This has been the most-scorned, the most mistrusted bull market in history. Why? Probably because most investors do not believe it’s real. Conventional wisdom has it that this mother-of-all bull markets has been the byproduct of overly inflated, non-nonsensical monetary policy actions rather than the result of fundamental economic growth and productivity. All engineered by the nation’s central bank. But even before the policy of large-scale asset purchases and quantitative easing is perceived to have shifted, the time has now come to derisk this bull market.
The technical evidence reviewed herein presents the very compelling case that we are right at the cusp of a stock market pinnacle. The May/June 2015 time period contains a panoply of cycles – long-term, intermediate, and short-term – all indicative of an important stock market high in the making. Technical indicators that measure both price range as well as price velocity across a multitude of time frames are, too, highly suggestive of an imminent major reversal. Market internals – advances/declines, new highs/new lows – are exhibiting signs of a very mature, aging bull market as well. In summary, this market would appear quite vulnerable to the cold winds from the north. I would caution investors that maintaining long positions from this point forward entails a significant degree of risk. Indeed, I would absolutely not be long equities here. Those who preach the faith of diversification – the most overused and oversold concept for financial safety – would be better served by including allocations to strategies that can go short. In derisking a bull market, you need to make money when you’re right, not just lose less money.
Potential for New Highs in NASDAQ
One aspect of this evolving bull market top that has nagged at me has been the failure – at least thus far – for the NASDAQ to make new, all-time highs. As you know, I’ve been up on my podium calling for new highs in the NASDAQ which have yet to occur. It’s possible – just possible – that my expectations for new highs in the NAZ may yet come to pass. Indeed, I see the potential for a repeat of what happened in the 2007 topping structure. You may recall the Dow/S&P topped on October 11th of that year; following a brief selloff the benchmark averages came roaring back to form a right shoulder high – with new highs in the NAZ – on October 31st. Following that Halloween Day high, the bear market rollover began. I see the potential for a similar topping evolution in the present. That is, we may have completed our highs in the New York markets with new highs in NAZ yet to occur in the coming trading sessions – from which point the rollover I’ve been calling for begins in earnest.
Over the last couple of years in my research I have found strong evidence of two long term cycles – 84.3 years and 49.2 years – both of which lead to 2015 as a defining pivot point for a major market top. Four so-called “manias” have occurred over the last four hundred years. The Dutch Tulip Mania of February 1637 appears to be the Genesis Point in all cases. The chart above is appended with the London market for data prior to 1792 – the beginning of the U.S. stock market.
At first glance, the 84.3 year pattern is not readily apparent. But I know to examine a market cycle from its duplex function – and look for 1.236 / 0.809 expansions / contractions in that sequence. 84.3 years represents what I call the baseline cycle. Its duplex function – 168.6 ( = 377 / √5) years – underwent a 1.236 expansion (very common) to 208.4 years. That 208.4 sequence was then split into two subcycles of 115.2 and 93.2 years (0.553 and 0.447) each. Note that my regression analysis corroborates this pattern very well. Note, too, that 2015 is 378 years from the 1637 Dutch Tulip Mania. 378 is, of course, very close to the Fibonacci number 377 – a very common reversal factor.
March-July 2015 Clustering
In the March 2015 issue of The Harley Market Letter, I highlighted the mathematics under-scoring the root-derivation for the cyclical functions I have found in the financial markets. A portion of the tabular listing is reproduced below. I have placed a red box and blue arrows around the cyclical functions that, when added to the turning points shown on the log chart for the Dow Jones Industrials at left, depict a cyclical clustering – and potential high-point reversal – spanning the March - July 2015 time period. My analysis of the weekly and daily charts has further narrowed the time focus to the May/June time period.
I have repeated this chart with some minor refinements in recent monthly issues – both for current and new readers – because the cyclical mathematics since the 1929 top presents compelling rationale for a major high in the May/June 2015 time period.
Bottom Line: We are there.
At left I show the NYSE Advance / Decline Line. This indicator is created by a running summation in each day’s difference between advances and declines. Historically, peaks in this indicator have preceded peaks in the overall market. The A/D Line’s peak – thus far – occurred on April 24, 2015. Below left is my 10 day / 30 day NYSE Advance/Decline Oscillator which, like my High/Low Differential below, is reflecting negative divergence. Significant peaks in the market are normally reflected in a divergent structure in these indicators – something that has been noticeably absent thus far but is now developing in all three of these indicators.
The New York Composite Index below – the broadest measure of stocks listed on the New York Stock Exchange – reached its all-time high (thus far) on May 21, 2015. Notice the divergent structure in the indicators above. The one upon which I place particular focus for the intermediate time period is the NYSE High/Low Differential. Note the considerable drooping in both the 10-day and 30-day components even as the NYA has pushed to new, all-time highs. This represents a bull market that is tired and rapidly running out of juice. I have been suggesting for some time that the 11,250 level – a major price octave – would signify terminal overhead resistance for the New York Composite index. The NYA has – thus far – been contained by this line in the sky.
30-year treasury bond prices have now pulled back into the region of the summer 2012 highs. The weekly chart at left depicts the price break below the 20-week moving average. I would not be surprised to see some kind of snapback to that important indicator of trend – but all in the context of an intermediate bear trend which I believe will continue throughout the balance of this year.
On the daily chart, the TLT Exchange Traded Fund (ETF) – a proxy for the 20-year bond (and by extension, the 30-year as well) has broken below both its 50-day and 200-day moving averages. For those who opine some kind of contra-cyclical relationship to stocks I would present the TLT chart to prove otherwise.
Metals prices continue to languish – etching out more of a sideways pattern for the last several months – in what I view as a multi-year bear market. Comex gold is trading below its 20-day moving average on the daily chart. My target on the downside near-term remains 1,125 – depicted on the chart at the bottom in light blue. The XAU is struggling to make it back to its 50 day moving average. A triple bottom exists in the 62-64 range. That area of support is likely to give way once gold begins its next heave-ho on the downside.
Each month, Stan Harley publishes The Harley Market Letter, a newsletter that provides advanced technical analysis of stocks, bonds, and precious metals. This is the latest abridged update to the Harley Market Letter for June. Want to learn more from acclaimed market analyst Stan Harley? Visit his site and subscribe to the full Harley Market Letter.
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