced high extremes in valuation which then mean reverted. Meanwhile, low extremes corresponded to major commodity or gold peaks.


Draw together both the solar cycles and demographics above and we get the projection of the black arrow, namely that stocks should wash out to undervaluation levels by around 2025, the next solar max, and gold should rise into a major peak then. What’s key is that there is no demographic relief in any of the major nations between now and 2025 nor a solar maximum (they are roughly every 11 years). Therefore, I expect a long bear market in stocks in this window, like these examples from history:


If I was to narrow the projection a little further, then the solar minimum of around 2018-19 is likely to mark the first major bottom within that. That means a bear from now of around 3 years, similar to those historic cases above. After that stocks ought to continue to languish, perhaps sideways Japan-1990s-style, whilst gold rises to dizzying heights to a peak circa 2025. But that time frame is a little to long to be anything more than speculative, so let’s keep the focus on the first major cyclical move, which I consider to be a bear from May this year to last some time and take valuations sub-mean.

The question mark is over central bank response. They won’t stand by and watch this occur but are likely to turn to increasingly unorthodox measures. The reason demographics and solar cycles work is because the markets are globalised, free, instant voting machines that therefore capture major collective trends. If central banks ban shorting, restrict capital flows out of the country, penalise people for not investing in government bonds, penalise savings, or other such policies then the markets environment will become more distorted and we will have to adjust accordingly. So far, however, central bank distortive measures haven’t been able to override the collective demographic trends, as evidenced here in global inflation and economic trade.


Source: Gavekal5sept5

All that stands between outright global deflation and recession is the wealth effect of the stock market. So let’s turn to that.

In 2014 we saw around 40 different topping indicators aggregate in the US stock market. From mid-2014 we saw multiple divergences in breadth and risk, whilst commodities and emerging markets broke down. In 2015 developed nation stock prices arched over, topped in May and snapped in August. Now, we see washout levels in commodities, emerging markets and various stock market measures such as sentiment, breadth and risk.

In the big picture, US stock market valuations have declined from their peak but are still highly levitated.


II sentiment and Rydex allocations either show a major unrepairable pop of the stock market bubble, or a healthy washout from which stocks can now in due course resume bullishly.

Screen Shot 2015-09-04 at 22.27.15

Source: Yardeni5sept51

It’s clear that the mania or the last 2 years depicted in these two indicators is about as crazy as it gets and odds are much higher that that recent bursting of the bubble is likely to have ushered in a period of mean reversion. Effectively it has broken the collective complacency and the record leverage deployed in the markets is now likely to shy away from its peak. Without the demographic tailwind, leverage has been the main fuel for this bull, through both margin debt and buybacks-via-borrowing.

Regarding buybacks, this fuel source is likely to continue through the end of this year as companies execute their purchase plans. We can see how something similar transpired in 2007.

Screen Shot 2015-09-04 at 17.31.11

At some point, the leverage in the system will unwind in a disorderly way, producing a crash. What I am wondering is whether this may occur again once both buybacks and margin debt are declining in a more united way together (like in 2008), which would likely be once 2016 hits. Just speculation.

In the meantime, the August breakdown in stocks has likely done enough damage to cement the bear and kick off the negative feedback looping that will produce escalating trouble from here on. ECRI leading indicators and Bloomberg financial conditions have both slipped negative.


Screen Shot 2015-09-05 at 08.28.15

Source: Bloomberg

Turning to the near term, this is how the SP500 looks:


Prices are consolidating after the August drop. Breadth, Trin and volatility show similar washout readings to 2011. Nonetheless, the historic pattern is that stocks ought to retest the August lows and at that point bulls should be looking for positive divergences. An absence thereof likely spells lower prices which in turn increases the odds we are in a bear market.

If we are in a bear market then this doesn’t prevent ripping rallies. In fact they are common. What’s important is to see a pattern of lower highs and lower lows. So, should we push upwards from the current oversold/overbearish short term readings then we should stop short of the August breakdown point. Should we break downwards we should take out the October low and initiate the lower low pattern. On a longer term view, the bear market should very gradually eliminate the dip buyers, until all hope is truly lost.

My tactics then are: hold short (Biotech, R2K, Dow), add short if we go higher, wait for August lows retest, check for positive divergences and bottoming pattern to judge whether to take profits. Cross market to gold, I am long and holding, looking for gold to cement its higher low than July and build out its rally. Were gold to break down to new lows, then it would be a warning.

Lastly, a note on washed out emerging market stocks and non-precious metal commodities. Oil has dropped from $100 to sub $40 in a short time and emerging market equity valuations are historically very low. Are they a buy?


My perspective is that we have experienced something similar to 2006-8 whereby markets crumbled in order. Then, real estate fell first, then equities then commodities. This time, commodities and emerging markets fell earlier than developed equities. When developed equities have eventually truly washed out then there may be attractive risk-reward on emerging and commodities. But between now and then I expect a bear market and global recession, which would keep the pressure on both asset classes.

Increasing Validation

Testing several key theories here real time, it’s been a slow process, but patience is being rewarded.

Firstly, that demographic forces are more powerful than central bank actions. Look what’s happened since 2010 despite QE and ZIRP:


Source: Don Draper


Source: Charlie Bilello

Slow degradation and now all negative. What an expensive mistake:


Source: FRED

Is it really a surprise? They actions amounted to entering numbers into a computer, corrupting the money mechanism and then trying to deceive the public with carefully chosen words that all is well with the economy. But that massively increased debt is real, and the plan to withdraw it gradually once the economy is booming again looks to be a pipe dream. So what do they do now? Having spent so much, they can’t admit failure and won’t give up. Expect more action and more unorthodox policies, but based on the evidence they won’t be able to stop demographics.

Secondly, that solar maxima bring about speculative peaks. As we hit the solar max of mid-2014, we saw a wide range of mania attributes in equities: valuations, sentiment, allocations, leverage, and more. What has been missing is the definitive puncture of the mania post solar max. But under the hood there has been a lot of evidence that speculation did indeed peak out then, such as in stocks:bonds, stocks:dollar and financial conditions.

21augu5 21augu6

Source: Stockcharts

Screen Shot 2015-08-21 at 08.33.14

Source: Bloomberg

Only if those ratios/indices made new highs since, would invalidation become more compelling. But a year later, they still haven’t and remain in downtrends.

That mid-2014 peak also shows among many more charts, along with a second important peak around May this year. Here, the Dow Jones World stock index (with a strength negative divergence between the two peaks), junk bonds and crude oil.


Next, the NYSE index, with negative divergences in breadth and volatility (inverted) between the two key peaks.


And here, a bunch of major country stock indices from around the world, showing similar twin peaks.


We see mainly a higher secondary peak in nominal prices, but this is not atypical historically. In 2007 we experienced a higher high in October after the first peak in July, with multiple telltale negative divergences between the two.

What’s challenging is that every top is different. The duration between the two peaks in 2014 and 2015 has been a long 10 months, fooling many bears and bulls in the process. In 2000, it was just 5 months between March and August. Yet we see similar hallmarks: degradation in internals, environment and risk appetite between the two.

The situation remains tentative of course. We can’t say for sure that stocks won’t rally back up to new highs. But the sideways price range of 2015 is now breaking to to the downside, and either it has been the arching over of a top, or a pause to refresh the bull. There is a lot of evidence for the former, and very little for the latter.

Thirdly, drawing the first two theories together, that ‘central bank policy trumps all’ has been the mantra rather than the driver for this bull market mania. Just like at all other major tops it has been an excuse for excessively high valuations, but one much more readily embraced than that herd behaviour under the sun’s influence brought about the mania.

Well, if stocks are now in a bear market, and the evidence argues that we likely are since May, the central bank support idea is about to face a tough challenge. Interest rates are zero or negligible and quantitative easing has been shown to have little positive effect on the economy: central banks are at risk of being shown to be totally impotent. This, together with the record leverage deployed in equities, is the recipe for stocks to fall hard. Panic selling lies ahead at some point, and if we think of equities like Wile E Coyote running off a cliff since the solar max of last year, they have been levitating with no support. I maintain the geomagnetic seasonal down period since June-July into October this year remains the likely window for that swift acceleration to occur, meaning this week’s key technical breaks could be kicking it off.

A Dumb Mechanism

Evidence reveals the financial markets to be ‘dumb’. Long term trends are dictated by demographics (swelling numbers of buyers or sellers) and solar cycles (influencing speculation levels amongst participants). Markets top out when there are no new buyers left and/or no room or appetite for existing buyers to increase debt, and bottom at the opposite. This contrasts with common wisdom that markets are instead dictated by central bank actions, economic indicators, or company fundamentals. They play a role, but the evidence shows that the stock market leads the economy, that central banks are typically behind the curve, and that stocks rise purely on multiple (valuation) expansion if there is either swelling leverage or swelling buyers (or fall vice versa).

Into 2014’s solar maximum we saw a speculative mania in equities akin to the last solar maximum of 2000. But unlike 2000, there was no demographic tailwind, instead a headwind. Without new buyer flows into the market, we have therefore seen equities bid up by (1) existing buyers leveraging up and (2) companies buying back their own shares.

This chart captures the flat money flows as predicted by demographics versus the declining share issuance due to buybacks.

15augu2Source: Business Insider

The effect of buybacks is to increase EPS and decrease P/E. The latest earnings show a blended 1% decline YOY, but without those buybacks the figure would have been closer to -4%. Revenues declined 3.3% YOY and reveal a truer picture of companies performance. Additionally, companies have largely borrowed to buy back their shares, making this market fuel particularly ‘unhealthy’.

Buybacks are likely heading for a new record this year, beating the 2007 record. This may partially account for stocks continuing to levitate despite all-round deterioration in other indicators.

15augu30Source: Bloomberg

The other fuel source has been increasing leverage. We can see that leveraged loans peaked out around last year’s solar maximum:


Source: LeveragedLoan

Whilst margin debt lurched upwards again in 2015 to a current April high.

15augu40Source: D Short

Meanwhile in China margin debt went crazy and can be seen to be wholly accountable for the rise in the Shanghai Composite. This too fits with demographics there: no new buyers, only existing buyers leveraging.

15augu20Source: FX Street

The subsequent collapse in China’s stock market shows what happens when there is no room or appetite for further leverage amongst participants, which brings us back to the top of this post. Then, when leverage starts to unwind, it brings about forced redemptions and thus more selling, as it is effectively a ponzi scheme.

So the question is when leverage in the US and elsewhere starts to unwind. Based on historical evidence, appetite for leverage should wane post solar maximum. We see that in leveraged loans above, but margin debt has rallied further. We know from 1929 that leverage extended a year post solar maximum before collapsing, whilst breadth deteriorated over the same 12+ months. We are again producing that kind of outlier extension, set against a similar ongoing breadth deterioration since the solar max of last year.

Either the sideways range in US stocks in 2015 is the pause that refreshes the bull or it is the topping process that turns into the leverage reversal inspired sharp declines. Solar-aside, there have been so many indicators that this is a market top, sharing characteristics with 2007, 2000 and other major historic peaks, that a bull pause is highly unlikely. But what’s different is that the interest rate, QE and inflation environment, together with commodities relative performance, hasn’t been seen in 50+ years, if this is to mark a top. However, rather than that negating a top, we simply need to look further back in time for reference points. Yet, if the stock market is a dumb mechanism, then we shouldn’t even need to do that.

The solar max produced the stock market mania. Demographic trends meant it has been fuelled by leverage and buybacks. The flat market of 2015 suggests saturation has been reached. Post-solar max, appetite for speculation unwittingly declines. China has broken and all markets are off their peaks. The last several weeks, indicators that have worked for the bulls over the last 2 years haven’t been working. I think the fuel is spent. Buybacks and margin debt are the key here, but both data sets come out with a lag.

Below we see several key indicators peaked out with last year’s solar max whilst a couple of others extended beyond. Now the latter should fall in line with the former. Note how the levels reached have been largely similar to 2000’s saturation levels.

Screen Shot 2015-08-15 at 08.43.03Source: Stockcharts

We are now through the August new moon, heading into the seasonal (geomagnetic) lows of Sept/Oct. I’ve been back on the attack short stocks, with particular emphasis on Biotech.



Capitulative breadth now down to 6 on the rally in stocks, but still suggestive of some more upside for equities to properly neutralise it.


Source: Rob Hannah

Today is the full moon, and lunar phasing for 2015 looks like this:


Not all have been compelling turns but nonetheless shorting each new moon and going long on each full moon would so far have made a profit every time this year. Historically, lunar phasing has worked better in periods of sideways chop like this. Based purely on the moon, we could expect stocks to peak out again in mid-August. But at some point this price range will break one way or the other.

As you know there have been many technical indicators for a bull market peak, suggesting that price range to be a topping process. Here are two more from Dana Lyons:

31juli13 31juli10Source: Dana Lyons

Valuations are crazy high:


And US small caps are the most expensive they’ve ever been.



Source: Meb Faber

But whilst stocks continue to levitate the key question remains whether excesses in valuations, sentiment, allocations and leverage need to be reassessed in the context of ZIRP and QE, and don’t pose the same threat as typically historically. That analysis is further complicated by not having experienced this combination of negligible rates, low inflation, low growth and high debt for over half a century.

However, the reason for ZIRP and QE is that the world economy has been in serious trouble since 2008, with demographic trends in the major nations all having turned negative. Below we can see the break in the long term trends of US growth and employment and how they remain broken:

31juli11 31juli12


Source: Scott Grannis

So, either (1) the stock market is majorly divorced from reality and reverting to mean soon, or (2) the economy finally picks up from here and catches up with stocks having led, or (3) this is a new norm skewed by central banks whereby current indicators of a top that resemble 2007, 2000 and others no longer apply. You know where I stand on this question, but the sideways price range of 2015 has yet to validate or invalidate any of the options.

Leading indicators still largely point to a pick up now and towards the end of 2015.

Screen Shot 2015-07-31 at 08.31.10

Source: Variant Perception

Whereas China looks to be in trouble.


Source: Cam Hui


Source: CNN

Biotech is also wobbling currently, testing the bottom of the parabolic. So are these the last gasps of a topping process? Or is the price range of 2015 in broad equities the pause that refreshes the bull? We saw some evidence of reset by the end of last week: AAII sentiment, bullish percent, capitulative breadth, put-call all suggestive of a significant low. However, in the bigger picture historically, these look like a low in a bear market, i.e. from which a counter rally erupts before lower lows ahead. What’s confusing is their occurrence just 5% from the highs in nominal terms.

Right now I expect stocks can move higher before they move lower again. So I am waiting and watching for evidence they are rolling over again. The key is whether they do so before they reach the July highs and then the May highs. At the same time I am looking for a lower low in gold and miners on positive divergence.

We still have a host of indicators pointing to an underlying peak around the solar maximum of last year:

31juli20 31juli22 31juli30That June/July 2014 peak remains in play unless we see those indicators reverse and reset. 12 months later they still haven’t. So I remain of the opinion that equities will ultimately break downwards. It’s just a matter of gauging the shorter term waves. On which note I have to prudently add that I can’t rule out a final move up to new highs before a collapse. It happened in 1987 and 1929. A range trade over the first half of the year and then a final rally to a peak in Aug or Sept:

31juli70 31juli90

Source: Financial-Spread-Betting

That extreme reading in capitulative breadth may support this occurring, so have to stay open minded. Hence the importance of watching indicators and price for evidence of a roll over before the July highs, then the May highs.



Comparison to 2000

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.

Screen Shot 2015-06-19 at 08.12.38 19junn4Source: 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.


The Conundrum Of Our Times Part 2

Let’s now draw in the solar cycle. Here are US equity valuations by Q ratio versus solar maxima over the last century. A relation becomes apparent with secular lows and highs.


Source: D Short

We can see three that don’t fit so well. The 1929 stocks peak extended over a year beyond the SC16 peak, stocks sailed through the 1957 solar max and whilst the SC22 peak wasn’t so significant for US stocks it turned out the secular peak for the Nikkei.

Now for the three secular ‘lows’ on the above chart (SC15, 18 and 21) we can cross reference to long term commodity prices and see that they instead marked secular highs in hard assets. Similarly, the secular stocks highs of SC23 and SC20 maxima marked secular commodities lows.

15junn3Solar science reveals peaks in human excitement at solar maxima (e.g. clusters of war). In the financial markets this appears to translate as peaks in speculation (and in the economy in peak activity). Therefore, it appears that the asset in favour at the time is bid up to a secular peak and subsequent pop around the solar max (with the rare exception, as with any indicator or discipline). So what would make the favoured asset stocks rather than commodities or vice versa?

The evidence suggests it is demographics, namely that secular = demographic. The chart below reveals equity valuations tracking US demographics and gold moving in opposite directions. Therefore we see a secular peak in gold at the demographic low and a secular peak in stocks at the demographic high.


The picture is enhanced when we discover that solar cycles influence birth rates, which may account for why demographic peaks often tie in with solar peaks.

The chart below shows how Japanese demographics peaked out first in the late 1980s, which explains why Japanese equities made their secular peak at the 1989 solar max whilst other major nation stock markets continued to advance under positive demographics.


The current relevance of the chart is that the global demographic composite is definitively negative, and this is echoed in other demographic variants. Together they spell recessionary and deflationary pressures, which we are seeing in reality. But they also should be sinking equities and launching gold, which we are not (currently) seeing. More on that shortly.


Solar cycles are long cycles, but armed with the above information we got the chance for a real time test with the SC24 max, which now appears to have been centred around April 2014 (smoothed max).

Two things were anomalous about the SC24 max. It was lower intensity (less sunspots overall) and it took longer to form (including a higher second peak).


The average duration between solar maxima is 11 years 1 month, but the SC24 max didn’t form until 14 years 1 month after the SC23 max, which makes it an outlier. Is this relevant? Well, a major commodities peak occurred in April 2011, exactly 11 years 1 month after the SC23 max.

Tangent for a moment. Here is the influence of the lunar phase cycle on the markets: it makes for a fortnightly oscillation with distinct measurable returns over time.


The most plausible explanation is the influence of nocturnal illumination levels on evolving humans. Yet, the influence is still present despite living under artificial lighting for several generations. Therefore it would appear to be hardcoded to some degree: we oscillate internally with the moon cycle, to some extent. Might the solar cycle also be to some degree hardcoded? If so, that could be a factor in the major speculative commodities peak (and associated major stocks low) in 2011, i.e. human excitement to some degree peaked into the anticipated/internalised solar max.


Source: Stockcharts

The case for that increases if we look at ‘leveraged’ commodity silver. The same kind of parabolic blow off as in 1980 occurred.


It would make the secular commodities bull 2000-2011 a mirror of the 1968-1980 bull, namely one solar cycle in length and set against a secular stocks bear, and both in keeping with demographic trends of the time. The implication would then be that commodities are now in a secular bear and stocks are in a new secular bull.

But let’s now look at the real experienced solar max of April 2014. From 2011 to 2014 stocks rallied strongly and since the start of 2013 displayed characteristics of a mania. A snapshot at April 2014 reveals many typical signs of a major market peak: extremes in valuation, sentiment, allocations and leverage; record negative earnings guidance and economic surprises all negative in the major nations; divergences in money flows and various risk-off measures; outperformance of defensive sectors and bonds; etc. At the time I gathered together 40 indicators all with different angles on a telltale top in stocks. Really, the evidence could not have been better for a speculative mania into the solar max.

However, as we passed through the real solar max, it was commodities that fell again, rather than stocks. An oil-heavy commodity index, used for emphasis, shown here:


Source: Stockcharts

Indeed, by the end of March 2014 large speculators had amassed an all-time record long position in the CRB commodities index, suspiciously right at the solar max. So we have a potential case here for commodities to have effectively made a double secular peak between the ‘average’ and ‘real’ solar maxima.

But… things get more complicated when we look under the hood at equities. Stocks:dollar, stocks:bonds, volatility, breadth and various other measures not only resemble previous major peaks but occurred together very close to the real solar max.


We are now waiting to see whether these will be repaired or whether nominal equity prices now fall in line. If the latter, then we have the evidence that speculation in equities peaked at the real solar max. At the same time, gold has been forming a technical bottom in recent months together supported by washout sentiment and allocation levels, which after a 4 year bear suggest it is ripe to break into a new bull. Which brings us back to demographic trends being aligned to stocks declining and gold rising: this angle on what happened would argue that the anomaly in hardcoded/real solar max produced a second speculative peak against demographic trends and in stocks, only for demographic trends to now reassert themselves (stocks complete the secular bear, as suggested in the last post, whilst gold goes to new highs).

As alluded to in the last post, the closest fit historically to the current time was the peak of 1937: a solar maximum and speculative peak against a backdrop of low rates and easy conditions. Equities peaked out at high valuation (see Q ratio chart at top of page for SC17), following a front-running of prices to an expected return to normal growth that didn’t materialise. If there was any doubt this isn’t being repeated today, take a look at how analysts continually expected bond yields to rise over the last several years. Reality (demographics) has persistently denied them.

15junn32Source: Mike Sankowski

In 1937, both equities and commodities rallied into the solar max of April and both topped out around then, falling sharply for the next 12 months with both deflation and recession occurring.



Stocks didn’t make a real (inflation adjusted or valuation) bottom until 5 years later.

Which brings me back to the unfinished business in equities and the prediction by both demographics and valuations:


In summary, from all the topping indicators in equities, stocks should now break into a bear market, tipping the fragile world economy fully into both deflation and recession. There should be a feedback looping between the two, taking stocks down to much more appropriate washout valuation levels, whilst crises breed crises again in the economy. As in 1937, it should kick off under easy monetary conditions, limiting the toolkit of central banks, but also as then, central banks will likely resort to unorthodox (and probably ruthless) tactics. Systemic breakdown is a real risk again, with debt levels greater than in the Great Recession (hat tip Sinuhet).

Screen Shot 2015-06-15 at 08.57.23

Source: McKinsey

Commodities (particularly industrial) should sink again too, but likely for shorter and shallower (in line with demographic pressures, as per 1937, and understanding their existing slide since 2011). However, I expect gold to break away and rally as real money. It’s not an easy call due to the limited history of gold free-floating and performing under deflationary conditions. But ultimately I maintain it is the anti-demographic ultimate safe haven, and should regain favour particularly as central banks are currently doing their best to corrupt the money mechanism with QE and ZIRP.

If I’m wrong? Well, this is where we get to the ultimate conundrum. If stocks are instead in a new secular bull (and commodities made their secular peak in 2011, doubled down in 2014) then the appropriate investments/trades are really the opposite of if they are on the cusp of a new devastating bear in an ongoing secular bear. Long stocks and short gold versus short stocks and long gold. I have been able to make cases for both in the last two posts, but I have also shown the flaws in both.

Ultimately it’s a game of probabilities. When all crunched together I see it as most likely that 40 topping indicators and an under-the-hood peak around the smoothed solar max of last year should produce an imminent meaningful correction in stocks unless those divergences start to be repaired. That would be the telling clue. Fitting with that I see gold’s technical basing as likely to produce a meaningful rally. From there I would expect to see serious troublespots emerging in the global economy (defaults, etc) and the meaningful correction in equities turn into a fully fledged bear. However, if the secular stocks bull scenario were to turn out true, then indicators should point to a recovery in equities before we hit such problems.

I have to end on a sobering note. If we do see a global bear market and recession here, then the damage will be immense. No capacity to reduce rates, QE proven to be a failure, record debt levels and increasing under deflation, and no demographic upturn in sight for some time. Accordingly, central bank response would have to get tough, such as penalising any saving, imposing capital flow controls or protectionism. The potential for civil unrest, war or systemic breakdown would increase. The outlook would be very uncertain but surely bleak for the majority of people for the period ahead. It would really be in mankind’s interest for the new secular stocks bull scenario to be true. However, both the debt and demographic problems that we now face can both be traced back to the second world war. They have been a long time growing and attempts to conceal or water down their impact cannot go on indefinitely. Printing money to buy your own debt is normally the end game, so it’s not realistic to expect ‘muddle through’ can keep going. It comes down to the complications of gauging how the end game plays out.