Short Term Clues

Posted on September 9, 2014 Posted in Indicators, Stocks134 Comments

The Dow, Biotech and Junk bonds are all still flirting with double tops and are unresolved at the time of writing, though JNK has been the most repelled (Stockcharts):

In the last two weeks before yesterday, all the gains in SPY came out of hours (Fat-Pitch).

The best performing sector of the last two weeks was Utilities, in line with the YTD (Macromon).

Volatility reached new lows, and suggests complacency which occurred into and around previous peaks (J Lyons):

Rydex bull/bear assets at the end of yesterday are back up to near 12x levels, on a par with the 2000 peak and all-time extremes.

Investors Intelligence percentage bears is down to 13, on a par with the 1980s lows:

The Sornette bubble end flag has dropped to zero (Financial Crisis Observatory):

If the July flagging was the bubble end, then it would fit with the model from 1987, which flagged and then several weeks later the market collapsed:

In support of the July bubble pop scenario, cyclicals broke down around that time (UBS):

If July wasn’t the final peak, then the Sornette bubble should rise again and flag at a higher intensity in the future.

Evidence in support of the speculation/solar maximum being around March time and behind us comes from the current peak margin debt reading and the first of the double tops in biotech, but also seen here in peaks in social media, commodities, Russell 2000 and Nasdaq advance-declines:

Like US small caps, the relative performance of European small caps also peaked out at that time.Today is the full moon. Let’s see what it brings.

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.

More on these below.

Leading indicators by CB and ECRI typically do a good job of announcing recessions ahead of time (though there have been some false positives and false negatives). However, they are not a good predictor of the stock market, with research showing they are typically coincident with each other.

Source: Yardeni

The stock market is a leading indicator of recessions itself, and in fact an agent, due to the wealth effect. Both ECRI and CB accordingly include the stock market performance in their leading indicator calculations.

ECRI WLI growth turned negative in 2000 and 2007 after the SP500 had suffered initial falls of around 15% in both cases (from March 2000 and from June 2007). In 2014 we have seen no such damaging break yet, but with ECRI WLI down to 1.8, a true technical break in stocks would likely pull it below.

Source: DShort

CB LEI topped out with the market in March 2000, and whilst it topped in early 2006 ahead of the 2007 market peak, it didn’t fall until stocks fell in 2007.

Turning to corporate profits, they also typically turndown as a leading indicator of a recession, but there are different ways of calculating this indicator.

The first method below shows profits peaked ahead of the stock market peak six times, coincident twice and after once. By this measure corporate profits peaked at the end of 2013, and are diverging in line with the majority of historic cases.

Source: PFS Group

A second method shows that corporate profits peaked out coincidentally with the stock market the last two times (or along with the initial falls of ~15%), and accordingly this measure is still levitating with stocks in 2014.

Source: PFS Group

The yield curve as a recession predictor does not work under ZIRP. Japan three times entered recession without yield curve inversion under ZIRP, and the US did likewise in the 1930s-40s.

Source: ZeroHedge

PFS’s recession model is proprietary but note how it only took off once stocks fell hard in the last two peaks:

Source: PFS Group

Like ECRI and CB leading indicators, it is coincident with the stock market.

Similarly, financial conditions also did not fall until the stock market peaked in June 2007, May 2010 and July 2011.

Source: Financial Sense

In short, leading indicators, financial conditions and valid recession models are benign whilst the stock market continues to levitate. Once it falls, they will begin to flag, as the wealth effect rapidly declines. The yield curve model is invalid and corporate profits are either coincident or warning with negative divergence, depending on the method. So, none of these indicators are bullish support for the stock market.

US QE is being wound down and will end in October. The stats show that 80% of QE money is parked as excess reserves at the Fed paying a meagre return to the banks. This is because they can’t lend it out: the demand simply isn’t there under demographics. The money multiplier and money velocity are both still in decline. So, 80% of QE money is impotent for now, but this is a threat for the future once demographics improve and demand comes back. The other 20% of QE money is difficult to track, but under conditions of ZIRP we can assume some has entered the stock market searching for yield and return. Ultimately though, QE does not create economic growth: it is just corruption of the money mechanism. Therefore, price rather than the earnings has risen significantly in stock market, making for valuations on a level with previous major peaks. Zero interest rates encourage money to search for yield but also can only tweak demand, not revolutionise it. Also, a large swathe of retirees have less income under ZIRP which acts as a drag in the economy.

The reality is that the US economy is overall chugging along at a lower rate than in the past when demographics (and debt levels) were more favourable. As in the 1930s US and 2000s Japan, QE and ZIRP can only have limited effect whilst demographics dictate.

Source: Fat-Pitch

Demographics are both deflationary and recessionary. Therefore, we have seen overall low inflation recently and the Fed does not have the luxury of rate rises. The point about both inflation and rate rises is that they choke the economy in rising input prices and tightening. Yet demand is too weak to stoke inflation and the economy too weak for rate rises. The tightening is coming from QE wind-down, but as noted the overall effects of QE are less than touted. I would argue that a sharp fall in equity prices is all that is missing from tipping the economy over, and that we again have to look to 2000s Japan and 1930s US as the most relevant analogs here.

We could argue that falling commodity prices lower input costs and are a driver for the economy and that falling yields are effective as easing. However, if we are in the last gasps of a stock market top then both treasuries and commodities are acting as per a deflationary recession.

The ECB cut rates and launched a form of QE last week. Does that offset the Fed winding down? Analysis of the ECB package shows it to be more window-dressing than content. The Eurozone economy is 3.5 times the size of Japan yet its package amounts to just one tenth the size of what Japan is doing, whilst the rate cuts were largely symbolic. Despite Japan’s aggression, the effects have been disappointing, which brings us back to the point about what QE actually does: it does not drive economic growth, and therefore, the new ECB actions are unlikely to make a significant difference.

Leading indicators predicted a mid-year upturn in US economic growth and this has occurred. Accordingly, economic surprises have leapt into the positive. However, leading indicators predict a peak in growth around now, which should set the scene for disappointment in data in Q4. As this coincides with the termination of QE, maybe this combination will unsettle the ‘Fed policy trumps all’ crowd perception.

In summary, the evidence suggests policies of ZIRP and QE are limited in their potency. They may both play a role in current higher stock market valuations, but the disconnect between prices and earnings/growth is bearish, as it was in 1937. The weak economy under demographic trends is unable to support inflation and rate rises, and I believe is at the mercy of the stock market. Namely, if the stock market falls, the economy will tip over. If it doesn’t it will continue to chug along.

So what is the trigger for the stock market? History shows that major peaks typically occurred without a major trigger, and then sharp falls occurred once there was a suitable technical break. So what factors bring about the topping out?

The evidence suggests one is saturation or buyer exhaustion. We have very recently seen sentiment, allocations and leverage all back to extremes of extremes. I therefore believe we are running out of fuel to go higher: everyone bullish, no-one left to buy, credit facilities stretched.

A second one is natural force timing, and the biggest factor in 2014, I believe, is the solar maximum. Most models point to a smoothed solar max being behind us, around March. Most market peaks, and growthflation peaks, occurred very close to the smoothed solar max, so we should be able to cross reference this.

As things stand, margin debt peaked Feb, the Russell 2K and social media peaked Feb/Mar and biotech is making a double peak now with Feb/Mar. Also, commodities and inflation peaked around April time, and we have seen various indices and risk measures peak out between December and August, either side of this kind of epicentre. So it looks promising.

However, as noted, SIDC are still running a model with an end of year smoothed solar max, and Mark’s theory is that weaker cycles such as this won’t see speculation peak until later in the maximum, not until 2015. Playing into these possibilities we see biotech, junk bonds, the Dow, and (likely) margin debt challenging their highs and attempting breakout. We can also monitor sunspots in real time to see if likely to exceed Feb.

So, I believe we have a useful combined measure there: if JNK, INDU, IBB, leverage and sunspots all break upwards and out to new highs then peak speculation is delayed, and we might then also look to the Sornette bubble end flag to rally again to a higher intensity. However, cross-referencing further, with sentiment and allocations last week back to record extremes, I see a breakout will be very hard to achieve here. Plus, the mature divergences in the market suggest this should be the last gasps of the topping process, not earlier in the process, and we are in the relevant time of the year for the falls to occur. I therefore continue to believe that the most likely scenario is that this rally since August 8th is the terminal rally, shown arching over on the 4-hourly SP500 below, and that JNK, INDU and IBB will all double top out.

SP500 4-hourly

Summary

40 indicators in 8 angles argue for a stock market peak. The only question is the timing, and that is the difficult calculation. The best-fit remains an epicentre of March 2014, placing us now in last gasps. Breakouts from here in several speculation measures would negate that and postpone the top. When the stock market falls it should trigger the ‘missing’ alerts in recession models, financial conditions and leading indicators. The effects of QE are overstated, whilst ZIRP and disinflation reflect the overarching weakness in demographics. Whilst the stock market levitates, the economy should continue to chug along, but if the market falls meaningfully then the economy should tip over into deflation and recession. I believe the two key and associated drivers of the peak are buyer exhaustion and the solar-speculation-maximum, and it appears they came together to peak levels between January and now, making a topping process. Helping tip the perception should be the inverted geomagnetic seasonal lows of Sept-Nov, the predicted disappointing economic data ahead, and the termination of QE support. For this not to materialise, sentiment, allocations and leverage will all have to stretch to new levels of excess to enable a higher stock market. Whilst not impossible, it is not probable.

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.

US Stock Market Valuation

Posted on September 1, 2014 Posted in Demographics, Indicators, Macro, Stocks73 Comments

Firstly, trailing 12m p/e valuation. This chart clearly shows this measure is a rather useless tool, and can be disregarded:

Source: D Short

Secondly, forward p/e (12m) valuation. This measure is based on expectations and guidance from companies and analysts. Under- and over-estimating is common for a myriad of reasons (some deliberate, some unrealistic), so this measure lacks reliability and produces another poor chart:

Source: Invesco

Thirdly, dividend yield valuation. Also a valuation measure with problems, due to companies increasingly having moved away from paying dividends in favour of share buybacks:

Source: Vector Grader

Fourthly, CAPE (or Shiller) valuation. Takes the last 10 years earnings inflation adjusted, and is much more reliable, with a 0.9977 historic correlation with the real SP500:

Source: D Short

By CAPE valuation the SP500 is in the 93rd percentile of all historic valuations.

However, the last couple of years have seen the real SP500 diverge from CAPE, suggesting an additional degree of exuberance is in play:

Source: Lucretalk

This is resolved by using, fifthly, the Crestmont p/e. Similar to the CAPE but uses a different method of normalising the EPS, which makes for an even tighter fit including that additional recent exuberance. By Crestmont p/e US stocks are in the 98th percentile historically:

Source: D Short

Sixth, the Q Ratio. This is a totally different approach based on the market divided by the replacement cost of all its companies. It, however, produces a similar compelling result historically, and estimates stocks to be in the 97th percentile historically, cross-referencing with Crestmont:

Source: D Short

Seventh: Market Cap to GDP. We can add in Warren Buffet’s preferred valuation measure as additional confirmation of the extreme historic over-valuation:

Source: D Short

Using the level playing field of the CAPE measure, we can see how the US’s valuation stands up relative to other countries:

Source: Seeking Alpha

By this comparative measure, US stocks are again extremely expensive, almost the dearest in the world.

Now we need to draw in demographics. Here are treasury yields and SP500 CAPE versus their respective US demographic trends:

Source: Barclays

The implication is that market valuation has to be assessed in the context of demographics. An expensive market will get more expensive if there is a swelling population of the age that would buy stocks (or bonds), and vice versa.

US demographic trends argue for lower valuations ahead, lower real stock prices:

Therefore, the extreme valuations in US stocks, both relative to history and relative to other countries (with more favourable demographics) argue for a bear market. There is no demographic tailwind to take them to even higher valuations.

The question is, why have US stocks run up so far?

Is it the aggression and support of the Fed? If so, then with QE scheduled to end in October, the market should be readying to fall. But, as per my recent post, I rather believe ‘Fed policy trumps all’ has been the mantra for the mania rather than the driver.

Is it the relative economic performance versus Europe and Japan, including its progress from energy importer to exporter? The problem is that all that is priced into the valuations, i.e. price has nonetheless run up far beyond earnings.

Is it the safe haven perception of US equities and the US dollar? Perhaps.

Is it the propensity for US companies to equity buybacks or for US investors to draw on loans and margin, both propelling prices higher? Could be.

Or is it that US stocks began the process still elevated following 2000’s biggest mania of all time? The valuation charts show this to be so.

I believe I can explain the mania of the last 18 months with the solar cycle. The sunspot maximum has driven the speculation to take US equities to these dizzy valuations and cast doubt on the secular bear progression since 2000, as the current bull has been given an exuberant last leg into 2014’s solar max (see my recent Last 18 Months post). However, now that we are through the smoothed solar maximum, the combination of valuations (CAPE, Crestmont, Q ratio and market cap to GDP) and demographics argue for a new bear market at hand within an ongoing secular bear to take us to the kind of washout valuations that 2002 and 2009 so far failed to deliver. Rather, we have stair-stepped our way down since 2000 in alternating cyclical bulls and bears, and we can see this in other economic measures:

Source: D Short

Source: Fat-Pitch

Source: Fred

Demographics and valuations both argue for another step (or even steps) down lower from here.

One more valuation measure to finish: we can look at US stocks pricing relative to commodities and relative to bonds. In both regards US equities are now at the same extreme relative pricing as 2000’s peak.

Source: Stockcharts

Therefore, by CAPE, Crestmont, Q ratio and market cap to GDP; by relative expensiveness to commodities and bonds; by relative valuation to other stock markets around the world; and all in the context of demographics: I believe US equities are very clearly a major SELL.

Last Trading Day Of August

Posted on August 29, 2014August 29, 2014 Posted in Indicators, Stocks120 Comments

The most likely scenario is August closes around the current highs on another day of ultra low volume. I expect margin debt for August will challenge the February highs. By history, increased volume should return next week after US Labour Day. Negative divergences on marginal highs, double tops, lunar negative period, 3rd day of geomagnetic disturbance and all those indicator readings would ordinarily mean volume should return on the sell side. The day after Labour Day marked the 1929 peak, whilst the 1987 peak and the 1937 secondary peak both occurred in the second half of August, so this is an opportune window for the peak to finally occur.

The ultra low volume in context:

Source: John Kicklighter

Wednesday’s ultra low volatility in context:

Source: Eric Scott Hunsader

Rydex bull-bear assets are back over 10, ten months in an extreme high band.

Source: Stockcharts

Investors Intelligence sentiment is also 10 months at historical extreme and showing a divergence from the turn of year high:

Source: Decision Point

NAAIM exposure similar, in extremes duration and divergence:

Source: Ryan Detrick

AAII sentiment has leaped back up to the bullish extreme following this latest V-bounce:

Source: Pension Partners

Skew is 10 months in an extreme high band and rising back up to maximum acute:

Source: Barcharts

CPC put call registered an extreme yesterday normally associated with the bottom of a washout, though clearly this has not been the bottom of a washout:

Source: Stockcharts

So what does odd reading mean? What do all the atypical and outlier readings in the 8 charts above mean?

Historic evidence says this is the prelude to an imminent collapse. Not a mild correction, but something truly devastating. The depth and maturity of the extremes and divergences does not mean safety is on the bulls’ side. Instead, history shows that the bulls needed these indicators to be resolved at lower readings and earlier in the timeline to prevent something irreparably nasty erupting. Panic-selling and crashes may not occur often, but all the ingredients for when they do occur are present.

Some final charts.

Money-losing IPO prevalence:

Source: Sentimentrader

Eurostoxx shows the parallel with 1937:

Source: Nautilus Research

German bond yields echo the deflationary trends of Japan:

Source: Holger Zschaepitz

Italy has moved into outright deflation; Spain too:

Source: Sober Look

Japanese household spending is down 5.9% yoy – QE isn’t working:

Source: Market Timing

With a global softening in economic growth predicted by leading indicators in Q4, I believe the recent beats in US economic data will give way to disappointments as the stock market rolls over, and the worsening economic problems in Europe, China and Japan will help produce global negative feedback looping.

If the stock market rises next week then it will really produce the greatest anomaly yet with the scene-set:

1. The next few sessions are lunar negative for sentiment

2. We have current geomagnetic disturbance which is negative for sentiment

3. We are entering the inverted geomagnetic seasonal low for the year which is negative for sentiment

4. The solar maximum continues to wane from its Feb peak, which should cap speculation

5. We have mature indicator extremes in place since the turn of the year which show divergences too

6. We have a variety of short term divergences between the SP500 July peak and the August peak

7. We have have rallied since Aug 8th on extreme low volume which makes the new high sticking unlikely

8. We appear to have already put in peaks in Japan and Europe stock indices, US small caps and various risk measures.

So if it ignores all this and rises anyway? Then it becomes difficult. Get out and miss a flash crash which could occur any day, from which the market does not recover. Stay in (short) and risk the market melting up further.

I don’t share the view that the market will give us time to get short with an observable topping out process from here. By various indicators we are equivalent to the collapse point in 1987 or 2011, as examples, rather than earlier in the process. I believe one day soon we will wake up to a large gap down that runs and runs, and that we can already see the topping process going through the previously noted Jan-Mar-July phases leading into that.

Last 18 Months

Posted on August 28, 2014 Posted in Indicators, Macro, Stocks, Uncategorized75 Comments

Over the last 18 months, US equities rose on 80% multiple expansion and just 20% earnings, and they diverged from economic fundamentals.

Source: Yardeni

Institutions were net sellers in this period whilst retail investors became the buyers, typically the ‘dumb money’ and a sign of a peak.

The carry trade ceased to be fuel for higher prices.

Source: John Kicklighter

Instead, retail investors went all-in on bullish equities allocations and then leveraged up in a major way, to propel equities higher.

Source: Stockcharts

Source: D Short

Source: Sentimentrader

We see a trend of distribution in this period, both in major accumulation days (just 1) versus major distribution days (12) and in Chaikin money flow, which suggests underlying building smart selling pressure.

Source: Ponzi World

In short, the stock market mania of the last 18 months has been fuelled by the retail crowd and their credit facilities, not manipulated by the big institutions in some sort of cartel as some suggest.

The whole process can be explained by the rise into the solar maximum, driving people to speculate.

The process is mature and here in mid-2014 we see a range of indicators suggesting termination:

1. The best performing asset in 2014 is treasuries.

2. The best performing sectors in 2014 are utilities and healthcare, the defensives that typically outperform post market peak.

3. The hot speculative targets of Bitcoin, social media stocks and small caps all appear to have topped out, with Biotech a question mark but having made no progress since February.

4. Margin debt has also made no progress since February, which remains the peak.

5. Divergences have grown in breadth, sentiment and risk measures.

6. Volume on down days versus up days resembles previous peaks.

7. Sornette bubble end has flagged and extreme Skew continues to warn of a big move to the downside.

8. The smoothed solar maximum appears to have passed around Feb/March time.

9. Valuations have reached dizzy levels, with the median stock average valuation higher than in 2000 which was more concentrated in tech stocks:

Source: Hussman

Turning to the short term, yesterday was another record ultra low volume day. Also, $SPY remained in a 1 cent range for 18 minutes, almost dead, beating a Nov 2006 extreme of 10 minutes. Indices went nowhere overall, so we roll over to today. Geomagnetic disturbance is underway.

To sum up, my bottom line is this. Whatever research angles I collate always point to the same: a comprehensive multi-angled case for a bull market peak, and not just a peak some time soon, but the last gasps of a peak that has been in progress all year. We can argue over select indicators and doubt them individually, and no-one can avoid confirmation bias. But the breadth of the indicators and differentiation of the angles make for a multi-way, cross-referenced set that is surely something objective and compelling. The evidence just does not support a bull market continuation from here nor a parabolic blow-off top from here. The evidence says we should collapse any moment, not just into a correction, but into a devastating bear market with all that retail leverage and skewed allocations unwound in a very painful way.

Clearly price is all that ultimately counts, and therefore you should maintain a healthy doubt about my case until price proves it. But, rightly or wrongly, I still think this is it: the stock market mania began 18 months ago; risk peaked 31 Dec 2013; the solar max, margin debt, hot sectors and indices peaked Feb/Mar 2014; and the last phase of the top was July/Aug with the Sornette bubble peak, European indices peaks and US indices peaks. I believe the current ultra-low volume double tops / marginal higher highs on negative divergences in Dow, SP500, JNK and IBB will resolve to the downside, and the devastation be reaped in September and October.

The Alternatives

Posted on August 25, 2014 Posted in Indicators, Macro, Stocks, Uncategorized201 Comments

Alternative 1: The Bull Is Safe

Stocks are in a new secular bull market. This cyclical bull began from the low in 2011. The economy is recovering and we need a series of rate rises before the bull’s termination is likely. If so, the bull, right now, is faced with these:

1. Over 80 weeks levitation above the 200MA on SP500

2. Over 80 weeks with no 3% change

3. Biggest ever cluster of extreme Skew readings over the last 10 months

4. Biggest ever cluster of extreme Investors Intelligence bull-bear spread over the last 10 months

5. Lowest ever net investor credit and highest ever margin debt to GDP ratio

6. Highest ever Rydex bull-bear asset spread and cluster of fund manager equity allocations

7. 8 months of ‘risk-off’ behaviour in HYG:TLT, WLSH5:GDX, XLY:XLU

8. Best performing sectors being those defensive sectors associated with a market peak

9. Averaging 4 valuation measures the market has reached a par with the peak of 1929 in terms of expensiveness

In other words, this market needs a reset to continue. The duration and magnitude of these indicator extremes mirrors 1987. The market is a mean-reverting mechanism and like an elastic band it will snap back. Therefore a significant reset is on the cards, and every day it has gone without a washout correction has stored up a major correction when it occurs. Therefore, even if the market were in a secular bull heading much higher, it is over-ripe for a cleansing. The maturity of the divergences and readings suggest the inverted geomagnetic seasonal downtrend from August to October is the most likely window for that to occur. The secular bull break outs post 1930s and 1970s also saw a reset shortly after breakout.

Alternative 2: The Terminal Melt-Up

Stocks, although stretched, are heading for a blow-off top. The kind of unsustainable trajectory that everyone knows can’t last but no-one wants to miss out on. A crazy rate of ascent to crazy valuations, and then ultimately an even more devastating pop than stored up currently. Like the Nasdaq in 2000, the Nikkei in 1989, the Dow in 1929. Although neither a demographic peak nor an economic boom peak like those three events, the combination of QE, low rates and a goldilocks economy (neither too hot nor too cool) provides different ingredients for the same kind of mania result.

(Understand, I disagree with a lot of what I am writing in these first two alternatives, I am just presenting the opposition).

The most likely candidate for that currently is the Nasdaq 100, which is the most parabolic of the indices. I’ve labelled the chart to show a potential mirror with the action in 2000 and where we might be:

Label (1) in both periods shows a first burst to what participants expect to be the peak, only for a running correction (2) to give way to an even steeper final termination leg higher (3). 5 months of crazy gains from ‘Here’ would take us to a January 2015 peak, which fits well as the other inverted geomagnetic seasonal peak of the year. If the index did break into the kind of terminal velocity of phase (3) then, make no mistake, it would be the biggest stock market mania ever, because to accomplish it we would see the highest ever valuations, leverage, allocations, sentiment and more.

Apple is the dominant stock in the Nas100 and as shown it has just made a potential breakout on the monthly view above its 2012 high:

If Apple can finish August by consolidating this breakout, then it could be set for further gains in clear air above, leading the Nas100 higher. If Apple is repelled this week, it would keep the double top option in play.

Alternative 3: The Bull Market Ends Here

As you know this is my favoured option and I have detailed my case for this many times over, so if you are new to my site, read back through a few recent posts.

This is the alternative to which all the evidence fits the best. Valuations and demographics show us to be at a cyclical bull peak within an ongoing secular bear, whilst the list of indicator extremes and divergences are features of a major peak, rather than anomalies in a bull market.

In the same way as for alternative 1, the stretched elastic band that those indicators depict means a period of heavy selling will feature in the erupting bear market, and the maturity of the indicator readings and divergences imply their satisfaction is likely very close at hand, in the period Aug-Oct 2014. Therefore, I would argue that alternatives 1&3 are similar in offering likely >20% bear gains imminently, whilst alternative 2 is the threat to my bearish stock-indices positioning.

If alternative 2 fulfils, then, because of the demographic headwind, it will require all-new levels of leverage, equity allocations and skewed-positioning. In thin volume, like in 1937, a smaller group of participants has been able to rally the market to the current level by taking Rydex and fund manager allocations, margin debt and net investor credit to beyond those previous major peaks. In all 4 of those measures we already exceed the biggest mania of all time, 2000. So, with less people available to buy the stock market, the only way to achieve the current market highs has been to stretch individual positioning and leverage to record extremes.

All the big blow-off top stock index manias of the past required leverage to rise into the peak. Therefore, with margin debt having so far peaked out in February, one important development would be that leverage peak being taken out. Tying in with that we would see various speculative targets break upwards. Expecting margin debt to be down in July, due to indices being down in that month, this last week in August becomes key, and we enter that with various investments showing obvious lines in the sand.

If IBB’s bubble has burst then it should tip over here under negative divergence. If not, it should break upwards and re-take the March high.

If JNK’s collapse in July was a true warning, then it should break down again here. New highs would invalidate.

The SP500 will either tip over here with a marginal higher high on multiple negative divergences, or it will ignore those indicators and cement an upward breakout.

The Nasdaq indices are also operating on very clear divergences:

I believe the next 2 weeks will be highly revealing. It is the lunar negative fortnight and indicators argue for a retreat. DeMark sell signals were reached at the end of last week, whilst today is the new moon and the last likely seasonal peak of mid-year. If stocks retreat from here it will make the SP500 breakout a fakeout and Dow will put in a lower high than July. The February/March peak in speculative indices and sectors and margin debt will likely be maintained. All those indicators that have been screaming ‘correction’ will move further towards validation.

If, on the other hand, stocks rally this week and next and various speculative measures break or cement upwards, then the melt-up alternative will gain weight. At that point I would consider stopping my positions, moving aside and waiting, because it would put great doubt on the epicentre of the top as the speculation peak of Feb/Mar with margin debt, IBB, SOCL and RUT.

Some further charts to consider:

The Nasdaq chart above shows advance-declines have diverged. But NYSE advance declines continue to rise in line with the SP500. Does it need to diverge too before we see a proper correction? The chart below shows a divergence into 1929 but a simultaneous peak in 1937 and 1946. With other breadth divergences in play in 2014, I’m not convinced it does.

The Sornette bubble end flagged in July 2014, but the peak nominal level of DS LPPL reached so far is lower than for previous major events:

As the three historical charts show, the ultimate market peak was always accompanied by a spike in DS LPPL, just not necessarily the highest spike. That means either July was the ultimate peak, or stocks are heading higher and we will see another spike in DS LPPL ahead, probably to a higher intensity level.

Is the global economy chugging along nicely? Germany, Japan and Russia GDP readings came in negative for Q2, France flat. China’s housing market is dropping sharply:

Global leading indicators predict a growth peak at the end of Q3. Therefore, although the US has produced some recent good data, that may be about to roll over, and data from the other majors in turn worsen. Deflationary trends are strengthening again in 5 year break-evens and in commodities:

With Europe on the cusp of deflation, waning commodities prices may provide the tipping point.

I would argue that those who believe we need to see a series of rate rises before the bull ends are failing to see that we do not have the luxury this time. Rate rises help kill bulls because they help choke off the economy. The global economy is too weak for rate rises, the choking is occurring without them.

Lastly, there has been some debate about the validity of the high CAPE valuation for the market. So here is 5 year, rather than 10 year CAPE, produced by J Lyons as an alternative:

It still shows us having reached the same overvaluation as the 1929 peak, and this is echoed in Doug Short’s aggregate of 4 valuation measures:

Which brings me back to alternative 2, the melt-up. Can we really challenge the biggest mania of all time without a demographic tailwind nor a booming economy, and from already-record leverage, sentiment and allocations? I find that extremely unlikely, but if we really can, then we surely equally see the biggest crash of all time as that is unwound.

Instead, the evidence supports us being in a 1937 peak to the 1929 demographic/economic peak (1929 being 2000 in this case). 1937 did not see a parabolic blow-off, but rolled over with sufficient disconnect between valuations and the economy.

The evidence still supports us being here in the last gasps of a topping process that began Dec 31st with a peak in risk, then followed with a speculation peak in Feb/Mar, then a final peak in July. European indices appear to have decisively broken down, and US small caps are some way from their highs. The Dow broke down from its 2014 wedge in July, and volume has been very thin in US equities on this August rally back up. I have outlined my lines-in-the-sand above and see the next 2 weeks as the crucial confirmation or invalidation.

Short Term Update

Posted on August 22, 2014 Posted in Currencies, Indicators, Lunar Cycles, Stocks, Uncategorized88 Comments

With Monday being August’s new moon, we arrive at the last higher-probability topping point mid-year 2014 for those indices which have not yet topped out:

With SP500 and Nasdaq overbought and showing negative divergences, their breakouts this week have the potential to become fakeouts here.

Source: Stockcharts

SP500 hourly RSI reached >95 and previous occurrences are shown in yellow on the two charts below, i.e. typically a pullback followed:

Source: U Karlewitz

ISEE put/call ratio is 3 days over 200 and the last such occurrence led to a drop in January and the previous time before that in 2011:

Source: Ryan Detrick

Thursday produced the most NYSE unchanged issues since 22 Feb 2007 (source: Dana Lyons), which could be a sign of complacency as last time it preceded a 3.5% drop on 27 Feb 2007. This is supplemented by Skew which is back at historical elevation warning of a potential big down move:

Source: Big Charts

Nasdaq reached a Demark exhaustion sell signal on Thursday and SP500 is expected to today.

Gold has weakened as the US dollar has surged higher. However, positioning in the Euro, which acts inversely to the USD, suggests that may be about to reverse:

Source: Emma Masterson

Source: J Lyons

In short, we have the set-up for a reversal here in both equities and USD, for at least a partial retrace of the recent gains, and as we pass through Monday’s new moon the set-up looks good for a down week next week. Margin debt has yet to be released for July, but with indices overall down in that month I expect a decline. However, if stocks were to rally further next week it would raise a question mark over margin debt in August, whilst taking the Dow to new highs and cementing the breakouts of the SP500 and Nasdaq. Alternatively a down week next week should create fake-outs on the SP500 and Nasdaq and set up the possibility of a full retrace of the rally of the last 2 weeks. The negative divergences on the new marginal high in SPX versus the July peak support this occurring:

Source: Stockcharts

S O L A R C Y C L E S

Category: Stocks

Short Term Clues

Characteristics Of A Stock Market Peak

As Things Stand

Last 30 Years

US Stock Market Valuation

Last Trading Day Of August

Last 18 Months

The Alternatives

Short Term Update