The Only Chart That Matters

Posted on October 7, 2014October 7, 2014 Posted in Indicators, Solar Cycles, Stocks274 Comments

Ask 100 analysts and traders what that is, and chances are that not one of them will point to this:

Yet I maintain that this is it. The last 5 solar cycles all produced speculative peaks within 5 months of the smoothed solar maximum, and in this era of global, instant access, it seemed reasonable to expect something similarly tight at this peak, which, in this real time test, appears to be the case. We see evidence that small caps were the main speculative target of this solar max, with the R2K p/e reaching over 100 at the top, like the Nikkei did in 1989 and the Nasdaq in 2000. We won’t know all this for sure for several more months, but with each month that passes the likelihood grows.

So am I delusional, or are other analysts failing? I am open to both possibilities and I mean that sincerely: I am just one self-taught guy, so how come all the veterans in the business aren’t aware of this phenomenon or don’t rate it?

I have doubters amongst you readers too. However, for the chart to be invalidated, we would need to see small caps and leverage make new highs whilst the solar maximum wanes. That would imply the 2014 formation in the R2K is not a topping process but a consolidation or coiling for a move higher. Chances of that are slim:

Source: ShortSideOfLong

Source: WSJ

The topping option gains further weight when we look at relative performance to large caps:

Source: Charlie Bilello

Plus, many topping indicators for equities have congregated since the end of 2013, which I have covered exhaustively on this site. And to be clear, if small caps break down then large caps will follow, in line with history.

There is still a question mark over whether the smoothed solar maximum is definitely behind us, but the majority of solar models predict so. Therefore, as things stand, we have pretty good evidence of a speculative mania in the markets centred on a particular asset class or index topping out very close to the solar smoothed maximum, just like in 2000 (Nasdaq) and 1989 (Nikkei, 5 months after smoothed solar max) and 1980 (gold, 1 month after smoothed solar max).

Going back to the title of this post, I believe the most popular answer amongst analysts for ‘the only chart that matters’ would be the QE versus stocks chart, but in a recent post (here) I instead showed that ‘Fed policy trumps all’ has been the mantra rather than the driver, just as into the year 2000 internet stocks were ‘revalued’ on expectations rather than earnings. In other words, the speculative mania is driven by the influence of the sun but people unwittingly assign some other justification for buying high: a ‘new normal’ which ultimately fails to be.

As stock indices were down for September, we can expect that margin debt retreated in that month, which keeps the leverage peak close to the smoothed solar max. If the R2K can break down decisively here in October – and it is currently at the critical last support – then it would likely seal the joint solar/speculation peak around March time. Should that occur, then the implications are major, namely that much of what is written about the markets is not true, and that humans, including central bank members, are more dumb subjects and less intelligent creatures of free will. But more on these implications once we have the validation seal.

It wasn’t easy trading this in real time, trying to gauge where both the speculation peak and the smoothed solar maximum fell. With both variables unknowable in advance it has been a process of cross-referencing and leaning on prediction probabilities, only made more certain with hindsight. Nonetheless, in trying to gauge the peak in the markets, there appears to have been no more critical factor to consider. However, we now need the decisive breakdown in equities to confirm it.

In the very short term, indicators still point to the bounce Thursday-Monday being short-lived and giving way to a lower low than last week. So, per my last post, this would likely entail the Russell 2000 making a decisive break beneath the last line of support. If this transpires then the selling should gain momentum and that would be the validation seal that I am looking for.

Last Quarter Of 2014

Posted on October 1, 2014 Posted in Commodities, Currencies, Geomagnetism, Indicators, Macro, Solar Cycles, Stocks218 Comments

September finished as a down month for all US stock indices, which means the peak in margin debt should remain as February. Cross-referencing: SOCL, RUT and Nasdaq breadth peaks are still signalling a likely Feb/Mar speculation top, whilst biotech remains tentatively supportive, at a double top with March. The smoothed solar maximum continues to look like it occurred around March, so the whole picture remains strong for a sun-driven speculation peak around March and a period of ‘borrowed time’ for equities since.

The SIDC chart shows that they are still running with an alternative in which the smoothed solar max double tops ahead at the end of the year, but the majority of other solar scientist models are aligned to their SC prediction (smoothed max behind us, circa March). By cross-referencing with measures of speculation above, the behind-us scenario gains further weight.

The Russell 2000 has now reached the key technical level around 1100 for triggering potential waterfall declines, and it arrives here at the most bearish point in the year, the seasonal geomagnetic low of October supplemented by downward pressure into the full moon of next Wednesday 8th.

Conversely, if the RUT and other US stock indices can hold up through the full moon and the rest of October, then a year end peak in large caps would gain weight, with the seasonal upward pressure out of November. As things stand though, the recent collapses in junk bonds and inflation expectations, the September declines in all stock indices and the acuteness and maturity of many different stock market indicators (which I have detailed on this site) all support the October breakdown option.

Turning to other markets, the US dollar is in a parabolic ascent, the Euro a parabolic descent, and the slide in precious metals continues. All three show extremes in positioning and indicators that are suggestive of a reversal, and the parabolic trajectory of the FX pair suggest a snapback should be imminent, but when?

I see it as linking in nicely with the situation in equities. If US equities break down through the key technical supports (to clearly kill the prospect of another v-bounce), then gold should at that point reverse course, and the dollar may then be sold off. Much of my recent work on stock market indicators shows that the case is strong for equities to break down without delay, suggesting these intercorrelated reversals ought to indeed occur here in this pertinent window at the beginning of October.

The rising Dollar negatively affects 45% of S&P companies. Earnings season for Q3 gets underway next Wednesday, and the predicted earnings growth rate is 4.7%. This stood at 8.9% on June 30th and 12.2% at the start of the year. For the YTD picture, US earnings growth forecasts at the start of 2014 were Q1 4.4%, Q2 9.2%, Q3 12.2%, Q4 13.5%, whilst actuals are Q1 2.2%, Q2 7.7%, Q3 4.7% (est). In other words, to justify valuations, average quarterly 10% earnings growth was required and projected, but the reality looks like less than half that. As earnings season typically have a ‘sell’ or ‘buy’ theme, I suggest odds are this one will be a sell (as reality dawns), and help pull down equities in October.

At the macro economic level, economic surprises in Europe and China continue to languish negative, whilst the US remains positive. The global real narrow money leading indicator predicts a slowdown once we hit 2015, whilst ECRI leading indicators for the US remain poised at a low level from which a fall in equities would likely tip then negative. This brings me back to what leads what. I recently covered that equities in fact tend to lead leading indicators by a month on average and that previous major tops reversals in leading indicators only occurred once equities had made initial hard falls, which in 2014 they have yet to.

This in turn leads me to the question of whether equities could yet have a second chance peak ahead, like in August 2000 (after the first March peak) or October 2007 (after the June top). In both those scenarios, large caps dropped around 15% before rallying to the second chance peak, whilst leading indicators diverged negative into the second chance peak. The possibility here would be for large cap stocks to break down in October, perhaps 15% again, but then rally back up towards the recent peaks by year end, perhaps for a 31 Dec second chance (lower) peak.

Well, the speculative targets of RUT, SOCL and IBB all show second chance peaks already. Developments in margin debt, HYG:TLT, NAAIM, Rydex and various mature divergences also suggest we should be at second not first chance peak. But the price patterns in large caps don’t really fit. UBS side with the year-end second chance prediction, shown below, yet beneath that their TNX divergence chart is another indicator conversely suggesting we should be at second chance peak already:

I suggest that if we are post-second-chance but having ‘cheated’ a decent first chance correction (and this is the picture painted by most stock market indicators), then the falls from here should be twice as hard and echo action post-second-chance in 1929, 1987, or 1989 (Nikkei) whereby the falls become waterfall declines or panic selling. If the selling is more measured and back and forth then we should alternatively look to indicators to washout and align for a bottom at perhaps a 10% or 15% correction, before a potential rally into year end.

This last quarter was the best quarter so far for viewing stats on solarcycles.net. The best month was this last month (shown below), the best day just yesterday. So, thanks for reading my analysis and thanks to all those who contribute and make for a good discussion board.

To sum up, I’d give 80% odds to equities falling in October through technical supports and cementing a new bear market. I’d give 20% odds to equities holding up into or making a second chance peak at year end (both around 31 Dec). I don’t have a case for a bull market extending into 2015, as this would invalidate a variety of historically reliable indicators with different angles on the market.

As this is the last quarter, it seems appropriate to stick this up: predictions from the professionals at the start of 2014 for year-end. We can see that all were bullish on equities, predicting an up-year (accepting that they largely play it safe and align with each other). As you know, I was bearish at the turn of 2014 and always expected us to end the year in a bear market, so it’s a black mark against me if we don’t. But I believe the weight of evidence still supports the markets swinging to me by year-end, so let’s see at 31 Dec.

Population, GDP, Debt, War And Solar Variation

Posted on September 29, 2014 Posted in Demographics, Indicators, Macro, Solar Cycles216 Comments

On a longer term view, these all fit together, and understanding their relationships can help us predict what’s coming.

The grand solar minima correlate with clusters of war:

War clusters / cycles

The grand minima were periods of lower population growth and lower GDP growth whilst conversely the grand solar maximum of the 1960s-70s was a period of peak population growth and GDP, shown here:

So, broadly speaking, the grand solar minima have equated to war, low GDP growth and low population growth, whilst the recent grand solar maximum was the opposite.

Benjamin Friedman established the correlation throughout history of declining economic growth giving rise to war. Extremists are brought to power under economic suffering. Revolutions occur when people are struggling (most recently, the Arab uprisings when food prices had risen to price people out of the basics).

World wars 1 and 2 were periods of low GDP growth, and WW2 occurred out of the Great Depression:

The end of that double great war period gave rise to a global baby boom that produced a young adult price-inflation swell in the 1970s then a middle-aged stock market boom swell between 1980 and 2010 (phased across individual countries).

Since then demographics are united in downtrends in the major nations producing this sobering composite:

Global GDP growth is struggling and should do so for an extended period, and stock markets should suffer likewise.

Meanwhile, solar scientists predict that we are tipping into a new grand solar minimum. The predicted low GDP growth above fits with the grand solar minimum predicted below, making for a compelling cross-reference.

The last piece of the puzzle is debt. Debt is prosperity taken from the future and has been increased with each war and each major recessionary/depressionary period, to pay for or offset those events:

The resultant long rising debt trend means more productive receipts have to be spent on servicing the debt, which crimps the economy beyond that of demographics.

The end game for debt is QE. Printing money to buy your own debt is the policy of last resort. The only way out of this is if demographics point to much higher receipts ahead, but in fact they show the opposite.

Drawing all these relationships together, the outlook is grim. The next couple of decades will be characterised by low global GDP (as written in demographics), which puts the world at risk of war (at both national and international levels). The debt situation threatens to accelerate out of control in certain countries (Japan is at highest risk) as central banks offset even lower GDP and potentially have to pay for war additionally. Major war would cut both GDP and overall population further, making for even greater per capita debt burdens.

These are the major themes. The specifics by country and by timeline are more difficult to predict. But at the global level, the negative feedback looping between solar, population, GDP, debt and war, suggest the crunch is unstoppable for the world.

Eventually, these interconnected phenomena will turn into a positive feedback looping. Out of the ashes of a grand solar minimum with a purge of population, the devastation of war and bankruptcies should come a new solar normal with another baby boom and some anticipated revolutions in systems and organisation (financial, economic, social). True new ways of doing things only occur when circumstances force.

Set against the bleak outlook of the next couple of decades is the continued parabolic rise of technological evolution. Developments in nanotechnology, biotechnology, artificial intelligence, space exploration, geonengineering and renewable energy may produce paradigm shifts that assist with GDP and debt, and accordingly could ease the conditions for war. However, the negative feedback looping captured above extends its grip over this too, as corporate investment has been shrinking across the world in recent years, in accordance with lower economic demand and higher uncertainty.

Declining levels of investment and R&D worsen the outlook for the future and add to the downward spiral.

We could argue that the global secular bear in the economy and stock markets began in 2000 and that as yet we have avoided major war. However, collective demographics have worsened since then, as Europe and China tipped over to join the US and Japan. With a comprehensive case for stock market peak here in 2014, the next leg down both in equities and the global economy should be the worse yet. To add to this, a large percentage of the population has seen little improvement in personal finance for some years (as the cyclical recovery since 2009 has been very unevenly distributed), which creates bubbling trouble.

The situation in Ukraine and between Russia and the West may be a fruition of these themes. Economic troubles were a major factor in bringing about the revolutions in Ukraine. The sanctions against Russia are hurting both the Eurozone and Russian economies, which are already struggling, thus worsening the situation for both parties. Protectionism was a theme of the Great Depression, and is a self-defeating policy, but it will most likely increase here with the anticipated next leg down in the global economy and markets, as nations turn to helping themselves and trying to prevent domestic unrest. There is the risk that China and/or Russia sell chunks of their large US treasury holdings and destabilise global markets in a major way. Both countries have been increasing gold holdings in recent years. Indeed, ‘war’ could take a new form in this era of global, interconnected and instant: financial markets may be targeted, adding to the risks for traders.

Putting such speculation aside, the trends in debt, demographics and solar variation combine to make a compelling case for a period of serious economic trouble. That period kicked off in 2000 but is now strengthening in intensity, and stock market indicators assess us to be on the verge of the next leg down, which should be the worst yet. The conditions for war are in place, and it seems fairly sure that trouble around the world will intensify. The question is to what degree and how matters unfold. The recent deterioration of relations between the West and Russia is an ominous development if we are now heading into a major breakdown in the markets and global economy at the end of 2014. Major international conflict is by no means certain, but if we were looking for the appropriate conditions for it, then they are in place.

Topping Timeline And Targets

Posted on September 23, 2014September 23, 2014 Posted in Indicators, Solar Cycles, Stocks204 Comments

I played the long side of the stock market from 2009 to 2013, which longer term readers can vouch for. I reiterate that in case there is any doubt amongst newer readers that I may be a permabear. However, I would rather hope you can see my work is as objective as I can make it, bearish as it now is.

I began my series of bearish posts in December 2013 as topping indicators began to accumulate and I entered my opening shorts. I made my first topping call in early January as 31 December 2013, and here is the link to that post: click.

In that analysis I cross-referenced over 30 topping indicators and I therefore don’t have many regrets. It was a strong case, and it did capture certain peaks in risk and the likely beginning of the topping process, as shown here:

At that time, leading indicators were predicting a weak Q1, which then shocked to the downside, and earnings guidance was the worst on record. Solar scientists predicted the smoothed solar maximum was already through by the end of 2013, so the whole set up looked very promising.

However, solar scientists got it wrong, as sunspots continued to a (likely) peak of around Feb/March 2014. Therefore, I can now retrospectively account for speculation increasing from 31 Dec through to the start of March, and the negation of my original topping call. But at the time, not much I could do.

Below I present evidence of that Feb/Mar speculation peak in social media, biotech, Nasdaq breadth x2 (i.e. Nasdaq stocks started to break down here), and relative European and UK small caps performance:

All peaked at the turn of Feb into March, and this fits with margin debt leverage which currently peaked in February. My biggest short position is in US small caps, the Russell 2000, and this index also peaked at the turn of March, adding to the collective case for speculation and the solar max to have peaked at this time.

In a recent post (click) I detailed the comprehensive case for the market peak but stated we were missing a technical break. That R2K chart above shows the likely trigger for waterfall selling. A decisive break below 1100 would confirm and seal the topping process.

Meanwhile, on the SP500, I suggest the technical break is around 1900, where the 200MA and August low now collide:

A decisive break below 1900 would produce a lower low, a move under the 200MA (after 2 years levitating above it) and a break in the pattern of v-bounces. When I look at that chart I see clear evidence of the sun-inspired speculative mania, whereby every dip is swiftly bought up and levitation is sustained. Could Elliot Waves or other pattern techniques really predict that chart, and its ultimate conclusion too? I find that hard to believe, as I see a mania which is only predicted by the solar maximum, and the chart does not have a more ‘usual’ ebbing and flowing of sentiment waves. However, something sustained the speculation in large caps between March and now, so what did?

Certain additional topping flags have congregated in the last 2 months: vix divergence, extremes in volume, more negative divergences, higher Sornette bubble end flag intensity. But none of these offer anything revolutionary to what was present at the start of the year. Certain divergences were not so mature in January, but equally certain divergences are now too mature (versus historic norms). In short, I don’t see anything major now present as a topping flag that was missing before, but rather only a few subtle additions which add to the case. However, I put that out to you readers for your views.

The Nikkei did not top until 5 months after the smoothed solar max in 1989, so a top at the turn of August-September in 2014 fits that kind of lag, though here we could argue that the speculation targets were RUT, SOCL and IBB and have conformed to a tighter fit with the solar peak. Either way, I believe the market is on borrowed time since the March speculation peak, which now looks fairly clear. This window around October is the most likely for the falls to erupt, and various measures of ‘fuel’ suggest continuation of the bull market to year end is unlikely. Friday and Monday action looks very promising, and now I look for further follow though to confirm it. But I’ll stick my neck out again and say I believe this is finally it.

So a reminder of targets. Falls were swift and nasty under similar historic conditions:

Dow 1929: 3 weeks 44% declines

Dow 1937: 8 weeks 38% declines

Dow 1968: 8 weeks 18% declines

Dow 1987: 2 weeks 34% declines

Nikkei 1989: 6 weeks 27% declines

Nasdaq 2000: 3 weeks 35% declines

SP500 2011: 2 weeks 18% declines

I am therefore looking for a minimum of 18% declines over a period of 2-8 weeks. I believe such waterfall selling will kick off once the technical price breaks noted above are made, and I expect precious metals at that point to accelerate in the opposite direction. However, history is not clear on which way gold mining shares should go at that point, as they may only take off after the waterfall declines, and precious metals could be held back to some degree by forced redemptions under cross-asset selling.

I believe Friday kicked off the downward momentum in stocks, and that what looks like a breakdown in precious metals will now become a fake-out that is reversed. The very skewed positioning in FX completes the picture for an all round reversal in assets.

Indicators put us at the end of the topping process in equities. This means no ‘second chance’ ahead. Rather, we can see the second chance peaks already on RUT, IBB, SOCL, European indices and in behind-the-scenes indicators, so I believe US large caps are displaying a false safety in their price trends and that those who think a topping process has yet to form from here will be mistaken. If I am correct in where the markets are in the timeline, then bears should remain firmly in control now. Not every day will be down, but the trend will be fairly unforgiving, with little chance for anyone to get out or in. The technical breaks should then trigger the panic selling and the devastation will be through by November. From there the market should begin a slower partial retrace of the falls into year end. This is all based on historical analogs.

My aim is to close out of shorts once the panic selling leg is through, as the partial retrace of the falls should be multi-month. So I’ll be doing my best to use indicators to try to gauge where and when the bottom is in the waterfall selling. Might selling be more measured, say like after the 2007 October peak to year end? I don’t believe so because of various factors: the solar max, leverage, sentiment, allocations, skew, levitation above 200MA / pent up correction. Rather, the set up is for particularly heavy waterfall selling, and the closest analogs listed above. They average at 30% declines over 4-5 weeks.

10 Indicators Cross-Referenced

Posted on September 11, 2014September 11, 2014 Posted in Indicators, Solar Cycles, Stocks79 Comments

1. Investors Intelligence

II Bears (advisor sentiment) is sub 15 again this week, previous clusters shown:

Source: Stockcharts

Here are those sub 15 readings on the 80s Dow:

Source: Stockcharts

The 1983 extreme II reading occurred 12 months after the new bull market kicked off, and is comparable to the spike down in early 2010 in the first chart that didn’t quite reach <15 bears. The 1986 and 1987 double (circa 5 years post bull launch) is comparable to the Dec 2013 and current extreme pair, but note how stocks rallied for 5 months after the 1987 extreme before collapsing.

2. Rydex

Rydex asset ratios (Rydex family of funds) current extremes are most similar to the 2000 period, namely a time band of extremely skewed holdings lasting for around 7 months in 2000, as we are seeing in 2014 (9 months mature).

Source: Stockcharts

But note that within that 2000 time band we saw two periods of major sell-offs: March to May and September to December. We have not experienced either so far in 2014.

3. NAAIM

NAAIM exposure (managers US equities exposure) made a pattern of extremes-plus-divergence at both the 2007 and 2011 market peaks:

Source: Acting-Man / My annotations

We see similar extreme high readings plus the same gradual divergence since November 2013. The pattern is most similar to 2007, where it lasted 10 months before the market finally entered a bear market. Here in 2014 the pattern has also been in play for 10 months.

4. HYG:TLT

The high yield to treasury bond divergence (a risk off measure) lasted 4 months, 5 months and 5 months at the 2007, 2010 and 2011 market peaks. The 2014 divergence has been running 8 months and is therefore excessively mature.

Source: Jesse Felder

5. Skew

The persistent extremes in Skew (risk of outsized move) beats any historic parallel, but we could point to 1990, and the most recent cluster in 2011, both which produced 20% sell offs in the market. The 1990 cluster lasted 7 months which makes the 2014 cluster, at 10 months, again excessively mature.

Source: Dana Lyons

6. Q ratio

Q ratio valuation (replacement cost of stock index companies) shows that flirtations with an extreme value of 1 were historically swiftly repelled (by bear markets) with the exception of 1996-2000.

Source: D Short

With the stock market now 2 years above the 1-level, the closest parallel is that period into 2000. Note there was a 20% correction half way in 1998. However, the run up to 2000 was a demographic peak, this is not, and valuations need demographic context. I believe 1937 is the most applicable mirror which puts us ripe to fall.

7. Household Equity Allocations

Equities as a percentage of US household financial assets have historically signalled market peaks once flirting with the 30% region, with the exception of 1997-2000. Again, demographics do not support this indicator rising to higher levels, so I would mark this indicator as similar in outlook to the one above.

Source: ShortSideOfLong

8. Margin Debt

Margin debt (investor leverage) surged for 15 months into 2000’s peak and 10 months into 2007’s peak whilst the surge into the Feb 2014 peak lasted 18 months, so relatively mature. Whilst the Feb 2014 margin debt peak is only tentative currently, it occurred 6 months ago, versus 5 months and 4 months pre-peak in 2000 and 2007, so also relatively mature.

Source: D Short / U Karlewitz

9. Sornette Bubble

Sornette’s bubble end flag calculation looks like this currently on the SP500 and the US tech sector:

Compared to historic examples, the SP500 has not flagged at as higher intensity, whereas the tech sector now has. On the other hand, the tech sector flag looks fairly ‘new’, whereas the SP500 flagging has built up gradually. Neither have spiked multiple times in an extended period like in 1929 or 2000 (which both lasted around 2 years). At this point, the picture is most similar to 1987 of the three.

Source: Financial Crisis Observatory

10. Solar maximum

By most solar models, the smoothed solar maximum is behind us, circa March 2014. If this is so, then the last four solar maxima delivered the asset mania peak within 5 months, which makes the current peak ripe.

There are question marks over how close the timing ought to be (looking further back in history), and we cannot yet be sure the smoothed solar max is behind us. However, this is where cross-referencing comes in useful.

Investors Intelligence argues the top should be before 2014 is out, whilst NAAIM calls for one straight away. Rydex, Skew and HYG:TLT all argue a sharp correction circa 20% or a bear market is overdue, and margin debt tentatively does too. Meanwhile, Q ratio and household allocations argue for a sharp correction circa 20% imminently or a bear market too.

All these indicators cast great doubt on the speculation peak being some way ahead in 2015. Collectively they argue for us to be in the last gasps of a topping process that began at the turn of the year. If stocks were to continue to rally into 2015 then we would print major anomalies in all these indicators: they all worked historically, but this time is different. I don’t buy that.

The Sornette bubble either places the market at a 1987 style peak now, or will come again at a higher intensity any time up to the end of 2015. The solar cycle places us either ripe to fall, 5-6 months post smoothed solar max, or also may allow for a peak up to the end of 2015.

I therefore believe that the logical case is for the eight market indicators to work once again and deliver a peak now, which then fits with the 1987-style Sornette reading and the most likely smoothed solar max / speculation peak lag combination. It all fits together, it all fits with history.

Characteristics Of A Stock Market Peak

Posted on September 8, 2014 Posted in Demographics, Indicators, Macro, Solar Cycles, Stocks60 Comments

Focussing on the US stock market, I’ll divide this into two: what’s currently flagging a peak, and what’s – arguably – missing.

First, the different angles and disciplines that are signalling a top.

A. Valuations

(1) CAPE, (2) CAPE/Baa yield, (3) Crestmont, (4) Q ratio, (5) Stock market to GDP ratio, (6) Median stock, (7) Relative pricing to bonds and commodities, (8) Relative pricing to other countries, and (9) Relative pricing to demographic trends: all show extreme overvaluation, fitting with previous major peaks.

B. Sentiment & Allocations

(10) Investors Intelligence, (11) Rydex, (12) Fund Managers, (13) AAII allocations, (14) Households, (15) Put/Call Ratio. We don’t need to speculate about whether this is ‘the most hated rally’ or whether Joe Public has yet to get involved. These measures collectively tell us that allocations and bullishness are extreme high and echo previous major peaks.

C. Dumb Money

(16) Retail v. Institutional, (17) Major distribution days, (18) Multiple Expansion, (19) Money losing IPOs, (20) Buyback levels. Again, these all resemble previous peaks.

D. Leverage

(21) Margin Debt, (22) Net Investor Credit, (23) Leveraged loan issuance. Compensating for a lack of demographic tailwind these have been driven to new all-time records.

E. Negative Divergences

(24) Stocks over 200MA, (25) New high-lows, (26) Nasdaq advance-declines, (27) NAAIM exposure, (28) High-yield to treasuries, (29) Consumer discretionary to utilities. These have broadly been in place since the turn of the year and are now mature versus previous major peaks, suggesting we should be around the end of a topping process.

F. Technical Indicators

(30) Skew, (31) Extreme low volume (Nasdaq and SPY volume on up down days), (32) Extreme low volatility (levitation above 200MA, weeks without a 3% move), (33) Sornette bubble end flag, (24) Compound annual growth. A variety of angles, each with a case for a peak.

G. Sector & Asset Rotation

(35) Best performing asset in 2014: Treasuries; (36) Best performing sectors: Utilities & Healthcare; (37) Hot assets, sectors and indices broke down from parabolics: Bitcoin, RUT, SOCL, IBB (tentative). In summary: out of speculative and cyclical and into defensives.

H. Natural Force Timing

(38) Peaks typically occur close to solar maxima (est. March 2014 (RUT)), at (39) Inverted geomagnetic seasonal peaks (Dec/Jan (risk, Nikkei), Jun/July (Dax, Dow)) and (40) Close to new moons (in Jan, Mar, Jul and Aug). The solar maximum is the question mark, because it is an estimate currently, but we know we are in the timezone of a smoothed solar maximum and from history a market peak is likely near.

Drawing all these angles and disciplines together it should be clear that we are in the vicinity of a stock market peak. You may take issue with a particular discipline or a particular angle or those indicators with shorter histories, but the collective case overwhelms. If you take issue with the collective case by arguing that is has all been distorted by QE and ZIRP, then I would point to 1930s US and 2000s Japan where the conditions were the same and we nonetheless experienced bear markets and recessions. But I’ll tackle this distortion idea more below.

Let’s now turn to what may be missing for a stock market peak and thus keeping the bear market at bay.

I. Topping pattern and technical breakdown

Nikkei, FTSE, Dax, Russell 2K are all overall flat for 2014 and display typical topping patterns. Yet, the other US indices remain in clear uptrends, India’s Sensex remains in a steep ascent, and the Hang Seng recently broke out. So the overall picture is mixed. None of the indices have made a decisive technical breakdown at this point.

J. Leading Indicators, Corporate Profits, Recession models, Financial Conditions

Conference Board LEI, ECRI WLI, corporate profits, yield curve recession model, other proprietary recession models. Corporate profits have turned down by certain measures but not all and the rest of these indicators display no clear warnings currently. Economic surprises are currently positive and the US economy is generally doing ‘fine’. More on these below.

K. Inflation & Rate Tightening

Commodities and inflation rallied from Nov 2013 and peaked out in May 2014, but still at overall historically low levels. Yields tightened into the end of 2013 but since then have reversed and eased. The Fed remains on zero rates but is tapering QE to an Oct 2014 termination. This is a general misfit with recent bull market peaks that have seen higher inflation and a series of interest rate rises. More on this below.

L. Question marks over (i) The solar max, (ii) Sornette bubble end flag, and (iii) NYSE Advance-Declines

Most solar models predict the smoothed solar max to be behind us, circa March 2014. However, SIDC are still running with an alternative model that peaks at the turn of 2014-2015. Also, Mark has a theory that under weaker solar maxima, like this one, speculation runs beyond the smoothed solar max, which would also take us beyond the end of 2014. The Sornette bubble end that flagged in July was at a lower intensity than mirror bubble ends in history, allowing for a potential greater flag ahead (which would imply the market needs to rally further yet). NYSE advance-declines have not negatively diverged yet unlike previous recent major peaks, however they did not at all peaks, and Nasdaq advance-declines have been divergent for 6 months.

As Things Stand

Posted on September 4, 2014 Posted in Geomagnetism, Indicators, Solar Cycles, Stocks148 Comments

The stock market topping process began at the turn of the year:

Speculation peaked in Feb/Mar along with the likely smoothed solar maximum:

So, topping process phase 1: turn of the year risk peak; topping process phase 2: Feb/Mar speculation peak. Topping process phase 3: mid-year bubble end peak:

The major stock indices peaked suitably at the seasonal highs close to new moons, either side of the speculation peak epicentre:

The SP500 and Dow peaks are tentative at the time of writing but the signals are promising.

The Nasdaq has been the leader but also put in a potential topping candle yesterday.

Has normality now been resumed? By normality, I mean negative divergences, volume patterns, sector rotation, lunar phasing, excessively frothy sentiment and allocations would all typically pull down the market. But the power of the solar maximum has trumped all, keeping the market levitated despite these being in play since the turn of the year. If the market still continues higher from here, then the sun’s influence isn’t through. But if the solar effect on humans is now waning, then the market should return to respecting those indicators of an imminent correction, and in doing so honour the phasing of the topping process as outlined above with a final roll-over here, into the typical period for market falls, Sept-Oct.

As previously noted, the aggregation of indicators and analogs suggests we should be in for a minimum 18% correction but most likely a bear market, and here is one more chart in support of that:

Last 30 Years

Posted on September 3, 2014September 3, 2014 Posted in Demographics, Indicators, Macro, Solar Cycles, Stocks59 Comments

MSCI world equity index valuation chart for the last 30 years:

Source: Investec

The overall dotted line trend matches the black global demographics composite in the next two charts:

Conventional analysis of equity valuations considers cheapness relative to history and averages as a predictor of returns. But valuation has to be considered relative to demographics, or rather, long term trends in valuation ARE demographics. Expensive will get more expensive if you have an increasing swell of people in the right age group to buy the market, and vice versa. By global demographics, we are destined for cheaper valuation yet, and the current bull rally is a counter-trend solar-maximum-inspired speculation peak.

The MSCI world index is weighted like my demographic composites. Therefore the US demographic peak was the most important peak and put in the main top. Since then Europe and China have joined the trend change, making post-2009 the most heavy collective demographic pressure yet. Accordingly, we have seen interest rates held at unprecedented low levels due to the resultant economic weakness.

If demographics are so dominant then we should see evidence in the current counter-trend bull of major weakness under the hood, which we do.

Whilst the SP500 has grown 120% in real terms since 2008, real revenues have grown just 2%. Companies have engaged heavily first in cost cutting then in buybacks. Sales remain elusive.

Also, the last 2.5 years in US stocks have been over 80% multiple expansion versus less than 20% earnings expansion, and this price-based rather than earnings-based expansion in equities whilst the economy has remained weak has taken stocks cap to GDP to an all-time record:

With a dwindling pool of stock market buyers under demographics, the market has been bid up on lower volume and increasing use of debt, taking the latter also to a new all-time record:

Source: DShort / UKarlewitz

This mix of unhealthy attributes has taken stock market risk to an appropriate record:

Source: EcPofi

In summary, the stock market rally since 2009 has been built despite demographics, largely through QE money, stocks buybacks, private investor leverage and a speculative pull into the SC24 solar maximum. But accordingly it is a rally at high risk of total reversal, it is a tower of sand.

It is the unprecedented collective demographic downtrend now in place between USA, Europe, Japan and China that make it so potent. World trade is depressed and each of these areas is struggling individually. Europe is on the cusp of deflation and recession. Japan’s Abenomics is not working. The USA, although outperforming currently in certain measures, is still operating at a lower all-round level of economic performance versus previous decades. And China, the last to tip over the demographic cliff, is now facing a bursting housing market and shrinking growth. In the 2000s China was driving the world economy, offsetting the USA which had gone over the demographic cliff. Now the world economy has no driver, with India’s economy still too small to offset all the majors. It makes for a negative feedback looping that ZIRP and QE should be powerless to stop.

Turning to the near term. Froth has gone back up to the max.

Increased volume did return yesterday post Labour Day, to test the validity of last week’s rise. Indecision was the result, so we roll over to today. The market is up so far with a burst on Ukraine peace news. Recall the Bin Laden top? Bin Laden captured and killed 2 May 2011, the market burst up, closed down and it marked the top for the year. With the Dow, JNK and IBB all still at double tops, it could go either way here. So let’s see how today closes.

Double Top Or Breakout

Posted on August 21, 2014 Posted in Indicators, Macro, Solar Cycles, Stocks, Uncategorized68 Comments

A double top here on the SP500 or another breakout to new highs? Below shows Aug 8th was another channel hold, so is it bull-business as usual or has something changed?

Source: Stockcharts

The vertical dotted lines show the last two times Nymo surged from oversold to overbought like now: one chopped sideways and one retreated. The CPCE and Vix indicators show that there were some changes under the hood in the last couple of months: possible capitulation in the Vix and big volatility in put/call. These developments may have meaning because the Sornette bubble end flagged at that time:

Source: Financial Crisis Observatory

There are also several negative divergences now in place in breadth, bullish percent and volume, with the July peak:

Source: Stockcharts

Volume has been particularly weak on this rally whilst continuing to be dominant on down days recently. The relevance of that is shown here, i.e. often associated with significant peaks:

Source: Dana Lyons

Trin closed low yesterday at 0.5 and suggests sideways chop then pullback may be next, previous occurrences in yellow below:

Source: U Karlewitz

The new moon is on Monday and therefore we might expect the markets to roll over after that.

The European markets were weak yesterday. Below is the German Dax performance relative to the SP500 over time. Such notable divergence has previously been associated with major peaks:

Source: @Market_Time

US small caps underperformed yesterday and the Nasdaq gave back all its day’s gains in the last 15 minutes.

In summary, the stronger case is for the rally to end here. A marginal higher high on SP500 would not negate that. Around this weekend’s new moon is the most likely scene for that to occur if it is to. But effectively a double top, with indicators and divergences calling for chop-then-retreat or just retreat. The two longer term charts above add to the comprehensive case for this being a major peak, and along with Rydex, II sentiment, Skew, sector rotation and risk-measure peaks call for the top being ripe or through.

The evidence still supports the sequence of events: risk peaked 31 Dec 2013 (HYG:TLT, INDU:GLD, XLY:XLU and more); speculation peaked Feb/Mar 2014 (smoothed solar max, margin debt, IBB, SOCL, RUT) and the topping sequence completed in July (European indices, Dow, Sornette bubble, various indicator completions). So the last week in August – next week – is important. If it is an up-week then it will cast doubt on some of those peaks, if it is a down-week it will further cement them.

The united picture of solar maxima and valuations and the relevance of 1937 to now:

S O L A R C Y C L E S

Category: Solar Cycles

The Only Chart That Matters

Last Quarter Of 2014

Population, GDP, Debt, War And Solar Variation

Topping Timeline And Targets

10 Indicators Cross-Referenced

Characteristics Of A Stock Market Peak

As Things Stand

Last 30 Years

Double Top Or Breakout