V-Correction Or Breakdown Part 2

Posted on October 9, 2014 Posted in Commodities, Currencies, Indicators, Solar Cycles, Stocks262 Comments

Tuesday’s selling to a lower low delivered the missing positive RSI divergence on the SP500 and out of that we saw a strong rally on Wednesday.

It was a necessary stick save for the bulls at key support in most indices, particularly the Russell 2000. So we are back to: is this another v-correction or just a save before a true breakdown?

There were clues behind the scenes yesterday.

The best performing sectors in the rally were the defensives: utilities and healthcare.

Gold and gold miners rallied and appear to be turning last week’s breakdown into a fake-down.

Treasuries also rallied, so either risk or defensives have it wrong.

Breadth weakened rather than strengthened, casting doubt that equities have it right.

The above chart shows Vix remains divergent too.

Investor Intelligence % Bears are at 14.1 this week, still at the historic extreme, so there has been nothing remotely resembling a washout. Complacency rules.

The US dollar’s parabolic has broken.

Lastly, to respond to the point that this chart may be cherry picking the RUT as it fits time-wise:

My case is that the RUT was the speculative target as evidenced by the p/e, hence the epicentre with RUT and margin debt right at the smoothed solar max. However, the point is that all stock indices should top out close to the solar max, without any cherry picking. So, the last solar max peak looks like this:

March 2000 = Smoothed solar max

December 1999 = FTSE peak

January 2000 = Dow peak

March 2000 = Margin debt peak; Hang Seng peak; Dax peak; Nasdaq peak; SP500 peak; Russell 2000 peak

April 2000 = Nikkei peak

So, the epicentre was March, and all major global indices topped out within 4 months of this. Now, if you assume here in 2014 the smoothed solar max was March and that all stock indices have now topped out (for which there is a strong case), it looks like this:

March 2014 = Smoothed solar max

February 2014 = Margin debt peak

March 2014 = Russell 2000 peak

May 2014 = FTSE peak

July 2014 = Dax peak

September 2014 = Hang Seng peak, Nikkei peak, SP500 peak, Nasdaq peak, Dow peak

So, the epicentre was March and all major global indices topped out within 6 months.

However, this can’t be validated until we are sure that the smoothed solar max was then and that stock indices do not make new highs from here. Nonetheless, with every month that passes odds are that this is correct and that stocks were on borrowed time since March.

To sum up, by the looking under the hood, the probability is that yesterday’s rally in stocks is quickly reversed again. This could happen as soon as today, or perhaps more upside can be squeezed out into the end of this week. But the signals point to ultimate failure, which means the stick save at support is just a temporary reprieve for the bulls. To those who think yesterday’s save means waterfall declines aren’t going to happen this year, understand that this was a crucial save at the final support on the RUT: it was unlikely to break without a fight. Traders have become conditioned to buy the V-bounce at support over the last 18 months, but the clues are that this time should fail, as covered in recent posts. 6 of the top 10 biggest Dow down days occurred in the window right ahead:

19 Oct 1987
26 Oct 1987
28&29 Oct 1929
6 Nov 1929
15 Oct 2008

And I believe this picture nicely sums up the Q4 2014 scene:

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.

V-Correction Or Breakdown?

Posted on October 3, 2014October 3, 2014 Posted in Commodities, Indicators, Stocks253 Comments

The bounce yesterday in equities arrived at an appropriate point when stock indices are cross-referenced technically: channel support on the SP500 and key horizontal support on the Russell 2000:

Plus rising support on the Hang Seng – which has generated what could be a fake-out above the long term wedge followed by a breakdown (if it can break):So can all these indices break down, or are we to see another dip-buying v-correction?

Source: Stockcharts

On the above chart a positive RSI divergence was a reliable signal for a v-correction bottom. We do not have that yet, which suggests there should be another leg down of selling, even if shallow, where momentum wanes, if this were to be another v-bounce. This period into next Wednesday’s full moon is the likely window for this additional selling to occur.

However, beyond the prospects of a slightly lower low ahead, could this be the correction that does not produce another V above the 200MA, but forms a ‘true’ correction? I believe the clues are in what’s different this time compared to the previous corrections:

Breadth has made a lower low on the SP500 this time:

Breadth deterioration is notable on the Dow since the last peak, plus Vix divergence:

Nasdaq breadth has deteriorated sharply since the last correction:

The bubble-end flagged strongly on technology at the latest peak:

Source: Sornette

Junk bonds double-topped at the last peak and have since made a lower low:

Recent deterioration in stock market internals has been a global phenomenon:

Source: GaveKal Kapital

The disconnect between global GDP trends and global stocks reached its greatest in the last couple of months:

Source: Zero Hedge

And inflation expectations have dropped to the lowest since the 2011 bottom:

Source: Sober Look

By yesterday’s bounce in equities, NAAIM exposure had pretty well washed out, whilst conversely Investors Intelligence bears remain extreme at 15%. Put-call had reached a suitable extreme for a bounce whilst exhaustion signals are still largely absent. So, some case for a longer bounce here, and some case for the markets to continue downwards. However, note that the extremes in II, Rydex and Skew and the lack of fear spike in the Vix are at this point very mature and at every correction the odds increase that we see the true breakdown.

If we tie in the worst seasonal geomagnetic month of October, an earnings season beginning next week that should cement the disconnect between reality and valuations/projections, the ‘borrowed time’ clues post-solar-maximum (circa March), and the extreme positioning in gold and silver (which I believe are ripe for a short squeeze as/if stocks fall through support), then the case grows for this being the correction that becomes the breakdown.

Source: Market Anthropology

To sum up, there has been a broad deterioration over the last 3 months that suggests this should be it: namely, the correction that becomes the breakdown. Stocks bounced yesterday at necessary levels to prevent such a breakdown, but drawing on the historical analogs any attempted rally out of that should be quickly reversed by the bears. The lack of positive divergence at yesterday’s low suggests there should be a lower low ahead, which could then provide the technical break for a much more voluminous sell-off. At that point (the dawning of this being the dip that isn’t bought), I expect precious metals to finally take off, creating a sharp short-squeeze in gold and silver.

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.

Increasing Deterioration

Posted on September 25, 2014 Posted in Indicators, Stocks242 Comments

A rally in equities yesterday on increasing under-the-hood deterioration.

1. SP500 breadth measures not confirming:

Source: Stockcharts

2. Dow negative divergences persist:

3. Nasdaq breadth divergences continue to worsen:

4. Russell 2000 made the smallest bounce of the four and remains in danger:

5. Junk bonds had another big down day:

6. Financial conditions have diverged since the start of July:

Source: PFS Group

7. Skew reached reached a par with its highest ever (in 1998) at Friday’s close:

Source: ISpyETF

8. Investors Intelligence sentiment remains at the extreme this week, with 15% bears:

9. Rydex allocations also remain at the extreme at the end of yesterday, with the Friday-Tuesday sell-off not having dented confidence:

10. Margin debt for August was released and shown below. The February high remains in tact, which adds further weight to the speculation peak having occurred close to the smoothed solar maximum around then, and weight to the stock market being at the end of its topping process. September may seal it, subject to how the month closes.

Source: DShort / UKarlewitz annotations / My annotations

11. Gold, Euro and US Dollar positioning continue to suggest a reversal is likely, in favour of gold and the Euro and away from the Dollar, with associations for equities.

Source: @Market_Time

Source: @Sobata416

12. Sornette bubble end flag for US tech has now reached 0.6, which is an extreme high reading historically:

Source: Financial Crisis Observatory

Four trading sessions left in September. I stick with my call that we have peaked. The internals reveal a very weak picture behind yesterday’s rally in equities, whilst we have an associated brewing reversal across gold, Euro and USD. I believe the breakdown in small caps and junk bonds in September, together with the potent negative divergences in equities this month have secured the broad markets peak and that we will not extend to year-end. The latest solar and margin debt data add to this likelihood.

In the very short term, yesterday’s rally broke the bearish momentum, setting up alternatives for how this week ends. Based on the deterioration covered above, it may be that yesterday’s bounce is quickly engulfed by the bears, to continue the downtrends, or it maybe that stocks can rally back up a little further and precious metals leak more before breaking (down/up respectively) in earnest. Either way, the next two weeks down into the full moon of October have great potential to trigger the true breakdown in equities and the squeeze in PMs.

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.

Stock Market Vs. Equinox

Posted on September 19, 2014 Posted in Indicators, Stocks268 Comments

Tuesday 23rd September is the Fall/Autumn equinox. Equinoxes occur twice a year, the other being around 20th March.

The last 4 major tops and bottoms in the SP500 all fell within 2 weeks of an equinox:

Extending this to include major turns in the period that took place within 2 weeks of an equinox, we get this:

In total 10 bottoms and 4 tops. The dominance of bottoms fits with the seasonal model of the stock market, which is based on the seasonality of geomagnetism, and has lows near the two equinoxes:

The two red arrows on the ‘seasonality of geomagnetism’ chart show when stock market crashes have predominantly occurred in history. Therefore, bottoms or lows not far from the equinoxes make sense.

Highs around the equinox? Inversions happen occasionally in lunar phasing. Full moons bring about pessimism and typically mark lows, but now and again they can invert as a high. As geomagnetism is a similar sentiment phenomenon, I expect the same sometimes happens here, but I can’t be more scientific. Nonetheless, if next week’s equinox is to have any relevance, then it would most likely be as a top, or inversion high, because we have not seen a period of selling into it for it to mark a low, as we did into the lows 1998-2011 shown above.

Looking further back in stock market history, in 1987 stocks peaked 1 month before the Fall equinox and completed their devastation one month after, so centred around it. The 1976 top and 1978 bottom in the Dow were both within 2 weeks of equinoxes, but other major tops and bottoms in the 1970s secular bear didn’t align, clustering rather at the turn of the year and seasonal high. In 1929 there was a mini-crash March 25 (equinox), the Dow topped 3 September, the London stock exchange crashed 20 September (equinox), and the whole combined crash process was done by November 13.

In short, I would summarise that maybe there is an equinox phenomenon. The most compelling reason for it is the stock market seasonal lows that occur close to them (circa March and October), driven by geomagnetism which affects human sentiment. On these grounds, most major turns would be lows at equinoxes, and just occasionally we would see an inverted high.

One more add: next week’s equinox falls one day from the new moon and new moons typically mark highs (both minor turns and major peaks) so if it were to mark a high then there’s an additional reason for it to do so. For this to have any merit, stock market indicators would need to be signalling such an imminent peak.

Yesterday was a bullish day for large caps and overnight action looks to have cemented a break out. Small caps and junk bonds again didn’t share the optimism, negative divergences persist on large caps, sentiment and allocations are very stretched, and ‘normally’ this would mean an attempted breakout becomes a fake-out. Wider indicators continue to warn that this is the last gasps of a topping process, and as I have covered recently there is no case for a rally much higher or much longer. e.g. 20% higher into mid-2015, as this would negate a whole host of reliable indicators. The evidence leads me to believe that the stock market will peak here and collapse through the seasonal low of October – or, failing that – it presses on and peaks at the seasonal high of the year-end (a historical clustering targets 31 Dec).

I have difficulty believing the end-of-year option because indicator extremes and divergences are already very mature, whilst sentiment and allocations suggest little fuel for higher or longer. We would need to print anomalies in various indicators with different angles on the market to achieve it, and it would be a major stretch to achieve. Additionally, the smoothed solar max looks likely to have been around March and various risk measures peaked then or either side of that, which suggests this is already ‘borrowed time’. That said, price just won’t obey yet and until it does, I have to consider this possibility.

If large caps consolidate their breakout and push on through the new moon and equinox, pulling up small caps and other laggards too, then the end-of-year option will gain weight. If stocks hold up through the month of October then that would seal it, in my opinion.

But… the charts below show how things stand, and these are why I just can’t believe the market can truly break out upwards here. These charts are indeed supportive of a new moon / equinox peak. Plus it’s the week after expiration, normally bearish, and also a week of geomagnetic disturbance is predicted.

I may cut back short positions if (despite the indicators) stocks collectively motor here, but my eye is on the new moon / equinox combination next week. UBS see high likelihood of an important reversal in the next 3 sessions, and FX positions and technicals continue to be extreme, suggestive of an imminent reversal with associations for risk.

US Demographic Peak Of 2000

Posted on September 18, 2014 Posted in Demographics, Indicators, Macro, Stocks86 Comments

The US enjoyed united demographic uptrends from 1980 to 2000 and since then united downtrends. Here are a collection of charts that show the powerful reality of this influence.

1. Risk assets markets in real terms trended accordingly, and are calling for another cyclical bear down within a secular bear underway since 2000:

2. Real economic growth trends also align:

3. A dwindling proportion of people in jobs:

4. With associated lower household incomes:

5. Means that there is less dollar circulation in the economy

6. And consumer sentiment is overall waning.

7. Turning to the supply side of the equation, business capacity utilisation is in decline:

8. And corporate investment too:

9. However, corporations have been doing better than households:

10. As they have cut staff, replaced with tech, and kept wages low for retained staff:

Source: ForexLive

11. With shrinking real demand in the economy and in asset markets, the Fed has attempted to offset this by depressing rates:

Source: Gary North

12. And ‘printing money’:

13. The stock market has to a degree been a beneficiary as investors search for yield and corporations indulge in buybacks rather than business investment. However, this has all been sponsored by increasing debt, enabled by the low rate environment:

Drawing this together, demographic trends are creating a negative feedback looping between jobs, wages, incomes, spending, business investment and utilisation in the economy. Lower demand and lower supply. QE and ZIRP can’t really influence this because they are nothing ‘productive’ (tinkering with the money mechanism), and they are also only policies of encouragement rather than policies of force. However, they have served to shore up the banking sector, to keep debt costs low, and to push some people and businesses to look for yield, driving up some asset markets with an associated wealth effect. Equally though they have detrimental effects by postponing necessary economic cleansing, driving up asset prices through increasing debt (i.e. unsustainable), discouraging more productive use of money and in some ways worsening the economic situation by reducing incomes dependent on saving rates. Nonetheless, the Fed was keen to avoid the 1930s front-loaded deflationary devastation and has succeeded in this. But have they prevented it, or just postponed it? On a long term view, they have of course only postponed it, because the massive borrowing that they have undertaken is wealth taken from the future. But for us traders, the shorter term outlook is key.

I believe the above collection of charts demonstrate clearly that the Fed’s policies do not overcome the overarching demographics as they all show a series of stair-steps downward since 2000. If we contrast it with the 1930s we see evidence that the Fed has helped to phase the devastation, but the charts show they have not been able to neutralise it. When we consider the unprecedented collective demographic downtrends in place now in all the major nations, I believe it is clear we are on the cusp of another leg down, both in economic measures and asset markets, that will take us to a new level in all lower than 2008/9. We can cross reference this with the stock market currently at extremes in valuation, sentiment, leverage, buybacks and allocations: namely it has the attributes of a ponzi scheme wealth effect, at high risk of full reversal. When the stock market collapses, the next leg of demographic devastation will wash through, revealing the relative impotence of the central banks.

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.

S O L A R C Y C L E S

Category: Stocks

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The Only Chart That Matters

V-Correction Or Breakdown?

Last Quarter Of 2014

Increasing Deterioration

Topping Timeline And Targets

Stock Market Vs. Equinox

US Demographic Peak Of 2000

10 Indicators Cross-Referenced