Perfect Set-Up?

Speculation increasingly looks to have peaked out exactly at the solar cycle maximum again, as demonstrated by these 3 charts:

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22m2If you have doubts about that beautiful triple cross-referenced set-up, then there are plenty of supporting indicators to shore up confidence:

22m3 22m8 22m9 22m10Once again: I am not an advisor, so don’t follow me. I see as perfect a set-up as I will ever get for a medium-long term trade, and the market is giving me plenty of time to position optimum short. If I wanted an opportunity to make a life-changing amount of money, here it is, and so I am positioned accordingly. Why front-run the market at all? Timing a top is very much possible, and not the game of fools: proponents of that mantra just don’t know the tools. My strongest case short was for the RUT and therefore the home of my biggest shorts – it is already down over 10%. My guess is some traders now see a potential short in that index but are waiting for a retrace that maybe never comes. The wider indices are an elastic band at snapping point. Some traders will be nimble enough to catch it, others will stand like rabbits in the headlights. Those still playing the long side at this point are the dumb money: not just my opinion but as evidenced in indicators.

A historic opportunity, which I hope we will all be celebrating together.

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Peak Speculation And Russell 2000

Speculation typically peaks out at solar cycle peaks. In 1989, the Nikkei was the speculative target reaching p/e>80 as it topped out at the solar cycle 22 peak. In 2000, the Nasdaq soared to p/e>80 as it topped out at the solar cycle 23 maximum. Now, at the current solar cycle 24 peak we see a broad range of historic topping valuations in equities but it is particularly the small caps that have been subjected and bid up to the extreme, as the trailing p/e for the Russell 2000 currently stands at >100.

Remove the companies with negative earnings, which is about 20% of them, and it would be 23, which is at the top of its historical pricing:

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 Source: Andrewunknown

Valuing by EBITDA, the R2K reached 10.8 in March, the highest since 1995.

Small caps are also at the top of their historical pricing relative to large caps:

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Source: Alhambra

Similar historical rallies to 2013 in the R2k have been reversed in full the following year:

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 Source: Fat-Pitch

R2K current historic levitation is demonstrated here:

Screen Shot 2014-05-01 at 10.40.50

 Source: Gordon T Long

Biotechs have been a key driver of the R2K outperformance, but their parabolic bubble looks to have popped:

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 Source: Alhambra

Along with Biotech, the Russell 2000 potentially topped at the turn of February into March:

Screen Shot 2014-05-01 at 10.19.08Lerverage also looks to have peaked out in February:

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Source: DShort

Over the last 5 months, the collective performance of the four major US stock indices switched from uptrend to range:

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Source: Stockcharts

I believe this is a topping process aligned with the solar cycle topping, so let’s look at the updated solar charts.

My daily sunspots chart shows a higher high but a lower low in April:

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The pole-switch progress has been oscillating around a trend that is now set to complete:

1ma3Source: Leif Svalgaard

Nasa and Noaa models suggest the smoothed solar peak is behind us. Solen agree, suggesting a smoothed peak around December 2013. The below forecast aligns with that, whilst allowing for an April peak:

Screen Shot 2014-05-01 at 10.49.49

Source: Sunspotwatch

SIDC are still running with their two alternatives. The SC prediction aligns with that of solar cycle 16 progress, which SC24 has mirrored to date. The CM forecast predicts ongoing but plateauing strength into late 2014.

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Source: SIDC

Previous speculation peaks occurred close to the smoothed solar maximum and on a spike in monthly sunspots. Aggregating the predictions, the smoothed solar maximum for SC24 is likely to have been at the turn of the year from 2013 into 2014, whilst the monthly sunspot spike so far was February 2014, with both March and April coming in lower.

As things stand, US equities broke out of their uptrend and into a range at the turn of the year and the R2K, Nasdaq, Biotech and momentum stocks all peaked out at the end of February. A February peak in margin debt is also supportive of a potential speculation peak having occurred.

I suggest chances are slim that equities resume an uptrend here following this price ranging, due to the 30 bearish indicators that I recently amassed, some of which are already overdue fulfilment by historic norms. We have a compelling cross-reference of stock market topping indicators (price clues) and solar cycle topping indicators (time clues) in the window of Dec 2013 to April 2014. I believe the Dow’s marginal new high yesterday will be shorted lived: a fake-out.

My biggest short remains the Russell 2000 and I have added to this today. It is the largest trading position I have ever had, so there’s my conviction. NFP Friday a likely market mover, and the start of the lunar negative period this weekend.

The State Of The Markets

Thank you so much for all the messages of support – I was really touched to read them all. I had a burn out and now have to take things easy. I was working long days with the markets and doing too much of everything on top. So my posts will be less frequent for the foreseeable future, but as my focus is on the medium and long term, less intensive tracking may be no bad thing. I come back to the markets after a couple of weeks away and although price continues to frustrate, little has changed in the big picture. Some of my near term timings didn’t work out, but the overall case remains solidly bearish, and it’s a question of patiently waiting for price to fall in line.

Focusing on US stock indices, I have updated the bearish indicators and flags and added some new ones below:

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

2. Historic levitation above longer term moving averages and lack of 10%+ correction since 2012

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Source: Gordon T Long

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

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

5. Crestmont P/E is the 3rd highest in history after 1999-2000 (market peak) and 1929 (market peak), and in 97th percentile

6. This is the 2nd highest market capitalistation to GDP valuation outside of 1999-2000 (market peak)

7. This is the 2nd highest Q ratio valuation in the last 100 years outside of 1999-2000 (market peak)

8. This is the 3rd highest CAPE valuation in the last 100 years outside of 1928-1929 (market peak) and 1999-2000 (market peak), and the US is the 4th highest CAPE valuation in the world currently.

9. Russell 2000 index p/e is currently 74.8; Russell 2000 to SP500 valuation differential at all time record

10. 84% of companies have offered negative earnings guidance for Q1 2014 so far; Last quarter’s revenue growth was the lowest since 2009

11. Skew is in elevated range for the last 6 months; Cluster of extreme Skew readings not seen since June 1990 before recession began July 1990

12. Put Call ratio 21 day average over the last several months has clustered in the extreme low zone that previously led to sharp corrections

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

14. Citi Panic/Euphoria model at a level only exceeded into the 2000 peak:

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Source: Fat-Pitch

15. NAAIM sentiment remains historically high

16. Investor Intelligence % bears levels and pattern similar to previous significant stock market peaks

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17. Rydex bull ratio at extreme historic high

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 Source: Sentimentrader

18. Margin debt (updated for Feb 2014) is at an all-time record, both in nominal and real terms, and as a percentage of market cap; Net investor credit balances are at an all time low

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Source: Dshort

19. IPOs with negative earnings at levels consistent with previous market peaks

20. Leveraged loan issuance at record, surge mirrors 2007 and 2011 important stock market peaks

21. High yield corporate bonds to 20+ year treasuries shows a divergence with the stock market that has previously marked tops

22. AAII equity allocations highest since June and Sep 2007 and Dec 2013

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 Source: UKarlewitz

23. Smart Money Flow Index shows siginificant divergence in 2014

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Source: Todd Harrison

24. Biotech parabolic bubble breakdown

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Source: Stockcharts

25. Wider momentum stocks breakdown

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Source: Charlie Bilello

26. Leading indicators suggest global industrial output slowdown into a May trough, then a pick up into late summer

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Source: MoneyMovesMarkets

27. Citi Economic Surprise Indices for major global regions all negative

3ap17 3ap18 3ap19 3ap20Source: Citigroup

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

29. Percentage of stocks hitting new highs is thinning into current new SP500 highs

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Source: Stockcharts

30. Six month breadth divergence in Nasdaq 100 in stocks above 200MA

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Source: Stockcharts

31. VXN/VIX ratio is a risk-off current flag

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Source: Stockcharts

32. Nasdaq 100 made a fake-out from its cyclical bull channel in March

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33. Best performing classes and sectors in Q1 2014 were commodities, treasuries and defensives

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Source: Fat-Pitch

34. Late cyclical outperformance of commodities as equities top out consistent with 2000 and 2007 peaks

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35. Winding down of QE historically negative for equities, positive for bonds and gold

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Source: Jesse Felder

36. Trading in penny stocks signalling a peak

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Source: Sentimentrader

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

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

39. Rydex money market assets back to 1999 lows

40. Equities topping out with the solar maximum, in line with history

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Underlying Source: Solen.info

A 40-indicator case is a fairly strong case to go short. But we need to balance with what’s supporting the bullish case.

Cyclical stocks have broken out upwards over the last week. The cumulative advance-declines breadth measure remains in an uptrend, supporting the advance in equities. Euro Stoxx broke out to a new high. Gold and gold miners have pulled back in March, with gold having failed to hold a break out above the first meaningful resistance level:

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The question is whether a higher low can now be made in gold, to continue the bottoming process.

Margin debt, for which we have data up to the end of February, did not yet top out. I had initially expected margin debt to top out in December with an anticipated highest monthly sunspots spike at that time. However, a higher monthly sunspot spike in February suggests speculation could have topped out as we moved into March instead. We have thus far seen peaks in the Russell 2000, Nasdaq and Biotech in March, and we saw a lower monthly sunspot spike in March than in February. The consensus view is that the smoothed solar maximum for SC24 already passed at the turn of the year and that sunspots should decline from here. However, SIDC are still running a second alternative whereby a smoothed solar peak still lies ahead in H2 2014:

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 Source: SIDC

Playing to that possibility is the trend in leading indicators noted above. If stocks can hold up whilst economic data starts to improve again as of May then may be they can rally through to the Fall. On the flip side, we should have another month of disappointing data right ahead which could equally pull the rug from under equities. Were the second SIDC scenario to occur then I would expect speculation not to top out until the Fall, and a suitable technical mirror from history may be 1987 whereby sentiment reached record levels in Q1 1987 but stocks did not fall hard until Q3. But for now, the more probable scenario is of a smoothed solar maximum having passed and speculation declining from here, and for this to be confirmed I would be looking to see that the RUT and Nasdaq indices do not make a higher high from here, and that margin debt tops out. Sunspots should also notably trend down as we head into mid-year to confirm this.

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There have been a concentration of market falls occurring in the inverted geomagnetism seasonal lows of March-April and October. So again taking that primary scenario of sunspots now on the wane, I look to this new month of April to deliver major falls in equities, in line with the Nasdaq in 2000 (smoothed solar max and sunspot spike March 2000). Presidential cycles in the market suggest stocks could eek out further gains in the first part of April before falling for a period of weeks. DeMark also believes a top is within days but suggests the SP500 could reach 1931 before inverting.

The primary scenario of a smoothed solar maximum having occurred in December 2013 and a highest monthly sunspot spike in Feb 2014 is supported by a chain of events to date: Bitcoin peaked in Dec, Nikkei and Dow (very tentative at the time of writing) peaked and money flows switched into defensives at the turn of the year, the ‘theme’ stock indices and sectors of the cyclical bull exuberance phase peaked out Feb-Mar 2014. But this is all subject to confirmation or invalidation. So let’s see how April develops. I remain significantly short equities, and siginificantly long precious metals, with other smaller positions long commodities. My worst case scenario is the continuation of speculation into late summer before Q3 falls in equties, and I would hold my positioning until then if so. But for now this is the outside scenario, and I maintain good odds of April delivering significant falls in equities, and momentum returning to gold with a higher low.

Thank you for all your input whilst I was away.

Biotech And Russell 2000

Just as the defining sector of the 2000 solar maximum speculative mania was Internet, a case can be made for both Small Caps and Biotech as defining manias at the current solar maximum. In 2000 the Nasdaq Composite made a parabolic blow-off and hit p/e >80 as companies were ‘revalued’ on expectations rather than earnings. The Russell 2K currently trades at p/e >80 and the index of Biotech companies trades at p/e>160, with both having a significant weighting of companies trading on expectations.

The Russell 2K trades at its most expensive historic valuation:

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Source: Karla Tango

The Nasdaq Biotech sector is in a parabolic trajectory signalling imminent exhaustion:

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Source: Blogspot

Marrying the two, the strength in the Russell 2K in 2014 has been dominated by Biotechs:

2ma3Source: Bespoke

Similarly the Nasdaq Composite has been significantly driven recently by Biotech strength. So a pop in the Biotech bubble would have significant ramifications for the Russell 2K and Nasdaq, and the wider markets.

On Friday, Biotech had a significant down day on high volume, having built up a negative divergence in RSI:

2ma5This occurred at the new moon and as we head into the inverted geomagnetic seasonal lows of March and April. Add in the near vertical trajectory of the parabolic on the longer term view and we have the potential for a top having occurred on Friday, but subject to follow through next week.

Similarly, the Russell 2K experienced a high volume reversal on Friday and shows other topping signals:

2ma6Source: Stocktwits

To further judge the likelihood of a top, a key question is: could the R2K and Biotechs rise materially higher yet? Whilst we cannot calculate a precise answer to that, we can look to various indicators to build up a case for a limit.

The Biotech sector has risen approx 150% in the last 2 years, which is very similar to the gain in the Nasdaq Composite from 1998-2000. Real margin debt and net investor credit have both now exceeded the 2000 market peak (and 2007 peak), whilst real margin debt to GDP is at the same level as the 2000 peak.

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2ma8Source: DShort

Citigroup’s panic/euphoria model, which aggregates short interest, put/call ratio, retail money funds and more, is above 2007’s peak but remains some way off 2000’s mania; whilst their CEM model points to a market correction right ahead which would fit with Friday having marked a peak:

2ma13Source: Citi / Fat-Pitch

Sentiment as measured by Investors Intelligence with 10 week smoothing is above or at levels that have previously marked tops, with an exception in 1986-7 where the market first rallied higher for several months before ultimately crashing.

2ma12Source: CMG Wealth

Solen’s updated solar cycle progress and prediction chart still suggests a peak at the end of 2013, which is consistent with the Dow and Nikkei having topped out then and other indices now rolling over to join, and my own daily sunspots chart also reflects this:

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Source: Solen2ma15

The waning of the solar maximum has historically given rise to a recession in the US. ECRI’s leading indicators rolled over in early 2013 and have recently reasserted that downtrend. Any further deterioration from here would suggest such a recession is coming, and that sort of timing would be a general fit with the business cycle:

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2ma11Source: DShort

In keeping with that prospect, 20-year treasury bonds look to be breaking out following an 8-month basing:

2ma14Source: Fat-Pitch

Drawing all together, I have a reasonable case for the Russell 2000 and Biotech to have peaked out on Friday, with the latter feeding into the former, and both into the wider markets. The Friday candles and volume and the negative divergences in both the R2K and Biotech suggest a peak. The Citi CEM, new moon and inverted geomag seasonal lows of March and April suggest follow through could then occur this coming week forwards. The rate of trajectory of the Biotech sector suggests terminal exhaustion should be close at hand, and that would then feed into the R2K’s fortunes as per the Bespoke table above. Valuations, leverage and sentiment collectively suggest significant further gains are unlikely. Solar speculative maximum timings suggest other US indices should now be ripe to join the Dow in rolling over, or more specifically began a topping process at the end of December which is now completing, and in so doing becoming leading indicators of a looming recession.