Failure High

Posted on August 19, 2014 Posted in Indicators, Lunar Cycles, Solar Cycles, Stocks, Uncategorized107 Comments

The potential post-second-chance positioning was negated as the rally since the 8th August gained momentum, albeit out of hours momentum. So the question is whether this rally now produces the failure high second chance peak, i.e. a lower peak than July, and thereafter we tumble into the bear-controlled post-second-chance market.

Whilst the Nasdaq has made a marginal higher high, the RUT, DJIA and European indices are some way from their peaks and as we reach increasingly overbought here, the odds favour those indices turning down again to cement lower highs. Plus, the Nasdaq has made the higher high on negative divergences, making the potential to become a fake out. If that is to occur, and with the SP500 not far from its July peak again, a renewed move to downside has to happen fairly promptly. With the new moon several days away providing such a potential peak (an optimism peak), that now becomes my most probable case: markets topping by the end of this week, making a lower peak to July on the majority of indices, and a critical lower high / failure high.

Tick and Nymo amongst those indicators showing overbought:

Nasdaq 100 negative divergences in place since late 2013, plus short term RSI divergence:

R2K, SOCL and IBB still peaked Feb/Mar but need to turn down soon to maintain the lower high / failure high patterns. A look at IBB shows the typical bubble model has played out and the short term RSI divergence shows the potential for another leg down. If that does occur, then it should be the major bear leg down. However, the recent rally has made the turn-down fairly urgent.

The Dow versus lunar phase oscillation shows the potential for a peak around the new moon of August 25th, which would also likely be a lower high, adding to the case of the late-July breakdown:

The bigger picture argues that a major peak in equities is in, and if not in, then overdue. Ten different angles on a stock market peak produce a cross-referenced case:

1. HYG:TLT divergence at major peaks:

Source: InflatedTemper

2. Implied correlation at major peaks:

Source: Rory Handyside

3. Skew at major peaks:

Source: Rory Handyside

4. Sentiment at major peaks:

Source: Ed Yardeni

5. Valuations at major peaks:

Source: DShort

6. Sornette bubble end flagged at the start of July:

Source: Financial Crisis Observatory

7. Various risk measures peaked, along with the Nikkei, at the turn of the year:

8. Rydex allocations echo the 2000 peak:

9. Sector rotation shows the two post-peak sectors of health care and utilities performing strongly relative to others:

Source: Macromon

10 Sunspots continue to be in a waning trend since their February peak, and a smoothed solar maximum of Feb/Mar ties in with margin debt and hot sector/index peaks of Feb/Mar as the speculation peak epicentre:

To sum up, I am looking for European indices, RUT, SP500 and DJIA to make lower highs / failure highs / second chance peaks by the end of this week around the new moon, and thereafter break downwards into post-bubble-pop momentum, into the geomagnetic seasonal low of October. Past analogs show hard falls lasted up to 8 weeks, which ties in with the available window from late August into late October. The mulit-angled case is still strong for a major peak not just being at hand but being in already, and the out-of-hours, low volume nature of this rally since 8th August add to the likelihood of it failing and cementing the broad July final peak in risk, in a topping process that began at the turn of the year.

New Secular Stocks Bull

Posted on August 15, 2014 Posted in Demographics, Indicators, Solar Cycles, Stocks, Uncategorized167 Comments

Is not underway:

Does not begin at these valuations:

And can not occur under these demographic trends:

Rather, those charts collectively present the real story. This is a cyclical bull market peak (per valuations) within an ongoing secular bear that began in 2000 (per demographic trends). The inflation-adjusted SP500 and gradual downtrend in p/e valuations show the secular bear in progress. The destiny (per demographics) is single digit p/es, in line with historic normalisation and necessarily befitting the greatest mania ever. The reason the cyclical bull peak is particularly high in nominal and valuation is the speculative drive of the solar maximum, with the current peak being one solar maximum after the mania peak, as 1937 was to 1929:

Turning to the near term. We’ve seen a partial retrace of the falls, but all the evidence suggests this will now roll over and firm up the new downtrend, the new bear market. On European indices the technical breakdown is clear and the current retrace barely a blip in the downtrend so far. Germany announced negative GDP and France zero GDP yesterday.

The SP500 now stands at twin resistance and this is an obvious point for the rally to roll over.

A look under the hood shows that volume has been thin and waning each day of this rally, and the best performing sectors have been healthcare and utilities, the post-peak duo. US small caps underperformed, treasury yields made new lows and crude oil broke down yesterday – all risk-off developments. Therefore I expect bears to resume control today or Monday.

Timing Major Market Peaks: Revisited

Posted on August 11, 2014 Posted in Geomagnetism, Indicators, Lunar Cycles, Solar Cycles, Stocks, Uncategorized38 Comments

In the original post (HERE) I showed that major market peaks typically occur:

1. Within the month – at new moons (optimism peaks)

2. Within the year – at inverted geomagnetism seasonality peaks (optimism peaks)

3. Within the decade – at the solar cycle maximum (speculation peaks)

Demographic trends determine which asset is the speculative target and whether the peak at the solar maximum is cyclical or secular.

My case is that stock indices have now all peaked out in 2014 and we are post smoothed solar maximum, so on those assumptions, here is how things stand.

The major world stock indices largely topped out close to new moons between Jan and July 2014 as shown in bold in the table, aligning with historic norms:

The major indices, with the exception of the Russell2K, also peaked out at the seasonal geomagnetic peaks of the turn of the year and mid-year as shown below:

The R2K peaked along with the hot sectors of IBB and SOCL, and margin debt, at the turn of Feb/Mar which is the projected smoothed solar maximum:

To complete the picture, demographics show us that this is a cyclical bull peak within a longer secular bear:

In summary, equities were speculated up to a solar maximum major peak, making a cyclical bull peak within an ongoing secular bear that began in 2000. The topping process lasted from January to July 2014, centred around the smoothed solar maximum / margin debt / RUT / IBB / SOCL peaks of Feb/Mar. The Nikkei and various risk measures such as high yield:treasuries and dow:gold all peaked at the turn of 2013-14 at the year end inverted geomagnetism peak, and the remaining stock indices peaked throughout the month of July at the mid-year inverted geomagnetism peak. The majority of peak closes fell around new moons.

In short, the market peaks in 2014 align well with historic norms, if they were the ultimate peaks. If higher highs are still ahead in equities, then we are moving away from the (likely) smoothed solar maximum and out of the mid-year seasonal peaks into a less typical zone. We could make an outside case for final higher highs around the new moon of Aug 25, but this possibility is weakened further when we cross-reference with market indicators (see HERE), which also point to the topping process completing in July. Therefore, the case is strong for the top being in.

So to the short term. Markets appeared to invert at the full moon (Sat) on Friday, starting with a big drop in the Nikkei and ending with a firm close and downtrend breakout in the US. This has relieved the oversold indicators that were gathering, but paves the way for further gains in the first part of this week. If I am correct about our positioning post-second-chance then bull action should be weak and bears should regain control fairly swiftly. So I am looking for fresh lows later this week.

Market Crashes

Posted on August 5, 2014 Posted in Geomagnetism, Indicators, Solar Cycles, Stocks, Uncategorized61 Comments

Here are some of the all-time records delivered in 2014:

1. Highest ever Wilshire 5000 market cap to GDP valuation for equities

2. Highest ever margin debt to GDP ratio and lowest ever net investor credit

3. Record extreme INVI bullish sentiment for equities

4. Record extreme bull-bear Rydex equity fund allocation

5. All-time low in junk bond yields

6. All-time low in the VXO volatility index (the original Vix)

7. Highest ever cluster of extreme Skew (tail-risk) readings in July

8. Highest ever Russell 2000 valuation by trailing p/e

9. Lowest ever Spanish bond yields

10. Lowest ever US quarterly GDP print that did not fall within a recession

And this week:

11. Lowest HSBC China services PMI since records began

12. Lowest ISE equity put/call ratio since records began

What I have been pondering is, what are the chances that we see not just a market crash but an all-time record market crash, given the elastic band is more stretched than ever?

Here are the biggest crashes in history, covering US, UK and Japan stock indices:

2011 August world indices

2010 May flash crash US

2008 Sep-Nov world indices

2001 Sep FTSE

2000 Mar-May Nasdaq

1990 Feb-Apr and Jul-Sep Nikkei

1987 October world indices

1929 Sep-Nov Dow

1907 Feb-Mar, Aug-Oct Dow

Draw them together and all the crashes happened in two windows in the year: Feb-May and July-November, with the latter period being the most dominant. This fits with the seasonal model of the stock markets, where geomagnetism influences collective optimism and pessimism. The two red dotted lines show the scenes of the crashes, both running from peak optimism to greatest pessimism.

What also unites those historic market crashes is the preceding extremes in valuations, sentiment, leverage, allocations and complacency. The current US stock market set-up is a mirror in all those regards and global stock indices appear to have finally rolled over in July as we entered the most common window for market crashes. So it is fairly clear that we have a crash ‘set-up’ if not a crash.

Additionally, those crashes of 1907, 1929, 1990 and 2000/1 took place in the waning of the solar maximum, with the sun first driving the speculative mania to achieve the extremes and then pulling the rug from underneath. Based on the latest solar data, we appear to be a similar position now, i.e. through the smoothed solar maximum.

To realise the biggest crash in history we would need to see the market halve in value in this window between now and November, which would mean the SP500 dropping to 1000 to August 2009 levels, i.e. the majority of the 5 year bull wiped out in a couple of months. That sounds utterly crazy, yes, but at the heart of a market crash is panic selling, whereby the selling reaches sufficient momentum to bring about a critical mass of forced redemptions and rapidly unwinds all the leverage. Sell levels trigger further sell levels and the process becomes unstoppable and out of control until exhausted. Given we are in many measures at the extreme of extremes, that process of exhaustion may cut deeper.

Amongst the historic crashes we see a cluster of big down days occurring on Mondays and Tuesdays (after weekend worrying) and close to new moons and full moons (at sentiment extremes). Also the waterfall selling typically erupted with the breaking of a notable technical support level following the passing through of a second chance peak (a failure high). I have argued that we have passed through the second chance peak as evidenced on RUT, IBB and SOCL and behind-the-scenes indicators for large caps. If I am wrong about that and large caps need to yet rally up again to a lower failure high then it would delay the initiation of the panic-selling. If however I am correct then the panic selling should be close at hand and we might then look to these possible dates for initiation, based on those historic patterns:

Mon 11 Aug, 1 day after full moon

Mon 25 Aug, new moon

To sum up, IF we were to experience the worst market devastation ever, then the set-up that we have would be pretty ideal for it, namely all-time extremes in valuation, sentiment, leverage, complacency, cross-asset valuation and allocations, the waning of the solar maximum, and the period of the year July-November. Initiation for waterfall selling could potentially trigger around one those August dates.

I am not peddling fear, I am just drawing together the common themes of historic crashes and pointing out how we fit in. We fit in well, so we need to consider the range of potential results. I am not predicting the worst crash in history, but I am predicting there will be a period of waterfall selling at some point to wash out the leverage and I see no compelling case for that episode to be mild and anomalous compared to the others. We are flirting with deflation and nominal values are therefore at greater risk. Therefore, considering the possibility of the worst ever crash does not seem inappropriate.

Would central bank reactive measures nip a crash in the bud more easily now? These crashes all happened quickly: between 1 day and 8 weeks. That doesn’t allow them to do much. Would circuit breakers and exchange closures alter things now? They may cap the devastation on any one day, but spread it out to the following days or weeks. Might any crash be restricted to the hot targets of RUT, IBB and SOCL? It could be worst there, but unwinding leverage should affect all assets. Could any crash and unwinding of leverage be postponed until 2015? I can’t rule it out, but it doesn’t fit with the patterns in those historical mirrors. We could look to the end of October 2014 as a marker for that: if hard falls have not erupted by then, the likelihood would transfer to such steep declines not occurring until the Feb-May 2015 window.

Turning to the near term, yesterday’s bounce was in line with indicators, and sufficiently contained to be no real threat to the bear case so far. I have no expectations for today but want to see the markets turn down again into the coming weekend’s full moon. If I am correct about our positioning post-second-chance then essentially we should see bears resume control quickly. Another two day’s rallying from here, clawing back much of the 31 July falls, would not be in keeping with that.

QE is mantra rather than driver

Posted on July 31, 2014 Posted in Indicators, Macro, Solar Cycles, Stocks, Uncategorized34 Comments

This is widely presented as the only chart that matters:

Or like this:

Namely, that QE has been the driver of the stocks bull market and its corrections, and the Fed is in control.

Yet, if we take a bigger picture view of the correlation it doesn’t look so compelling:

Furthermore, the two corrections of 2010 and 2011 took place once we hit typical topping levels of bullishness, overbought indicators and divergences.

Additionally, the stocks bull market took off at the solar minimum and, subject to confirmation, is topping out at the solar maximum, in line with history, rather than it being a Fed-induced bull market by QE.

Lastly, here is Japan’s initial QE programme in the early 2000s. It did not prevent 43% falls over its first year.

Japan’s most aggressive programme yet, Abenomics 2013-2014, has also thus far failed to produce equal results in the economy and stock market.

In short, QE is overhyped. We would have had a bull market anyway from solar minimum to solar maximum. The corrections of 2010 and 2011 would have happened because of excess bullishness, overbought and technical indicators and divergences. Rather, the wealth effect of stock market strength into 2010 and 2011 aided the Fed in stopping QE, and their corrections in restarting it. QE was coincident or even lagging. The first two charts in the post look convincing, but under scrutiny are less so.

I am not saying QE is impotent, but it is not the driver for this stocks bull. ‘Fed policy trumps all’ is instead the mantra for the stock market mania into 2014, just as ‘valuations revised from profits to expectations’ was the mantra for the stock market mania into 2000. In fact both were solar maximum induced manias, and both excuses for extreme overvaluations. The sun did it, not the Fed or the revolution of the internet.

What has then QE achieved? Shoring up bank balance sheets, shoring up confidence, pressing down treasury yields, helping create asset bubbles around the world. As I’ve argued before, the Fed can delay the full impacts of demographics but it cannot overcome, and it is still subject to the solar cycle, not agent. In keeping with that, we have seen a broad range of topping indicators congregating at the solar maximum and I await the validation that passing through that maximum is all that was required to peak and then kill the stocks bull, regardless of what the Fed is doing.

Short term: yesterday we saw a doji candle in the markets and few clues from the indicators, so need to see how today plays out.

Last Gasps

Posted on July 23, 2014July 23, 2014 Posted in Indicators, Solar Cycles, Stocks, Uncategorized144 Comments

New moon this coming weekend and the seasonal geomagnetic model peak.

SP500 is still in a topping range since July 3, with RSI and Vix divergences.

Source: Stockcharts

Skew continues to flag an imminent correction.

Source: Stockcharts

Small caps are at historic overvaluation.

Stocks earnings relative to bond yields at historic level. 2014 is 1937 to 2000’s 1929: one solar maximum later and a similar backdrop.

Source: Martin Pring

Margin debt to GDP: 1987, 2000 and 2007 all gave rise to waterfall declines.

Source: Martin Pring

Investors Intelligence sentiment. A 6 month double peaked concentration of excessive bullishness, like 1987.

Source: Ed Yardeni

Liquidity negative spike as per 2000 and 2007 peaks.

Source: Cross-Currents.net

Baltic Dry Index collapsed again.

Source: Stockcharts

The solar maximum has waned sharply.

I’m feeling confident that this is finally it. It’s been a 7 month topping process, during which we’ve seen extreme indicator readings and negative divergences develop, margin debt, hot sectors and the solar maximum peak out, and two distinguishable peaks behind the scenes. I’ve been able to publish 100+ charts warning of the top between December and now, with some of the latest charts filling in the missing gaps.

Small caps and European indices have already broken down, leaving US large caps to now join and complete. Large caps may potentially overthrow to new highs into the coming weekend’s new moon but if so it will be on negative divergences and unsustainable. Thereafter we tip into negative lunar pressure and August to October provides the seasonal backdrop to market falls, due to the seasonality of geomagnetism. A congregation of indicators suggest the sharp falls will erupt in this period.

I’ve done my best to produce a cross-referenced multi-angled case for why this is a (i) stock market peak that will give way to (ii) waterfall declines within a new (iii) bear market. If you are sceptical about it, you are right to be: until price turns down definitively then it’s just theory. But it’s the strength of the case which gives me the confidence – once large caps break I will be looking to add short with stops and build in as much as possible, on top of the existing short portfolio. It’s another decade until the next solar maximum, and I see this is as a golden opportunity.

Second Chance Peak

Posted on July 19, 2014 Posted in Indicators, Solar Cycles, Stocks, Uncategorized72 Comments

Friday was a bullish fightback, but I still think the roll over is in gradual progress here. Here’s why I think the markets are at the second chance peak, rather than earlier in the topping process.

It’s fairly clear on RUT, IBB and SOCL: the nominal peak was Feb/Mar and second chance lower highs have since been made, in keeping with historic norms.

Source: Stockcharts

It looks acceptable on COMPQ too – a marginally higher high on negative divergences is not uncommon. But the large cap indices of SPX, INDU and NDX don’t appear to conform, making significantly higher highs, which are not in keeping with, for example, 2000, 2007 or 2011.

Nonetheless, we can see divergences initiated at the turn of 2013 into 2014:

Source: Stockcharts

Bubble end flagged once around then and again now:

Source: Financial Crisis Laboratory

In II bull-bear spread, we have seen two extreme peaks plus a divergence between them, which positions us where the markets tanked in both 2010 and 2011 (rather than earlier in those peaking processes).

Underlying source: Jack Damn

Ditto the HYG:TLT divergence. We are more like where the markets finally rolled over in 2007, 2010 and 2011, than earlier in the process.

Source: Jesse Felder

Put/call and Skew tell similar tales.

We also have seen extreme peaks and divergence in Rydex assets, which would position us where the wider markets finally broke down in Autumn 2000, rather than earlier in the topping.

Source: Stockcharts

Margin debt peaked out in Feb. The 2000 and 2007 analogs again position us at the second/final peak, with July 2014 being 5 months after.

Source: Dshort

We are likely now 4-5 months or so after the smoothed solar maximum. That would also position us around the second chance peak of 2000, rather than the initial peak (March 2000).

Source: Solen.info

So what happened next in each of the applicable historic mirrors?

In 2011, the markets fell heavily over the course of 2 weeks. In 2010, the markets fell heavily over the course of 3 weeks, including an intraday flash-crash.

In 2007 and 2000, the markets entered definitive bear markets at this point. Bears firmly in control, with periodic heavy selling. I suggest 2000 is a more compelling mirror than 2007, because this is a solar maximum like 2000, with RUT and biotech p/es reaching similar craziness levels to internet stocks in 2000. Rydex, market cap to GDP and q ratio all look more similar to 2000 too. What’s missing here in July 2014 is that by this point in 2000, the speculative targets of the Nasdaq indices had already suffered waterfall declines, washing out that excess leverage that had built up. That hasn’t happened yet in 2014 (RUT, SOCL, IBB or COMPQ have seen no heavy selling) meaning it’s still ahead.

Going further back in time, I maintain 1937 as the closest historical mirror. As then, if this is the second chance peak, it falls around 5 months after the smoothed solar maximum. At this point in 1937, two months of heavy selling erupted.

Drawing it all together, the messages are that heavy selling should be imminent, at least in the key speculative target indices and sectors, and that in the wider markets there should be no second chance retrace peak ahead for the bulls, but that we are rather currently rolling over into the definitive bear trend, at the end of a topping process that began in January. Yes, US large caps have made significantly higher highs versus Q1 2014, but the divergences and indicators tell the hidden story of this being the second chance peak.

I believe the definitive bear process has initiated on US small caps and European indices, since the turn of July. US cumulative advance-declines also peaked out then, and Vix bottomed. SP500 has yet to beat its start-of-July high, and although the Dow and Nas 100 have, they have done so on negative RSI divergences. Therefore, Friday’s up day should form part of the rolling over process for large caps, and nothing more.

Update

Posted on July 17, 2014 Posted in Indicators, Solar Cycles, Stocks56 Comments

US equities unresolved still at the time of writing, but unlikely for long.

US small caps and European stock indices made a definitive trend change around the start of July, making what looks like second chance lower high peaks. The RUT was just unable to to take out its 4 March closing high, and as things stand the main speculation-excess targets of the R2K, biotech and social media all peaked end Feb / start March along with margin debt and the likely smoothed solar maximum. That’s a very close mirror of March 2000.

There has been a sharp deceleration in sunspots over the last few days as can be seen on the chart above, which further enhances the likelihood of the smoothed maximum being behind us, putting equities on borrowed time.

Based on the analogs of 1929, 1937, 1987, 2000 US indices and 1989 Nikkei, the second chance peak in these speculative indices and sectors should give way to a fairly relentless bear trend. Since July 3rd, they have indeed been suitably persistently weak, despite large cap strength.

For the large caps, the danger, to the bears, can be seen on the monthly charts. The NDX and SPX are still in accelerating trends:

The price action is consistent with the Nasdaq into 2000 or the Nikkei into the end of 1989. On a zoomed-out monthly view the shaping looks to some degree parabolic, but on a daily basis the action was not always up and nor is it now.

Despite the Dow printing a new high again yesterday, there have been some subtle changes recently. Gaps up have not run but petered out, some gaps down could not be recaptured intraday. NDX, INDU and SPX are all in the realm of potential double tops with 3 July, and volume has picked up the last couple of days. Divergence with small caps and European indices is unlikely to be maintained for long, meaning either they pull up and recover or US large caps roll over. I refer you to my last post and many previous charts as to the compelling case for it being the latter, and here a couple more:

Source: Rory Handyside

Source: Jesse FelderSource: AThrasher

The record stretching of indicators, both in values and by time, means the correction, when it comes, is likely to be nasty. The leverage and lop-sidedness that has been built up suggests there will be a period of waterfall selling. I don’t share the view that the stock market will correct, say, 10% and make a new high into 2015. When US large caps roll over, too many indicators suggest that will be it. As noted above, I believe this is the second chance peak leading to the eventual sharp falls. Unlike 2000 and 2007, large caps have made higher high second peaks, rather than lower peaks, perhaps in keeping with the solar cycle and its unusual higher second peak. But behind these large caps higher highs second peaks, the divergences and indicators have been telling, such as margin debt declining.

What I’m looking for. Those subtle changes, yesterday’s Bradley turn, and the potential double top here: large caps can roll over here and fulfil the last post’s charts warning of immediate decline, resolving the divergence with small caps and Europe to the downside. This is my focus. If large caps do tip over here, I will be back on the attack on the short side. If they do not, I will be looking towards 26 July, the new moon, and the rolling over of the geomagnetic seasonal calendar, as the next potential peak. I still can’t rule out the possibility of large caps continuing to accelerate upwards, but the developments in small caps and Europe and the subtle behind-the-scene changes mean the odds have shifted yet further towards large caps finally giving up. Regarding gold: it could not build up on the recent breakout so was sold-off again. I believe it will take off when large cap equities finally roll over.

Charts For A US Stock Market Peak Here And Now

Posted on July 7, 2014July 7, 2014 Posted in Indicators, Solar Cycles, Stocks, Uncategorized121 Comments

1. Put-call extremes plus negative divergence as per previous peaks:

Source: Rory Handyside

2. Skew extremes and clustering greater than 2011 peak:

Source: James Goode

3. Implied correlation volatility reflects previous significant peaks:

Source: Rory Handyside

4. Investors Intelligence sentiment extremes and negative divergence per previous significant peaks:

Source: Jack Damn / my annotations

5. Sornette bubble end pop flagging:

Source: Financial Crisis Observatory

6. Rydex assets extremes and negative divergence per 2000 peak:

Source: Stockcharts

7. Margin debt already rolled over:

Source: DShort / Fat-Pitch / my annotations

8. The solar maximum appears to be waning since a smoothed max of Feb/Mar 2014. In the modern era the biggest slack in smoothed maximum to market peak was the Nikkei 5 months after the smoothed solar maximum in 1989. June/July 2014 is 5 months after.

Source: Solen.info